For Public Comments: Exchange Traded Fund Market Making Rules and Implementing Guidelines

April 10, 2013 PSE MEMORANDUM NO. CN-0011-13 TO : The Investing Public SUBJECT : For Public Comments: Exchange Traded Fund Market Making Rules and Implementing Guidelines The Board of Directors of The Philippine Stock Exchange, Inc. approved today, April 10, 2013, the release for public comments of the Revised Exchange Traded Fund ("ETF") Market Making Rules and Implementing Guidelines of the ETF Market Making Rules, which would form Part C of the PSE Rules on Exchange Traded Funds ("PSE ETF Rules"). In March 2013, the Securities and Exchange Commission ("SEC") approved Parts A and B of the PSE ETF Rules, which cover "General Provisions" and "Listing and Disclosure Rules", respectively. In view of SEC comments received by the Exchange as regards the ETF Market Making Rules, the Exchange has revisited the obligations of the ETF Market Maker in performing its role as the liquidity provider based on the latest Market Making rules of other Markets. In connection with the foregoing, the Exchange is inviting all concerned parties to give their comments to the Revised PSE ETF Rules pertaining to market making (attached as Annex "A"). Please send your comments to Ms. Ria Datu-Cabanela at [emailprotected] on or before April 17, 2013. (SGD.) ROEL A. REFRAN Chief Operating Officer ANNEX A Proposed PSE ETF Rules Part C ETF Market Making Rules & Implementing Guidelines As of April 10, 2013 Rules on Exchange Traded Funds PART C ETF Market Making Rules Section 12. ETF Market Making Rules cTDECH Section 13. Registration of the ETF Market Maker Section 14. Exchange Reportorial Requirements of the ETF Market Maker Section 15. Market Making Orders Section 16. Occurrence of a Wide Spread Section 17. Other ETF Market Making Obligations Section 18. Segregation of Functions Section 19. Temporary Suspension of the Registration of the ETF Market Maker Section 20. Voluntary Termination of a Designated Specialist Section 21. Voluntary Withdrawal of Registration as ETF Market Maker Section 22. Expiration of ETF Market Making Agreement Section 23. Involuntary Suspension and Termination of an ETF Market Maker Section 24. Resumption of ETF Market Making Obligations Section 25. 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 PART C ETF Market Making Rules SECTION 12. ETF Market Making Rules . Pursuant to Sections 5 (14) and 8 (2) of the SEC ETF Rules, which provide 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 shall apply for registration as an ETF Market Maker with the Exchange. For this purpose, the Trading Participant shall fulfill such requirements that may be imposed by the Exchange and the Commission, including, without limitation, the requirement to have at least one (1) licensed Salesman who has been accredited as a Designated Specialist by the Exchange or any person authorized by the Commission. Designated Specialists, as defined in the PSE Trading Rules, shall mean the appointed licensed Salesman employed by a Market Maker to perform Market Making obligations. ATHCDa b. Upon compliance with the requirements of the Exchange and the Commission, the applicant shall be registered as an authorized ETF Market Maker and may be engaged as such by an ETF. c. The registration and authority of a Trading Participant to act as an ETF Market Maker shall be non-transferable. d. The registration of an ETF Market Maker and the accreditation of Designated Specialists shall be valid for a period of one (1) year, unless sooner terminated under these Rules. The registration and accreditation may be renewed thereafter subject to compliance with the requirements of the Exchange and the Commission. e. Only a registered ETF Market Maker shall be allowed to enter into a Market Making agreement with an ETF and shall be allowed to perform its Market Making functions pursuant to the agreement and in accordance with the requirements of the Exchange and the Commission. f. Only accredited Designated Specialists are allowed to perform the Market Making functions and obligations of the ETF Market Maker. g. The ETF Market Maker shall furnish the Exchange, through the PSE Listings Department, copies of all Market Making agreements it has entered into with ETF/s. The Market Maker shall comply with this obligation throughout the duration of its registration. 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 . The ETF Market Maker shall inform the Exchange, through the PSE Market Operations Division, in writing by hand or in electronic form of any of the following matters: DTaAHS 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 or any regulatory body, 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 amounting to at least One Hundred Thousand Pesos (P100,000.00) is filed against the ETF Market Maker. 