Executive Brief on Application Requirements for Futures Exchange

August 16, 1999 PSE MEMO FOR BROKERS NO. 292-99 SUBJECT : Executive Brief on Application Requirements for Futures Exchange Pursuant to Section 7 of the Revised Securities Act (BP No. 178) and the provisions of Section 3 of Presidential Decree No. 902-A, as amended, the SEC has issued the "New Rules And Regulations On Futures Trading" (the "Rules") on July 9, 1999. The said rules and regulations sets out the requirements for and shall govern futures exchanges, futures brokers and persons associated with them, futures associations, fund managers, trading advisors and other matters concerning the futures industry. aisadc In accordance therewith, noted hereunder are some important requirements for approval of an application for licensing of a futures exchange: 1. The applicant futures exchange shall be a domestic stock non-profit corporation with a minimum paid-up capital requirement of 200 million pesos . The same shall comply with the minimum requirements of a self-regulatory organization (SRO) (Sec. 2) and such other requirements (Sec. 3) as set out in the said rules. 2. An independent Clearing House shall be incorporated to serve as the central agency through which transactions are cleared and guaranteed and settlements effected. (a) The applicant clearing house is required to submit a Memorandum of Understanding with any world-class clearing house in the U.S., London, Frankfurt, French or Australian markets where, among other, it will be provided that the latter shall assist the Philippine clearing house attain world-class status. (b) The said applicant shall submit its risk management processes as well as a brief description of the operating systems of the clearing house which, among others, shall include the following: i. Real Time Processing ii. Flexibility, in that the clearing house must be flexible to support an expanding universe of products applicable to the domestic market, efficient and rapid in new-product launches, and able to monitor trading and margin operations, settlement and banking processing. iii. Open Architecture, to expand the integration between the trading and clearing system. (c) The clearing house system must measure up to international standards and provide a link-up to other international clearing organizations. aisadc (d) The clearing house must be organized as a separate corporation independent from the futures exchange management. The owner structure must be open to one or several foreign international clearing corporation/s that will best assure the success of the domestic futures operations. The criteria for choosing the foreign joint venture partner shall be capital adequacy, global operations capability, international credit rank, technology capabilities using real-time systems for clearing, trading, risk-management monitoring, accounting and audit system. The domestic ownership must be composed of members of the futures exchange. In addition, a percentage of the clearing corporation may be sold to the public through the listing of the shares in the stock exchange. 3. The applicant futures exchange is likewise required to submit its Business Plans and their corresponding TimeTables for completion. 4. At the pre-operations stage, the applicant futures exchange is required to submit: (a) Product Manuals (b) Trading and Clearing House Manuals (c) Accounting, processing, auditing and surveillance manuals (d) Code of Conduct, Arbitration, Penalties and Suspension manuals (e) Risk Management, provision for suspension/receivership/liquidation, and taxation manuals (f) Business Conduct Rules (g) Investigation and Disciplinary Procedures (h) Table of Organizational structure (i) Guidelines and policies on the hiring and termination of key personnel (j) Liquidation Procedure for the Exchange, member-brokers and the Clearing House. For your information and guidance. (SGD.) JOSE LUIS U. YULO, JR. President & CEO