Business World, 28 May 2013


According to news reports, the Philippine Stock Exchange (PSE) is planning to take over the fixed-income trading platform under Philippine Dealing and Exchange Corp. (PDEx). Have the PSE officials done due diligence on their proposed acquisition? Have they checked the controversial birth of PDEx? Are they willing to risk the rising and untarnished reputation of PSE by “buying” a damaged good? Are they willing to face numerous congressional investigations and, perhaps, years of litigation.

The PDEx is faced with many legal issues. A review of the minutes of proceedings of the March 22nd 2011 congressional hearing by the committee on banks, financial institutions and currencies (subcommittee on fixed income securities market) would show the many legal and moral questions on the existence of PDEx.

The hearing was attended by who’s who in central banking, finance, and securities. One can detect how uncomfortable the resource persons were in explaining the existence of PDEx. No one wants paternity of this horrible monster. One gets the feeling that the honorable men from the government and the private sector didn’t want to get associated with PDEx.

I have already explained in previous articles some objectionable properties of PDEx.

First, PDEx has reached virtual monopoly status in the trading of government securities This is a demonstration of government failure. Through errors of omission and commission, and perhaps working in cahoots with, at best, innocent, or at worst, corrupt public officials, PDEx now dominates, monopolizes, trading of government securities.

The Department of Finance has reneged on its responsibility to secure the integrity of government treasury bills, notes and bonds, both their initial issuance and subsequent trading. It has surrendered this responsibility to the Securities and Exchange Commission (SEC).

The SEC is responsible for corporate bonds not government securities. But even then, there should be no exclusivity and certainly no monopoly.

If the DoF would like to assign the execution of its functions to a private partner, ala public-private partnership — a questionable act in the first place because of the issue of confidentiality of government securities transactions — then the act of choosing a private partner should go through the bidding process. This way the best private institution will be chosen and the government will get paid by the winning bidder.

Right now, PDEx is exercising what is clearly a DoF function without the benefit of public bidding. That’s highly disadvantageous to the government.

Second, PDEx has been given de facto power to tax. It collects fees — and ad valorem at that — from both buyers and sellers of government securities. It collects fees even from transactors who didn’t use its trading platform, charging them purportedly for mapping purposes. Which agency of the government gave PDEx the privilege of collecting fees?

Since the fees are coercive in nature, then it is a tax. But only the government has the power to tax. More precisely, only Congress can pass a tax law. So, which agency of the government usurped the powers of Congress?

A fundamental tenet of taxation is that the real burden of any tax falls on real people (shareholders, workers, consumers) and not on corporations or traders. The higher the fees (taxes), the higher the burden.

The other objectionable part here is the use of the proceeds. PDEx collections go to the pockets of their shareholders. A tax, on the other hand, maybe used to finance public goods.

Third, the existing arrangement is going to make the cost of public borrowing costlier. Potential buyers of government securities will certainly consider the uncertainty of how much PDEx will charge in the future (already unreasonably high according to some traders) for transactions of government securities. This should be a major concern for the Department of Finance which is expected to borrow heavily from domestic sources in the next few years.

What’s the idea behind the proposed merger of the Philippine Stock Exchange (PSE) with PDEx? An attempt to legitimize what appears to be an illegally assembled institution? Maybe those who were responsible for this sordid mess — some dead, some retired, some back in power, others pretty much around and rejoicing on their way to the bank — are trying to cover up for their past mistakes. But if the organization is illegal in the first place, no slicing and dicing and reorganizing will make it legal. That’s the risk the PSE officials are taking.

Is it greed? PDEx is raking in billions of pesos in revenues, given the questionable grant of ‘taxing’ power by some unnamed authorities. Firms or individuals pay fees every time they sell, or buy, government securities — whether they use the PDEx platform or not.

A lawsuit against PDEx before the Supreme Court is imminent. With a revitalized political opposition, congressional investigations on the creation and activities of PDEx are forthcoming. But even a self-righteous administration should strive to look at the bottom of this mess. PDEx was created under the former regime, so I don’t see why the present administration should protect it.

In the meantime, PSE is likely to experience a significant market correction. Face with this possibility, why take more risk? To the PSE authorities: forewarned is forearmed.