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Amendments to the 2015 Securities Regulation Code Rules

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On August 11, 2023 the Securities and Exchange Commission (SEC) released Memorandum Circular (MC) No. 11, series of 2023 which amends certain provisions of the 2015 Implementing Rules and Regulations of the Securities Regulation Code (“The 2015 SRC Rules”) and SEC MC No. 16, s. 2004.

 

The amendments to the 2015 SRC Rules pertain to the shift from the T+3 to the T+2 settlement cycle. They shall also only take effect after publication in 2 newspapers of general circulation. Lastly, the amendments shall only apply to transactions executed starting August 24, 2023. 

 

SRC Rule 49.1.1.5.3 on the Net Liquid Capital Rule was amended to read:

In computing NLC, the Equity Eligible for Net Liquid Capital of a Broker Dealer is adjusted by the following, provided, however, that in determining net worth, all long and all short securities position shall be marked to their market value:

 

49.1.1.5.3.1. Adding unrealized profits (or deducting unrealized losses) in the accounts of the Broker Dealer

 

49.1.1.5.3.2. Deducting fixed assets and assets which cannot be readily converted into cash [less any indebtedness excluded in accordance with SRC Rule 49.1.1.5.2.4 of the Definition of the term Aggregate Indebtedness] including, among other things:

 

49.1.1.5.3 .2.1. Real estate; furniture and fixtures; Exchange memberships/trading rights; prepaid rent, insurance and other expenses; goodwill, organization expenses;

 

49.1.1.5.3.2.2. All unsecured advances and loans; deficits in customers’ and noncustomers’ unsecured and partly secured notes; deficits in special omnibus accounts or similar accounts carried on behalf of another Broker Dealer, after application of calls for margin, marks to the market or other required deposits that are outstanding two (2) business days or less; deficits in customers’ and non-customers’ unsecured and partly secured accounts after application of calls for margin, marks to the market or other required deposits that are outstanding two (2) business days or less, except deficits in cash accounts for which not more than one extension respecting a specified securities transaction has been requested and granted; the market value of stock loaned in excess of the value of any collateral received therefore; and any collateral deficiencies in secured demand notes in conformity with SRC Rule 49.1.2 above.

 

SRC Rule 50 on Purchases and Sales in Cash Account was amended to read:

50.1. Purchases by a customer in a cash account shall be paid in full within two (2) business days after the trade date.

 

SRC Rule 52.1.11 on Monthly Aging of Customers Receivable was amended to read:

52.1.11.2. The aging schedule shall indicate the monetary and securities collateral values of the customers’ receivable as of end of month, broken down as follows:

 

Classification
T+0 to T+1
T+2 to T+12
T+13 to T+30
T+31 up

 

52.1.11.3. Every Broker Dealer shall appropriate Allowance for Doubtful Accounts (ADA) using and in accordance with the following schedule:

 

Classification Provision Base
T+0 to T+1 0 Total Receivables (TR)
T+2 to T+12 2% TR
T+13 to T+30 50% TR less collateral (net of haircut)
T+31 up 100% TR less collateral (net of haircut)

 

The ADA is computed by getting, for each doubtful account, an amount equivalent to the provision (see Table above) of the amount outstanding, net of collateral (net of haircut). Basis for the computation would be the individual accounts.

 

As to the revisions for SEC MC No. 16, s. 2004, Subsection II on the Computation of Net Liquid Capital (NLC), paragraph C is amended to read as follows:

C. Computation of Net Liquid Capital (NLC)

i. XXX

ii. Deducting fixed assets and assets which cannot be readily converted into cash [less any indebtedness excluded in accordance with paragraph (iv) of the Definition of the term Aggregate Indebtedness] including, among other things:

a. XXX

b. All unsecured advances and loans; deficits in customers’ and non-customers’ unsecured and partly secured notes; deficits in special omnibus accounts or similar accounts carried on behalf of another Broker Dealer, after application of calls for margin, marks to the market or other required deposits that are outstanding two (2) business days or less, except deficits in cash accounts for which not more than one extension respecting a specified securities transaction has been requested and granted; the market value of stock loaned in excess of the value of any collateral received therefore; and any collateral deficiencies in secured demand notes in conformity with SRC Rule 49.1 (G) above.

XXX

The Schedule for part 4 Schedule for Specific and General Provisioning for Overdue Accounts is hereby amended to read as follows:

SCHEDULE FOR PART 4
SCHEDULE FOR SPECIFIC AND GENERAL PROVISIONING FOR OVERDUE ACCOUNTS

A. Customer accounts qualifying as Non-performing Accounts

 

Type of account Criteria for classification of account as non-performing Date for classification
  1. Contra losses
 When the account remains unpaid starting from T+3 or more from the date of contra transaction T+3
  1. Overdue purchase contracts
 When the account remains unpaid starting from T+13 T+13 or when the broker exercises its right of mandatory close out over the securities serving as collateral
  1. Margin Accounts
 When, upon making a margin call, the period to put up equity to meet the margin deficiency has expired Upon expiration of period

 

B. Specific Provision

 

