The Securities and Exchange Commission (SEC) is proposing changes to the rules governing margin financing, including tighter standards for the securities that investors may buy using funds borrowed from brokers. Margin financing lets customers borrow from brokers to buy shares, with the securities in the account serving as collateral — a form of leverage that magnifies both gains and losses, which is why eligibility lists and minimum equity levels directly shape how much borrowing investors can access.

The draft circular, issued on Aug. 25, is open for comments until Sept. 15. It seeks to amend Rule 48.1 of the 2015 Implementing Rules and Regulations of the Securities Regulation Code (Republic Act No. 8799) and to establish a risk-sensitive framework for margin financing.

Division of oversight

Under the proposal, the Philippine Stock Exchange, Inc. (PSE) would determine which securities may be purchased using borrowed funds and could set different margin requirements for different classes of eligible securities based on factors such as liquidity, volatility, settlement risks, and other prudential considerations, subject to SEC approval.

The SEC would set minimum prudential standards and retain continuing oversight, while the PSE would establish and administer the operational framework for margin financing. The split mirrors arrangements in many markets where the securities regulator sets prudential floors and the exchange or its self-regulatory arm runs the day-to-day rules. The Capital Markets Integrity Corp. (CMIC), the industry's independent audit, surveillance and compliance arm, would supervise and enforce broker-dealer compliance with SEC and PSE rules.

Interim eligibility and credit limits

Pending the adoption of the new exchange rules, margin financing would be limited to equity securities included in the PSE Composite Index and the MSCI Philippines Index, as well as other equity securities or classes that may be designated by the PSE under SEC oversight. Both indices track the country's biggest listed companies, so the interim list effectively confines margin financing to the market's most liquid names.

Under the proposed interim requirements, a broker-dealer may not extend credit exceeding 60% of the current market value of a margin-eligible security — equivalent to requiring investors to put up at least 40% of the purchase value in equity at the outset.

A customer would also need at least P50,000 in equity in a margin account before receiving new margin financing or increasing an existing margin position. The account would then have to maintain equity equivalent to at least 30% of the current market value of its margin-eligible securities.

Broker-dealers may impose stricter requirements, including higher margin levels, additional collateral, tighter customer qualifications, and concentration limits.

Exchange rules and methodology

The PSE would have 90 calendar days from the effectivity of the SEC rule to submit its proposed Exchange Margin Trading Rules for approval. The exchange may also establish different requirements for different classes of eligible securities, subject to SEC approval. Its methodology would be subject to periodic backtesting and independent validation, with results reported to the SEC at least once a year.

Those exchange rules will settle the operative details for brokers and investors — the final eligibility list and any class-specific margins that succeed the interim limits — making the Sept. 15 close of comments and the SEC's finalization of the circular the next milestones in the process.

Broker-dealer qualifications

Only broker-dealers authorized under the Securities Regulation Code and applicable SEC and exchange rules may engage in margin financing, the proposal said.

During the transition period, a broker-dealer may engage in new margin financing or increase an existing margin account only if the PSE determines that it has at least P150 million in unimpaired paid-up capital, complies with applicable risk-based capital requirements, has adequate operational and risk-management capabilities, and meets the disciplinary requirements under the proposed rule.

The proposal also requires that the broker-dealer not have been penalized by the exchange for major violations of its rules, particularly those governing margin trading, during the two years before the rule takes effect.

The SEC said the proposed rule would supplement existing broker-dealer requirements and would not create a separate licensing, registration, financial-responsibility, or supervisory framework beyond those already prescribed under the Securities Regulation Code and applicable SEC and exchange rules.

Margin calls and liquidation

The proposal would give customers three trading days from receipt of a margin call to restore the required margin, unless a shorter period applies under the margin financing agreement or the broker-dealer's own requirements.

If a customer fails to meet the call, the broker-dealer may sell or otherwise liquidate securities or other collateral in the account to restore the required margin, reduce or satisfy the customer's outstanding obligations, or protect itself against losses arising from the transaction.

Any remaining deficiency after liquidation would remain payable by the customer, while the broker-dealer would have to notify the customer of the liquidation and the resulting status of the account by the next business day.

A broker-dealer may also agree in writing to delay liquidation while the customer addresses the margin deficiency under agreed terms.

The proposal also allows the required payment date for an initial-margin call to be extended by seven days in exceptional circumstances, subject to an application by the broker-dealer to the exchange or the SEC.

Transition for existing accounts

"Margin Accounts lawfully established prior to the effectivity of this rule may continue under the applicable margin financing agreements then in force. Any new margin financing or any increase in an existing margin account after the effectivity of this rule shall comply with this rule and these transitional provisions," the SEC said.

"Existing House Margin requirements and internal credit, compliance, and risk management policies of broker dealers shall remain valid," it added.

— Alexandria Grace C. Magno