Rules on Futures Trading in Philippines 1999

Definitions establishing key terms

Section 1 provides that “Commission” refers to the Securities and Exchange Commission.
Section 1 defines “Futures Exchange” or “Contract Market” as a corporation authorized by the Commission to operate as such, whose members engage in the business of purchasing and selling futures contracts for the account of other persons, including the market place and market facilities.
Section 1 defines “Futures Contract” as an agreement to (1) buy and sell a specified quantity and grade of commodity at a future date at a price established at the floor of the Exchange, or (2) buy or sell foreign currency or foreign interest notes at a future date where, on expiration, instead of delivery there is cash settlement.
Section 1 defines “Commodity” as agricultural or mineral products or financial instruments that may be the subject of futures contracts, including coconut products, soybean, rice, corn, wheat, sugar, coffee, other goods, articles, financial instruments, foreign currency, indices, interest rate-linked instruments, options, or similar instruments as determined by the Commission.
Section 1 defines “Future Delivery” as a commitment to deliver a specific commodity on a specified future delivery date.
Section 1 defines “Member of a Contract Market” as persons owning or holding a membership seat; Exchange seats are for those who actually engage in futures broking business, while those who trade exclusively for their own personal account should buy “locals” rights.
Section 1 defines “Futures Broker” as a corporation registered and licensed by the Commission that solicits or accepts orders for purchase or sale of futures contracts traded in the Philippine market and collects margins in the form of money in connection with such solicitation or acceptance.
Section 1 defines “Locals” as an individual authorized by the Exchange to trade exclusively for his own personal account.
Section 1 defines “Trading Advisor” as a Commission-licensed person who, for an advisory fee, advises others about the value of commodities and the advisability of trading in any commodity for future delivery on or subject to rules of a contract market, or, for compensation as part of a regular business, issues or promulgates analyses or reports concerning futures markets, with specified exclusions (including banks or trust companies, certain media professionals, lawyers, accountants, teachers, publishers of bona fide newspapers/news/business/financial publications of general and regular circulation and their employees, contract markets, and other persons the Commission specifies by rule/order), and provides that services by the excluded persons must be solely incidental to their business/profession.
Section 1 defines “Fund Manager” as a person engaged in a pooled funds/investment trust/similar enterprise who solicits, accepts, or receives money from others for the sole purpose of trading in a futures contract.
Section 1 defines “Clearing House” as the central agency that clears and guarantees transactions of members of a futures exchange and effects settlement.
Section 1 defines “Margin” as money equivalent to a certain percentage of the total contract value without which a customer cannot trade.
Section 1 defines “Futures Association” as an association composed of duly registered and licensed futures brokers, locals, fund managers, trading advisors, and other persons designated by the Commission as eligible for membership.
Section 1 defines “Foreign Principal” as a clearing member of a foreign futures exchange that (1) signs a contract in a Commission-approved form with a local broker regarding transmittal of local orders for execution in the foreign exchange and (2) guarantees contracts with clearing members of other foreign futures exchanges or their agents so that the local broker can directly trade with such clearing members.
Section 1 defines “Branch Office” as an office licensed by the Commission other than the principal office of any local broker established for solicitation or acceptance of futures contracts.

Futures exchanges: registration and operations

Section 2 requires any applicant for registration and licensing as a Futures Exchange to satisfy minimum requirements of a self-regulatory organization (SRO), including qualifications/guidelines for acceptance of membership, organizational structure and key personnel rules, business conduct rules, trading rules and measures preventing trading abuses, uniform accounting and record keeping for audit trails, surveillance/compliance/enforcement systems (including financial health and sales/trading practice audits), investigation and disciplinary procedures, customer protection and settlement of disputes systems, internal and market risk management assessment mechanisms, and procedures/guidelines for suspension or liquidation of the Exchange or its members.
Section 2 requires that the Exchange’s Board of Directors have non-brokers comprising at least 1/3 of membership, and that the President must also be a non-broker.
Section 2 requires that the Exchange have adequate facilities, financial and managerial capabilities, expertise, and integrity to undertake Exchange activities.
Section 2 requires a public gallery providing real-time trading price visibility and transparency assurance for all prices/transactions, and requires that the electronic trade system be hooked up with regulatory bodies to provide direct access to information.
Section 2 requires the Exchange be located where efficient and sufficient communication systems allow real-time public monitoring and transactions, with swift confirmation; the Exchange may relocate with prior Commission approval to continue serving trading and hedging public efficiently.
Section 2 permits, if necessary, requiring that warehouses be accessible for surveillance and monitoring by the Exchange and by the Commission or its authorized representatives.
Section 2 requires that the operation of the Exchange promote public interest.
Section 2 requires applicants to submit an application in the prescribed form with required documents; if denied, the applicant must be afforded an opportunity for a hearing before the Commission.
Section 2 requires any approved Exchange to undertake to advise prospective marketing participants that obligations under futures trading contracts carry no implied assurance of provision of foreign exchange by the Bangko Sentral ng Pilipinas or the banking system.

