For Public Comments: Proposed PSE Rules on Exchange Traded Funds

January 9, 2013 PSE MEMORANDUM NO. CN-0001-13 TO : The Investing Public SUBJECT : For Public Comments: Proposed PSE Rules on Exchange Traded Funds In the meeting of its Board of Directors today, January 9, 2013, the Board of Directors of the Exchange approved for release for public comments the proposed PSE Rules on Exchange Traded Funds ("Proposed PSE ETF Rules"). The Proposed PSE ETF Rules are in line with the Rules and Regulations on Exchange Traded Funds issued last October 22, 2012 by the Securities and Exchange Commission in its Memorandum Circular Number 10, series of 2012. The Exchange is inviting all concerned parties to give their comments to the Proposed PSE ETF Rules attached hereto as Annex "A" which shall govern the listing and trading of Exchange Traded Funds and shall form part of the Listing, Disclosure and Trading Rules of the Exchange. Please send your comments to Ms. Ria Datu-Cabanela at [emailprotected] on or before January 18, 2013. (SGD.) ROEL A. REFRAN Chief Operating Officer Rules on Exchange Traded Funds PART A General Provisions Section 1. Rationale CHTcSE Section 2. Applicability of the Rules of the Exchange Section 3. Scope and Application Section 4. ETF Participants PART B Listing and Disclosure Section 5. General Criteria for Admission to Listing Section 6. Continuing Listing Requirements Section 7. Trading Halts and Suspensions Section 8. Grounds for Involuntary Desisting of an ETF Section 9. Penalties and Fines Section 10. Fees aSITDC Section 11. Compliance with Laws Governing Investments PART C ETF Market Making Rules Section 12. ETF Market Making Rules Section 13. Registration of the ETF Market Maker Section 14. Exchange Reportorial Requirements of the ETF Market Maker Section 15. Eligibility of Securities to have a Market Maker Section 16. ETF Market Making Obligations Section 17. Segregation of Functions Section 18. Temporary Suspension of the Registration of the ETF Market Maker Section 19. Voluntary Termination of a Designated Specialist Section 20. Voluntary Withdrawal of Registration as ETF Market Maker Section 21. Expiration of ETF Market Making Agreement Section 22. Involuntary Suspension and Termination of an ETF Market Maker Section 23. Resumption of ETF Market Making Obligations Section 24. Violations and Penalties for ETF Market Making Operations Implementing Guidelines of ETF Market Making Rules Section 1. Registration of ETF Market Maker Section 2. Obligations of an ETF Market Maker Section 3. ETF Market Maker Incentives TESICD PART A General Provisions SECTION 1. Rationale. The Philippine Stock Exchange, Inc.'s ("Exchange") Rules on Exchange Traded Funds ("Rules") are being made to govern the listing and trading of Exchange Traded Funds ("ETF") to facilitate more investment opportunities for investors. These Rules are consistent with the requirements under Section 8 (1) of the Rules and Regulations on Exchange-Traded Funds of the Securities and Exchange Commission (the "Commission", the rules shall hereinafter be referred to as the "SEC ETF Rules") that the shares of stock of an ETF shall be listed and traded in a registered Exchange. These Rules shall form part of the Listing and Disclosure Rules and the Trading Rules of the Exchange. SECTION 2. Applicability of the Rules of the Exchange. These Rules shall be read in conjunction with the SEC ETF Rules, the Securities Regulation Code and its implementing rules and regulations, the Investment Company Act and other relevant laws, rules and regulations and shall form part of all rules of the Exchange. All rules of the Exchange not inconsistent with these Rules shall apply to ETFs. A copy of the SEC ETF Rules is attached herewith as Annex A and is incorporated by reference to these Rules. SECTION 3. Scope and Application. Only companies duly registered with the Commission as ETFs may apply for ETF listing in the Exchange. SECTION 4. ETF Participants. a. ETF Company An Exchange Traded Fund is an open-end investment company that continuously issues and redeems its shares of stock in creation unit in exchange for delivery of a basket of securities representing an index whose performance the ETF endeavors to track; provided that, the terms and conditions relative to the creation and redemption in Creation Unit shall be prescribed by its Registration Statement as filed with the Commission and disclosed in its Prospectus. DAEaTS An ETF is established in accordance with the Investment Company Act of the Philippines and duly registered with the Commission. b. Fund Manager In addition to the requirements for the appointment of a Fund Manager under Section 15 of the SEC ETF Rules, the Fund Manager must likewise have been in operation for at least two (2) years and have satisfactory experience in managing collective investment schemes. An ETF must seek shareholders' approval for any change of the Fund Manager. c. Authorized Participant An ETF shall appoint at least two (2) Authorized Participants, who are registered broker-dealers and authorized trading participants of the Exchange, who shall meet the following requirements: (i) Those laid down in Subsections 16.2, 16.3 and 16.4 of