Loan by a Trading Participant to a Client Structured as a Trade

July 21, 2008 PSE MEMORANDUM NO. 0338-08 TO : All Trading Participants RE : Loan by a Trading Participant to a Client Structured as a Trade We provide below for the guidance of all trading participants ("TPs") how the Market Regulation Division ("MRD") will treat an agreement between a TP and a client for the early release of the proceeds of a selling transaction before the actual trade settlement date ( i.e., a TP will pay the cash proceeds of the trade to the selling client on T+0 or at any time earlier than T+3). CHTcSE 1. The payment by a TP to the selling client of the trade proceeds earlier than the actual trade settlement date will be deemed an advance or a loan to the client. By engaging in such lending activity, the TP will violate the condition of its registration as a broker dealer that it "shall be solely engaged in the business of a Broker Dealer." (SRC Rule 28.1 (1) (C)). 2. Considering that the TP will structure the loan as a trade with the TP advancing payment of the proceeds to the selling client prior to the settlement date, the TP may be deemed engaged in manipulative practices because the loan transaction disguised as a trade "has the effect or is likely to have the effect, of creating a false or misleading appearance of active trading in any security or with respect to the market for, or the price of, any security." (SRC Rule 24.1 (b)-1). Under SRC Rule 24.1 (b)-1 (3), a transaction may be manipulative if, among other considerations, "the order is accompanied by settlement, delivery or security arrangements which are unusual." We enjoin all TPs to exercise due diligence and discretion in accepting and executing orders of a client upon consideration of the transactional circumstances. In conducting its business, a TP should "observe high standards of commercial honor and just and equitable principles of trade" and "act with due skill, care and diligence . . . for the integrity of the market." (SRC Rule 30.2). For information and guidance. (SGD.) JOSEPH P. SAN PEDRO Vice President, Market Regulation Division (SGD.) JINKY A. ALORA Head, Trading Participants Regulation Department