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. The Exchange reserves the right to disclose to the public any and all documentary submissions and disclosures of the ETF Market Maker upon a determination that the same is necessary in order to maintain a fair and orderly market for the protection of the investing public. SECTION 15. Market Making Orders . Only when the ETF has a market making agreement with its Market Maker can its shares be subject of Market Making orders. SECTION 16. Occurrence of a Wide Spread. Wide spread shall mean the occurrence of any of the following situations: TEcAHI a. the bid and ask spread is larger than a limit specified by the Exchange from time to time; b. there is only one-sided quotation; or c. there is no existing quotation on both the bid and ask queues. The abovementioned circumstances shall be in occurrence continuously for a period of time, as the Exchange may from time to time prescribe, during the Continuous Trading phase, defined as the period during the market open, where orders are immediately matched. SECTION 17. Other ETF Market Making Obligations . a. A Market Maker shall be permitted to act as a Market Maker for more than one ETF, subject to the approval by the Exchange and the Commission. b. An ETF Market Maker shall only use its designated ETF Market Making account to enter Orders that are covered under, or in pursuance of, its ETF Market Making functions. c. An ETF Market Maker shall be allowed to maintain only the ETF Market Making and error account for the ETF in which it is designated as a Market Maker. d. 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. e. 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 be obliged, upon occurrence of Wide Spread, to perform the following: (i) enter two-sided ETF Market Making Orders into the System in quantities not less than the minimum volume required by the Exchange; HEacAS (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 18. 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 19. Temporary Suspension of the Registration of the ETF Market Maker . Any agreement between the ETF and the ETF Market Maker to the contrary notwithstanding, the Exchange may grant the request of an ETF for the temporary suspension of the registration of its ETF Market Maker under any of the following circumstances: 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 cCTaSH c. Such other cases as the Exchange may deem necessary for a fair and orderly market and to protect the investing public. SECTION 20. 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 the Market Maker shall immediately assign a replacement, if necessary. SECTION 21. 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. 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 shall submit to the Exchange the name and other details of the replacement ETF Market Maker appointed by the ETF. In cases where the previous ETF Market Maker is the sole ETF Market Maker of the ETF, 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. ADaEIH SECTION 22. 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 23. 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. Substantial non-compliance with the ETF Market Making rules, regulations and guidelines of the Exchange; b. Failure to promptly settle any dues or fees payable to the Exchange; c. Suspension of the ETF Market Maker by the Commission, the Capital Markets Integrity Corporation or the Securities Clearing Corporation of the Philippines; or d. 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 24. 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. HAIDcE SECTION 25. 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 (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 in its proprietary account, ETF shares for which it is engaged to act as Market Maker; (iv) Any acts similar or analogous to the foregoing; (v) Non-compliance with the ten (10)-minute disclosure rule as specified in Section 14 above; and (vi) Continuous failure by the ETF Market Maker to comply with its Market Making obligations under these Rules which may be detrimental to the interest of the investing public or cause a disruption in the fair and orderly maintenance of the market. b. Minor Violations (i) Failure to comply with the reportorial requirements under these ETF Market Making Rules. 