the SEC ETF Rules; (ii) A minimum capital requirement of One Hundred Million Pesos (Php100,000,000.00); (iii) Such other qualifications that the Exchange may impose or require from time to time. An ETF shall ensure that it has at least two (2) Authorized Participants at all times. aEHAIS d. Market Maker At least one (1) of the designated Authorized Participants of an ETF shall be designated as a Market Maker of the ETF. The Market Maker shall be subject to the provisions on ETF Market Making Rules found in Part C of these Rules and any applicable rules and regulations that the Commission and/or the Exchange may issue from time to time. e. Custodian An ETF's custodian must comply with the minimum requirements for the appointment of a Custodian under Section 17 of the SEC ETF Rules. f. Transfer Agent In addition to the minimum requirements for the appointment of a Transfer Agent under Section 18 of the SEC ETF Rules, a Transfer Agent must have a paid-in capitalization of One Hundred Million Pesos (Php100,000,000.00). g. Auditor The ETF shall engage an independent auditing firm duly accredited by the Commission and acceptable to the Exchange to perform an independent audit of the ETF's financial records. h. Index Provider The ETF must engage an independent Index Provider which is compliant with the requirements set forth in Section 14 of the SEC ETF Rules. In the event that the ETF engages the Exchange as its Index Provider, the Commission shall have the sole authority to ensure compliance by the Exchange with the requirements for an Index Provider. cAECST PART B Listing and Disclosure SECTION 5. General Criteria for Admission to Listing. a. Minimum Paid-up capital An ETF applying to list in the Exchange shall have a minimum paid-up capital of at least Two Hundred Fifty Million Pesos (Php250,000,000.00). b. Offering Requirement When the registration of the ETF's securities becomes effective and its listing application is approved by the Exchange, the ETF may, at its option, undertake an offering for its securities. Such offering will not be covered by the IPO Rules on Distribution of Shares under Article III, Part G of the Exchange's Listing Rules, including the provisions pertaining to the twenty percent (20%) mandatory allocation for Trading Participants and the ten percent (10%) mandatory allocation for Local Small Investors. The lock-up and track record requirements in the Listing Rules shall not apply. c. Shelf listing The ETF may apply for listing the equivalent number of shares subject of the Registration Statement filed with the Commission. The Exchange's approval of the listing of the ETF shares shall remain valid provided that the Registration and Licensing Order as well as the Permit to Sell Securities for Sale issued by the Commission covering the subject ETF shares are likewise valid and subsisting. The eligibility for trading of the ETF shares shall take effect only upon the Exchange's receipt of an official notice issued by an authorized officer of the ETF and confirmed in writing by the Custodian/Transfer Agent, that such number of ETF shares has been created and issued to the Authorized Participant. d. Underlying securities The underlying securities comprising the index which the applicant ETF intends to track must be listed and traded in a registered exchange and have sufficient liquidity. The ETF shall disclose the liquidity criteria and methodology in its Prospectus. cACDaH e. Procedure for processing of listing applications An application for listing shall only be accepted upon submission of the documentary requirements for listing of an ETF as set forth in Annex B and payment of the applicable processing fee. The general procedures for the listing of equity securities as contained in Article III Part B of the Listing Rules and any subsequent amendment and policies relevant thereto shall be adopted in processing listing applications for ETFs in accordance with the Exchange's initial listing rules. f. Contents of Listing Application In addition to all minimum requirements set forth in the SEC ETF Rules (including, but not limited to, Sections 7, 11, 12, 13 and 19 thereof), the listing application of an ETF must contain the following information: (i) Investment Objective It must define which securities or what types of securities it will invest in. Such objective must be adhered to strictly by the manager of the ETF; (ii) Detailed structure and composition of the ETF; (iii) Full title or designation, and rights and privileges of the ETF shares for which listing is sought; (iv) Complete information regarding the Fund Manager, Authorized Participants, Market Maker, Custodian, Auditor, Index Provider and Transfer Agent of the ETF; (v) The financial track record of the Fund Manager and when applicable, the persons or parties engaged by the Fund Manager to carry out activities necessary for the operation of the ETF pursuant to Subsection 15.5 of the SEC ETF Rules. The required information shall include, among others, their related engagement history and work experience and details of all funds and ETFs managed or advised by them; IAEcCa (vi) Legal opinion from an independent legal counsel to the effect that the ETF is