  1. Specific provisions for bad and doubtful accounts shall be made for contra losses, overdue purchase contracts and margin accounts. For purposes of this section, these types of accounts are classified as Doubtful or Loss depending on the default period each respectively has. They are as follows:

 

Type of Accounts Period when account is overdue Classification
  1. Contra losses
 a. T+3 to 30 calendar days

b. Over 30 calendar days
  1. Doubtful 
  2. Loss
  1. Overdue purchase contracts
 a. T+13 to 30 calendar days

b. Over 30 calendar days
  1. Doubtful 
  2. Loss
  1. Margin Accounts
 When the Equity has fallen below the required minimum margin maintenance and the margin deficiency is more than P10,000.00 Loss

 

XXX

Schedule B.2 Counterparty Risk Requirement Ciunterparty Risk Factors for Unsettled Agency Trades, SRC Rule 49(H), Subsection VI is hereby amended to read as follows:

SCHEDULE B.2
COUNTERPARTY RISK REQUIREMENT COUNTERPARTY RISK FACTORS FOR UNSETTLED AGENCY TRADES
SRC Rule 49(H) Subsection VI

 

Agency Transaction Time period for application of Percentage Credit Risk Factor
  1. Sell Contract
  • Covers possible risk of failing to receive the security on a sales contract
 T to T+1 of clients 0%
From T+2 to T+12 of clients 8% of the mark to market value of the sell contract multiplied by the CW, for negative counterparty exposure (i.e. if the current market value exceeds the transaction value of the stock)

0% if it is a positive counterparty exposure (i.e. if the current market value is less than the transaction value of the stock)
Beyond T+12 of clients The marked to market value of the contract multiplied by the CW for negative counterparty exposures (i.e. if the current market value exceeds the transaction value of the stock)

0% if it is a positive counterparty exposure (i.e. if the current market value is less than the transaction value of the stock)
  1. Buy contract
  • Covers possible risk of failing to give cash payment on a buy order
 T to T+1 of clients 0%
From T+2 to T+12 of clients 8% of the mark to market value of the buy contract multiplied by the CW, for negative counterparty exposure (i.e. if the transaction value exceeds the current market value of the stock)

0% if it is a positive counterparty exposure (i.e. if the transaction value is less than the current market value of the stock)
Beyond T+12 of clients The marked to market value of the contract multiplied by the CW for negative counterparty exposures (i.e. if the transaction value exceeds the current market value of the stock)

0% if it is a positive counterparty exposure (i.e. if the transaction value is less than the current market value of the stock)

 

Schedule B.3 on Counterparty Risk Requirement Counterparty Risk Factors for Unsettled Principal Trades, SRC Rule 49(H), Subsection VI is hereby amended to read as follows:

SCHEDULE B.3
COUNTERPARTY RISK REQUIREMENT COUNTERPARTY RISK FACTORS FOR UNSETTLED PRINCIPAL TRADES
SRC Rule 49(H) Subsection VI

 

Principal Transaction Time period for application of Percentage Credit Risk Factor
  1. Sell Contract
  • Covers possible risk of counterparty failing to deliver securities on a sell order
 T to T+1 of counterparties (i.e. Exchange/Clearing Agency or BD) 0%
From T+2 to T+12 of clients 8% of the mark to market value of the sell contract multiplied by the CW, for negative counterparty exposure (i.e. if the transaction value exceeds the current market value of the stock)

0% if it is a positive counterparty exposure (i.e. if the transaction value is less than the current market value of the stock)
Beyond T+12 of clients The marked to market value of the contract multiplied by the CW for negative counterparty exposures (i.e. if the transaction value exceeds the current market value of the stock)

0% if it is a positive counterparty exposure (i.e. if the transaction value is less than the current market value of the stock)
  1. Buy contract
  • Covers possible risk of failing to deliver securities on a buy contract
 T to T+1 of clients 0%
From T+2 to T+12 of clients 8% of the mark to market value of the buy contract multiplied by the CW, for negative counterparty exposure (i.e. if the current market value exceeds the transaction value of the stock)

0% if it is a positive counterparty exposure (i.e. if the current market value is less than the transaction value of the stock)
Beyond T+12 of clients The marked to market value of the contract multiplied by the CW for negative counterparty exposures (i.e. if the current market value exceeds the transaction value of the stock)

0% if it is a positive counterparty exposure (i.e. if the current market value is less than the transaction value of the stock)

 

Schedule B.4 Counterparty Risk Factors for Debts/Loans, Contra Loss, And Other Debts Due, SRC Rule 49(H), Subsection VI is hereby amended to read as follows:

 

SCHEDULE B.4

COUNTERPARTY RISK REQUIREMENT

COUNTERPARTY RISK FACTORS FOR DEBTS/LOANS, CONTRA LOSS AND OTHER DEBTS DUE

SRC Rule 49(H) Subsection  VI

 

Debt/Aging Period Credit Risk Factor (of Counterparty Exposure)
Less than 1 day (or T+0 to T+1) 0
2-12 days (or T+2 to T+12) 8% of amount due
13-30 days 50% of amount due
Over 30 days 100% of amount due
0

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