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. aCTcDS 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; (iii) Has been continuously operating as a broker/dealer 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, upon occurrence of Wide Spread, to perform the following when posting Market Making orders: TCIHSa a. Maximum Spread An ETF Market Maker must ensure two-way quotes, i.e. , buy and sell orders, with a maximum spread based on the table below: Price Maximum From To Spread 0.0001 0.4950 20 ticks 0.5000 19.9800 15 ticks 20.0000 999.5000 10 ticks 1000.0000 UP 5 ticks b. Minimum Order Quantity Each Market Making order posted by an ETF Market Maker must have a minimum quantity of five (5) board lots. The Exchange may prescribe other appropriate volume requirements, as may be necessary. c. Presence (i) The limit of the bid and ask spread for the situations under the definition of Wide Spread as stated in Section 16 of the ETF Market Making Rules shall be based on the following table: Price Bid and Ask Spread From To Limit 0.0001 0.4950 Beyond 20 ticks 0.5000 19.9800 Beyond 15 ticks 20.0000 999.5000 Beyond 10 ticks 1000.0000 UP Beyond 5 ticks (ii) The minimum period of time for which the situations described in Section 16 of the ETF Market Making Rules, must have occurred continuously for at least three (3) minutes, in order to constitute a Wide Spread. IaECcH (iii) The period of time within which an ETF Market Maker must enter Market Making Orders, upon an occurrence of Wide Spread, must not exceed ninety (90) seconds. (iv) An ETF Market Maker shall maintain Market Making Orders for at least fifty percent (50%) of the time for any given trading day. This obligation is measured by getting the total number of hours/minutes that the Market Maker has an active order when the market is open at any given trading day. (v) An ETF Market Maker shall post and maintain Market Making Orders for a total of at least eighty percent (80%) of the time for one month. This obligation is measured by getting the total number of hours/minutes in a month that the Market Maker has an active order when the market is open. Illustration: ETF symbol: ABC LTP: 25 Tick Size: 0.05 Lot Size: 100 Using the table above, the Market Maker for ETF ABC must maintain a maximum spread of 10 ticks. This means that the difference between the best bid price and the best ask price for ETF ABC must not exceed .50 (10 ticks x .05). The market making orders to be entered must have a minimum quantity of 500 shares (5 board lots x 100 shares). - Scenario 1: Current Order Book Volume Bid Ask Volume 1,500 24.90 25.50 6,000 2,300 24.80 25.55 400 25.60 1,200 In the current order book, the bid and ask spread is .60 which is beyond the maximum spread for ETF ABC. If this situation does not change for more than three (3) minutes, it is considered an occurrence of a wide spread. In this case, the Market Maker for ETF ABC is obliged to enter market making orders within ninety (90) seconds. The Market Maker may enter either of the following: ESCTIA Sell order: 500 shares @ 25.40 New Order Book: Volume Bid Ask Volume 1,500 24.90 25.40 500 2,300 24.80 25.50 6,000 25.55 400 25.60 1,200 Buy order: 700 shares @ 25.00 New Order Book: Volume Bid Ask Volume 700 25.00 25.50 6,000 1,500 24.90 25.55 400 2,300 24.80 25.60 1,200 Buy order: 1,000 shares @ 24.95 and Sell order: 800 shares @ 25.45 New Order Book: Volume Bid Ask Volume 1,000 24.95 25.45 800 1,500 24.90 25.50 6,000 2,300 24.80 25.55 400 25.60 1,200 Buy order: 900 shares @ 25.00 and Sell order: 1,200 shares @ 25.35 Volume Bid Ask Volume 900 25.00 25.35 1,200 1,500 24.90 25.50 6,000 2,300 24.80 25.55 400 25.60 1,200 - Scenario 2: Volume Bid Ask Volume 3,000 24.75 200 24.60 This scenario is considered a one-sided quotation or one-sided order book since there are no selling orders. Thus, if there are no selling orders that will be posted for more than three (3) minutes, it is already considered as an occurrence of a wide spread. In this case, the market maker is obliged to enter market making orders to maintain the maximum spread for the ETF which is 10 ticks (equivalent to .50 for ETF ABC). The Market Maker may enter either of the following: Sell order: 600 shares @ 25.25 New Order Book: Volume Bid Ask Volume 3,000 24.75 25.25 600 200 24.60 Buy order: 1,100 shares @ 24.80 and Sell order: 500 shares @ 25.30 . New Order Book: Volume Bid Ask Volume 1,100 24.80 25.30 500 3,000 24.75 200 24.60 Buy order: 1,300 shares @ 24.85 and Sell order: 700 shares @ 25.00. New Order Book: Volume Bid Ask Volume 1,300 24.85 25.00 700 3,000 24.75 200 24.60 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. EDcIAC 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.