duly constituted, validly existing and is in good standing with all relevant government agencies and instrumentalities; and (vii) Any other information or document that may be required by the Exchange in connection with its evaluation of an ETF's listing application. g. Prospectus, Press Releases and Other Similar Documents In addition to the requirements under Sections 19 and 20 of the SEC ETF Rules, all prospectuses, primers, subscription agreement forms, newspaper prints, advertisements, press releases and similar documents in connection with the issuance shall first be submitted to the Exchange for review and disclosure purposes and may not be printed en masse , distributed or published without the prior written approval of the Exchange. h. Suitability Rule An ETF shall be in compliance with the Suitability Rule as contained in Part B Section 1 b to m of the Listing Rules, as well as applicable provisions on the eligibility of its officers, directors, employees and other relevant persons under the Investment Company Act and applicable laws, rules and regulations. SECTION 6. Continuing Listing Requirements. Without in any way limiting the applicability of the rules governing the continuing listing of securities already in effect and all the rules and regulations set forth by the Exchange, the following shall be observed at all times: a. Minimum Public Ownership The ETF shall maintain a public ownership of 10% of the issued and outstanding shares, exclusive of treasury shares, or such other number as the Exchange may from time to time prescribe; provided that a newly-listed ETF shall have a period of one (1) year from listing date within which to comply with the said requirement. aDECHI Non-compliance with this provision shall be subject to the penalties and fines provided under these Rules. b. The ETF shall maintain all applicable regulatory licenses and accreditation; c. The ETF must ensure that all necessary facilities and information are available to enable holders of its listed shares to exercise their rights. In particular, it must inform holders of the holding of meetings which they are entitled to attend, enable them to exercise their right to vote where applicable, and publish in newspapers of general circulation the notices or distribute circulars giving details of the allocation and payment of interest in respect of such shares, the creation of new shares and redemption of shares. d. The ETF must have an Investor Relations Office which manages the investor relations program of the ETF. The said program must ensure that information affecting the company are communicated effectively to investors. This program shall include, at the minimum, a corporate website that contains, among others, information about the company's operations, financials, plans, senior management, controlling stockholders and investor services. e. Periodic Reporting, Disclosure Policy, and Other Requirements The general structured and unstructured reportorial requirements shall apply to ETFs under the Disclosure Rules of the Exchange, in addition to the reportorial requirements under Section 27 of the SEC ETF Rules. SDHETI In addition, the ETF must likewise comply with the following: (i) Periodic Reports a) The ETF must disclose the iNAV every fifteen (15) seconds, or such other period as may be prescribed from time to time by the Exchange and/or the Commission. The iNAV, as defined in the SEC ETF Rules, is an approximation of the current value of the basket of securities on a per share basis computed at a fifteen (15) second interval throughout the trading hours of the Exchange. b) An ETF must announce no later than 4:30 p.m. of every trading day, or on a frequency that the Exchange may from time to time prescribe, via the Online Disclosure System of the Exchange (ODiSy) the following information: (1) Net Asset Value (NAV) and NAV per share; (2) Issued and outstanding shares of the ETF; (3) Underlying index; and (4) Tracking Error as defined under Section 5 (21) of the SEC ETF Rules. (ii) Annual Report In addition to the requirements under the Securities Regulation Code and the SEC ETF Rules, the annual report of an ETF must disclose the following information: SHCaEA a) A list of all investments with a value greater than 5% of the ETF's gross assets, and at least the 10 largest investments stating, with comparative figures where relevant: (1) a brief description of the business; (2) proportion of share capital owned; (3) cost; (4) valuation of other assets and investments, and in the case of listed investments, market value; (5) dividends received during the year (indicating any interim dividends); (6) dividend cover or underlying earnings; (7) any extraordinary items; and ITcCaS (8) net assets attributable to investments. b) An analysis of any provision for diminution in the value of investments, stating for each such investment: (1) cost; (2) provision made; and (3) book value. c) Breakdown of the income received: (1) dividends and interest; and (2) any other income. d) An analysis of realized and unrealized gain/loss on investment(s) e) The name of the Fund Manager together with an indication of the terms and duration of its appointment and the basis for its remuneration; f) The Securities Lending activities of the ETF The ETF as a direct lender shall submit a bi-annual Summary Report of their Securities Borrowing and Lending (SBL) transactions within thirty (30) days after the end of the covered period. See Section 23 of the SEC Memo Circular No. 7, 2006. g) Amount of related-party transactions for the period under review; TcEaDS The term "related parties" shall refer to "affiliates of the ETF Company, the Fund Manager, the Custodian, the Transfer Agent, or the Index Provider, accounted for by the equity method of accounting; trusts for the benefit of employees such as pension and profit sharing plans that are managed by or under the trusteeship of the management of the ETF Company; directors, major shareholders or principal owners of the ETF Company, the Fund Manager, the Custodian, the Transfer Agent, or the Index Provider; and their management; members of the immediate families of major shareholders, principal owners and management of the ETF Company, the Fund Manager, the Custodian, the Transfer Agent, or the Index Provider." h) The performance of the ETF in comparison to its underlying index, in a consistent format, covering the following periods of time: 3-month, 6-month, 1-year, 3-year, 5-year, 10-year and since inception of the ETF. Returns of the ETF must be computed before charges such as: brokers' fees, administrative expenses, with dividends reinvested in computing the ETF price. i) Expense ratios for the period under review and for the immediately preceding year. It should be indicated that the expense ratio does not include brokerage and other transaction costs, performance fee, foreign exchange gains/losses, front or back end loads arising from the purchase or sale of other investments and tax deducted at source or arising out of income received; and j) Turnover ratios for the period under review and for the immediately preceding year. (iii) Quarterly Reports In addition to the requirements under the Securities Regulation Code and the SEC ETF Rules, particularly Subsection 27.2, an ETF must submit Quarterly Reports which must disclose the following information: a) Top 10 holdings at market value and as a percentage of NAV as at the end of the period under review and for the immediately preceding year; EaTCSA b) Expense ratios for the period under review and a year ago. A footnote should state (where applicable) that the expense ratio does not include brokerage and other transaction costs, performance fee, foreign exchange gains/losses, front or back end loads arising from the purchase or sale of other schemes and tax deducted at source or arising out of income received; and c) Turnover ratios for the period under review and for the immediately preceding year. (iv) Monthly Issuance and Redemption Report of ETF Creation Units; (v) If an ETF is also listed on another stock exchange, any information released to that stock exchange must also be released to the Exchange at the same time. The disclosure to the Exchange shall be in English. (vi) An ETF must also comply with the following reportorial requirements: a) The ETF must notify the Exchange at the end of each dividend distribution period as soon as the following are computed by the Fund Manager: (1) The net amount per share; (2) The date of the recording of the list of shareholders; and b) The Fund Manager must state clearly, in all disclosures issued in respect of the sale of shares of the ETF, the terms upon which it undertakes to repurchase ETF shares. If there is no undertaking, it must state that fact; and ICHcTD c) An ETF must notify the Exchange of the following within ten (10) minutes from the happening of each event: (1) Any creation and redemption and the resulting issued and outstanding ETF shares; (2) Breach of tracking error threshold; (3) Failure and/or inability to disclose the iNAV at the prescribed frequency; (4) Any changes in the control of the Fund Manager; (5) Any proposed change in the general character, nature or investment objective of the ETF and/or fund management; (6) Any intention to renew, vary or terminate the management agreement; aSTHDc (7) The fact of inability of the Market Maker to perform its functions or the absence of the Market Maker and the reasons therefor; (8) The fact of termination of the ETF's agreement with its Market Maker and the reasons therefor; (9) The name and qualifications of the Authorized Participant which will assume the functions and obligations of the ETF's Market Maker; (10) The fact of termination of the ETF's agreement with its Authorized Participant(s) and the reasons therefor. (11) Detailed information, including the qualifications, of the new Authorized Participant(s) which will assume the functions and obligations of the ETF's Authorized Participants; (12) Any trading halt or suspension of the ETF Shares and the reasons therefor, if the ETF is simultaneously listed in another stock exchange; (13) Any trading halt or suspension of the underlying securities and subsequent lifting thereof, including the percentage of the said underlying securities in relation to the applicable current index group value and, in the case of underlying securities listed in another exchange, the reason for the halt or suspension; (14) Any material facts related to the listed ETF, or the operation, business or assets of the ETF, which may significantly affect the investment decisions of investors. d) Other reports and records as may be required by the Commission from time to time. cDHAaT Part A (General) of Article V (Additional Listing of Securities) of the Listing Rules shall not apply. SECTION 7. Trading Halts and Suspensions. a. Trading of the ETF shares shall be suspended under the following circumstances: (i) if the underlying securities accounting for 30% or more thereof have been suspended; (ii) absence of a Market Maker for a period of one (1) month; (iii) when the Commission issues an order of suspension on the registration of the ETF shares; or (iv) other applicable grounds provided under the Listing and Disclosure Rules and Trading Rules of the Exchange. b. Trading of the ETF shares shall be halted for an hour, or for any appropriate period that may be specified in these Rules, on the first day under the following circumstances: (i) Breach of tracking error threshold; (ii) Any of the underlying securities has been delisted; (iii) Trading has been halted for one or more underlying securities accounting for 30% or more of the applicable current index group value; (iv) If the timely posting of the iNAV is not published within the frequency prescribed in these Rules; or (v) Other applicable grounds provided under the Listing and Disclosure Rules and Trading Rules of the Exchange. c. In the case of ETF shares simultaneously listed in another exchange, the Exchange may halt or suspend the trading of the ETF shares if the trading thereof is halted or suspended in the other exchange. SECTION 8. Grounds for Involuntary Delisting of an ETF. The following shall be grounds for the delisting of an ETF: a. Failure by the ETF to comply with its continuing listing obligations, including the failure to pay the applicable fees; b. Continued breach of the tracking error threshold set by the ETF for a period of at least one year. Tracking error as defined in the SEC ETF Rules Section 5.21 is the standard deviation of the difference in relative returns between the ETF and its underlying index; c. Expiration or revocation of the registration of the ETF shares; d. Breach of the provisions in the Listing Agreement; or e. Such other grounds as may be determined by the Exchange, where delisting of the ETF may be appropriate in the public interest or for the protection of investors. SECTION 9. Penalties and Fines. a. For non-compliance with the minimum public ownership requirement under Section 6 (a) of these Rules, the ETF shall be penalized as follows: (i) Php100.00 for every trading day of non-compliance after the lapse of the one (1) year period from listing date; (ii) If non-compliance shall exceed six (6) months, a trading suspension shall be imposed; provided that such suspension shall not exceed six (6) months; DCcTHa (iii) If the ETF remains non-compliant upon the lapse of the trading suspension, the Exchange shall initiate delisting procedures. b. For non-compliance with the required number of Authorized Participants, a monetary penalty of One Hundred Pesos (Php100.00) for every day of non-compliance shall be imposed upon the ETF. c. For any violation of these Rules not stated herein, the penalties under the PSE Disclosure Rules shall apply. SECTION 10. Fees. An ETF shall be required to pay the following fees: a. Processing Fee Upon filing of its application to list, the ETF shall pay a non-refundable processing fee of Fifty Thousand Pesos (Php50,000.00) plus other incidental expenses. b. Listing Fee The ETF shall pay a flat rate of One Hundred Thousand Pesos (Php100,000.00). c. Annual Listing Maintenance Fee The ETF shall pay an Annual Listing Maintenance Fee of 1/200 of 1% of the total market capitalization but in no case shall it be more than Two Hundred Fifty Thousand Pesos (Php250,000.00). SECTION 11. Compliance with Laws Governing Investments. The ETF must ensure compliance with the provisions of existing laws, rules and regulations and issuances including, but not limited to, the Anti-Money Laundering Act of the Philippines, the Investment Company Act, or any other applicable law or regulations. TcIHDa PART C ETF Market Making Rules SECTION 12. ETF Market Making Rules. Pursuant to Sec. 5-14 and Sec. 8-2 of the SEC ETF Rules, which provides for the obligations of a Market Maker as a required participant in the ETF, the following sections comprise the Market Making Rules specific to ETFs: SECTION 13. Registration of the ETF Market Maker. a. In order to participate in the ETF trading process as a Market Maker, a Trading Participant designated as an Authorized Participant by an ETF shall apply for registration as an ETF Market Maker with the Exchange and for this purpose shall fulfill other requirements that may be imposed by the Exchange and the Commission. b. Upon compliance with the requirements of the Exchange and the Commission, the applicant shall be registered as an authorized ETF Market Maker while its appointed licensed salesmen shall be registered as Designated Specialists. Designated specialists as defined in the PSE Trading Rules, shall mean the appointed licensed Salesman employed by the designated Market Maker to perform Market Making obligations. c. The registration and authority of an Authorized Participant to act as an ETF Market Maker shall be non-transferable. d. The registration of an ETF Market Maker and its Designated Specialists shall be valid for a period of one (1) year unless sooner terminated under these Rules. The registration may be renewed thereafter subject to compliance with the requirements of the Exchange and the Commission. e. Only registered Designated Specialists are allowed to perform the Market Making functions and obligations of the ETF Market Maker. f. The ETF Market Maker shall furnish the Exchange, through the PSE Market Operations Division, copies of all Market Making agreements it has entered into with ETF/s. However, the Exchange shall not be liable to the ETF Market Maker, ETF or any other party for any and all losses, claims, or damages, direct or indirect, arising out of or in connection with the Market Making agreement. SECTION 14. Exchange Reportorial Requirements of the ETF Market Maker. Without prejudice to the reportorial requirements of the Capital Markets Integrity Corporation (CMIC), the ETF Market Maker shall immediately inform the Exchange, through the PSE Market Operations Division, in writing of any of the following matters: ICcDaA a. Any material change in information relating to the ETF Market Maker or its Designated Specialist/s; b. Any actual or expected breach by the Designated Specialist/s of the ETF Market Making rules and the requirements of the Exchange; c. Any disciplinary actions taken or any penalties imposed by the SEC on the ETF Market Maker or the Designated Specialist; d. Any disciplinary action taken by the ETF Market Maker against its Designated Specialist/s; e. Any criminal case involving fraud filed against the ETF Market Maker, its officers, directors or Designated Specialist/s; f. Any civil case against the ETF Market Maker amounting to at least One Hundred Thousand Pesos (P100,000.00). The ETF Market Maker shall supply any additional information or supporting documents that may be requested by the Exchange in connection with the aforementioned circumstances. SECTION 15. Eligibility of Securities to Have a Market Maker. a. Shares of an ETF are eligible for Market Making orders only if such an ETF has a market making agreement with its appointed Market Maker. b. A Market Maker shall be permitted to act as a Market Maker for more than one ETF, subject to approval by the Exchange and the Commission. SECTION 16. ETF Market Making Obligations. a. An ETF Market Maker shall only use its proprietary ETF Market Making account to enter Orders that are covered under, or in pursuance of, its ETF Market Making functions. prLL b. Apart from its ETF Market Making account and error account, an ETF Market Maker shall not be allowed to maintain other proprietary accounts for ETFs for which it is designated as a Market Maker. c. An ETF Market Maker shall be fully responsible and liable for all ETF Market Making Orders entered into the Trading System, The ETF Market Maker, upon entering an ETF Market Making Order, warrants to the Exchange that the said Order is valid, binding and enforceable and that the necessary authorizations and approval have been secured. d. The Exchange reserves the right to define the parameters on ETF Market Making obligations of the ETF Market Maker. Subject to these Rules, each ETF Market Maker shall perform the following: (i) enter two-sided ETF Market Making Orders into the System in amounts not less than the minimum value required by the Exchange; (ii) observe a maximum bid and offer spread throughout a mandatory period; and (iii) maintain presence in the market within the period required by the Exchange as provided in Section 2 (c) of the Implementing Guidelines of the ETF Market Making Rules. The Exchange may periodically assess and revise the parameters to adjust to market conditions such as, but not limited to, excessive volatility of the relevant securities. SECTION 17. Segregation of Functions. a. The ETF Market Maker shall maintain proper segregation of functions within the firm to prevent the flow of information between its Designated Specialists and its other salesmen and any conflict of interest that may result. b. The ETF Market Maker shall ensure that its Designated Specialist does not, in the same trading day, enter orders or handle or manage any transactions relating to client accounts. c. The ETF Market Maker shall maintain complete and identifiable books and records for its ETF Market Making transactions. SECTION 18. Temporary Suspension of the Registration of the ETF Market Maker. Any agreement between the ETF Company and the ETF Market Maker to the contrary notwithstanding, the Exchange may grant the request of an ETF Company for the temporary suspension of the registration of its ETF Market Maker under any of the following circumstances: TCSEcI a. If the delay or inability to execute the obligation is due to technical problems arising from circumstances outside the reasonable control of the ETF Market Maker; b. If the Designated Specialist is temporarily unable to perform his functions for reasons beyond his control and there is no substitute Designated Specialist available; or c. Such other cases as the Exchange may deem necessary for a fair and orderly market and to protect the investing public. SECTION 19. Voluntary Termination of a Designated Specialist. The Exchange may, upon the written request of the ETF Market Maker, terminate the registration of its Designated Specialist and shall immediately assign a replacement, if necessary. SECTION 20. Voluntary Withdrawal of Registration as ETF Market Maker. An ETF Market Maker may voluntarily withdraw as an ETF Market Maker for any ETF with which it has an existing ETF Market Making agreement provided it submits to the Exchange at least thirty (30) trading days prior to the intended date of withdrawal (i) a written request for its withdrawal and (ii) the written consent of the concerned ETF. If the ETF Market Maker intends to completely cease its ETF Market Making operations, it shall submit to the Exchange at least thirty (30) trading days prior to the intended date of cessation (i) a written request for its cessation, and (ii) the written consent of all ETFs with which it has existing ETF Market Making agreements. If the ETF Market Maker submits both requirements, it shall be eligible to reapply for registration as an ETF Market Maker at any time. If it submits only the request for cessation but fails to submit the written consent of the concerned ETFs, it shall only be eligible to reapply for registration as an ETF Market Maker after a cooling-off period of one (1) month from the effective date of cessation. cECTaD Within a reasonable time and in all cases prior to the intended date of withdrawal by the ETF Market Maker or its intended date of cessation of Market Making operations, the ETF Company shall submit to the Exchange the name and other details of the replacement ETF Market Maker appointed by the ETF Company. In cases where the previous ETF Market Maker is the sole ETF Market Maker of the ETF Company, the appointment of the replacement ETF Market Maker shall commence not later than the date of withdrawal or the date of the cessation of the ETF Market Making operations of the previous ETF Market Maker. SECTION 21. Expiration of ETF Market Making Agreement. Upon expiration of the agreement between the ETF and the ETF Market Maker, the ETF Market Maker shall be prohibited from entering ETF Market Making Orders for that particular ETF. SECTION 22. Involuntary Suspension and Termination of an ETF Market Maker. The Exchange may suspend the ETF Market Maker or terminate the ETF Market Maker's registration for any of the following causes: a. Non-compliance with the ETF Market Making rules, regulations and guidelines of the Exchange; b. Breach of the continuing requirements and standards for ETF Market Makers; c. Failure to promptly settle any dues or fees payable to the Exchange; d. Suspension by SEC, CMIC or SCCP of the ETF Market Maker; or e. Other reasons as deemed necessary by the Exchange to maintain an orderly and fair market. Such suspension or termination of registration shall be without prejudice to any penal sanctions that may be imposed by the Exchange or to any civil, criminal and/or administrative action that the Exchange may take against the ETF Market Maker or its Designated Specialist, as may be applicable under the circumstances. SECTION 23. Resumption of ETF Market Making Obligations. a. An ETF Market Maker that has been suspended by the Exchange shall be prohibited from performing its ETF Market Making activities until it receives the appropriate notification/clearance from the Exchange. The Exchange shall send an advisory to all Trading Participants informing them of the resumption of the functions of the ETF Market Maker. b. An ETF Market Maker whose registration has been terminated by the Exchange shall be prohibited from performing its ETF Market Making activities until it has re-registered as an ETF Market Maker. It shall be eligible to reapply for registration as an ETF Market Maker after a period of three (3) months counted from the effective date of termination, unless a longer period is imposed by the Exchange or the Commission under the circumstances. SECTION 24. Violations and Penalties for ETF Market Making Operations. The following acts shall be considered violations of ETF Market Making Rules and shall be penalized in accordance with Article IX (Penal Sanctions) of the Trading Rules of the Exchange: a. Major Violations ITCcAD (i) Using the ETF Market Making account for non-ETF Market Making transactions; (ii) Allowing an unauthorized person or entity to use the ETF Market Making account; and (iii) Maintaining a proprietary account for ETF shares for which it is engaged to act as Market Maker, or entering orders for said proprietary account; and (iv) Any acts similar or analogous to the foregoing. b. Minor Violations (i) Failure to comply with the reportorial requirements under these ETF Market Making Rules. Any other violation of these Rules not covered by the above enumeration shall be considered a minor violation. The penalties imposed pursuant to these ETF Market Making Rules shall be without prejudice to any civil, criminal and/or administrative action that the Exchange may take against the violating party, or to any penalty that may be imposed under the Trading Rules, depending on the circumstances. Implementing Guidelines of ETF Market Making Rules SECTION 1. Registration of ETF Market Maker. a. To register as an ETF Market Maker with the Exchange, an Authorized Participant designated by an ETF, shall meet the following requirements: (i) Licensed to act as a broker/dealer by the Commission; (ii) Registered as a trading participant of the Exchange; TacESD (iii) Has been continuously operating for the five (5) year period immediately preceding the filing of the application; (iv) Has at least one (1) Designated Specialist; and (v) Has no violations of laws or serious non-compliance with rules and regulations for the last two (2) years prior to filing the application. b. The Authorized Participant designated by an ETF shall submit the following to the Exchange as an ETF Market Maker: (i) Letter of Intent to operate as an ETF Market Maker duly signed by the nominee; (ii) Board Resolution authorizing the Trading Participant to engage in ETF Market Making operations; (iii) Processing fees in the amount of Five Thousand Pesos (P5,000.00) for each issue, or such other amount as may be prescribed by the Exchange from time to time; (iv) Such other documents that may be required by the Exchange. SECTION 2. Obligations of an ETF Market Maker. All ETF Market Makers must comply with the rules set by the Exchange. To ensure sufficient liquidity in the market, ETF Market Makers are obliged to observe the following when posting orders: a. Minimum Price THDIaC An ETF Market Maker must maintain two-way quotes, i.e., buy and sell orders in accordance with the following parameters: (i) During the period required under Section 2 (c), the ETF Market Maker must have at least five (5) posted orders each on the buy side and on the sell side ("two way quote obligation"); (ii) The price for each posted order must comply with the tick size indicated in the Trading Rules of the Exchange, provided that, the first order posted should be at most two (2) price fluctuations from the last traded price ("LTP") of the ETF share, provided further that, the succeeding orders must be posted at most two price fluctuations from each other. Board Lot and Price Fluctuation Table Example A: LTP of the ETF share is P9.00 The ETF Market Maker must post at least five (5) bid (buy) orders and five (5) ask (sell) orders at the following prices Price Tick From To Size Lot Size 0.0001 0.0099 0.0001 1,000,000 0.0100 0.0490 0.0010 100,000 0.0500 0.2490 0.0010 10,000 0.2500 0.4950 0.0050 10,000 0.5000 4.9900 0.0100 1,000 5.0000 9.9900 0.0100 100 10.0000 19.9800 0.0200 100 20.0000 49.9500 0.0500 100 50.0000 99.9500 0.0500 10 100.0000 199.9000 0.1000 10 200.0000 499.8000 0.2000 10 500.0000 999.5000 0.5000 10 1000.0000 1999.0000 1.0000 5 2000.0000 4998.0000 2.0000 5 5000.0000 UP 5.0000 5 Bid (Buy) Ask (Sell) 8.98 9.01 8.96 9.02 8.94 9.04 8.92 9.05 8.91 9.07 Example B: LTP of the ETF share is P50.00 The ETF Market Maker must post at least five (5) bid (buy) orders and five (5) ask (sell) orders at the following prices IacHAE Bid (Buy) Ask (Sell) 49.90 50.10 49.80 50.20 49.70 50.30 49.60 50.40 49.50 50.50 49.40 50.60 The tick size for an ETF priced at P50.00 is 0.05. The ETF Market Maker is required to post its first order at two (2) price fluctuations from the LTP, so its first bid order is at P49.90, while its first ask order is at P50.10. The ETF Market Maker is required to skip one (1) price fluctuation for the succeeding orders. b. Minimum Daily Volume The total daily volume of the buy and sell orders posted by an ETF Market Maker for a particular ETF must be at least fifty percent (50%) of the average trade volume for the three (3) months immediately preceding the current month. TDAcCa A Market Maker must fulfill its two way quote obligation within sixty (60) seconds after any of its orders have been executed in full, deleted, or have expired. c. Presence An ETF Market Maker shall post and maintain the orders described in Section 2 (a) for at least eighty percent (80%) of the time for any given trading day. The Exchange shall regularly monitor the performance of all ETF Market Makers using the parameters set forth in these guidelines. Any breach or non-compliance with the obligations provided herein may result in the suspension or termination of an ETF Market Maker or any disciplinary action deemed appropriate by the Exchange. An ETF Market Maker's agreement with an ETF may not supersede the minimum requirements of the Exchange as set forth in these guidelines. The ETF may impose additional obligations for the ETF Market Maker provided that the obligations set by the Exchange are complied with at the minimum. SECTION 3. ETF Market Maker Incentives. The Exchange may reduce or waive the transaction fees for a given month if, during that period, the ETF Market Maker is shown to have been fully compliant with the above-mentioned parameters and has not committed any violation of law and the relevant rules and regulations of the Exchange.