Additional Exchange obligations and designation

Section 3 requires each domestic Futures Exchange to furnish the Commission copies of its rules and regulations, and governing board/committee resolutions containing provisions that include:
- A screening process admitting only fit and proper applicants.
- Prevention of false or misleading crop or market reports affecting commodity prices.
- Prevention of price manipulation and cornering by brokers or fund managers in the Exchange.
- Warehouse operators’ duties to keep records, submit reports, and permit Commission visitations.
- A delivery notice requirement: written notice of delivery date at least three (3) business days prior to delivery, to the party obligated to accept delivery.
- Contract delivery-grade provisions conforming to Exchange standards approved by the Commission.
- Acceptance of Warehouse Receipts Law receipts in satisfaction of approved futures contracts.
- Minimum financial standards for futures brokers who are members, approved by the Commission.
- Contract terms relating to execution/sale/purchase or other trading requirements subject to Exchange rules.
- Delivery of grades and points/quality and locational price differentials that tend to prevent or minimize price manipulation, market congestion, or abnormal commodity movement.
- A fair and equitable customer-claim settlement procedure through arbitration or otherwise.
- Penalties for inactive members.
- Educational courses for the investing public and broker members, plus training/testing facilities for broker sales representatives, with curriculum subject to Commission approval.
- Making available complete lists of accredited brokers/members and requiring brokers to make available complete lists of sales representatives.
Section 3 requires the Exchange to submit required reports to the Commission.
Section 3 requires prior Commission approval for all Exchange rules/regulations or amendments.
Section 3 requires the Exchange to keep books, records, and minutes of proceedings and governing boards/committees for five (5) years or longer if the Commission directs, and make them available for Commission inspection during business hours.
Section 3 requires a Fidelity Fund/Surety Bond to protect the investing public against broker bankruptcy or fraud.
Section 3 requires Exchange rules to advise prospective investors that obligations arising from futures trading contracts carry no implied assurance of foreign exchange by the Bangko Sentral or the banking system.
Section 4 provides that a domestic Futures Exchange seeking designation as a contract market must apply to the Commission and demonstrate compliance with Exchange requirements and sufficient assurance it will continue complying.
Section 4 requires the Commission to afford a hearing opportunity to a commodity futures Exchange whose designation application is refused.

Enforcement: suspension, revocation, and trading bans

Section 5 provides that a Futures Exchange’s failure/refusal to comply with these rules or any Commission order is valid cause, after due notice and hearing, for suspension of designation for a period not to exceed twelve (12) months or for revocation of designation as a contract market.
Section 5 authorizes the Commission to suspend for not more than twelve (12) months or revoke designation upon a showing the Exchange is not enforcing or has not enforced its designation-conditional rules of procedure.
Section 5 authorizes the Commission, if public interest requires, to summarily suspend trading in any futures contracts on any domestic contract market for up to thirty (30) days, or summarily suspend all trading of any Futures Exchange for more than thirty (30) days but not exceeding ninety (90) days.
Section 6 allows a Futures Exchange to voluntarily withdraw its contract market designation by written notice to the Commission requesting withdrawal, served at least ninety (90) days prior to the withdrawal effective date stated in the notice.
Section 6 provides that an Exchange may be designated again as a contract market by applying as for an original application.
Section 7 provides that the Commission may investigate futures exchanges and other persons subject to Presidential Decree No. 902-A, as amended, BP No. 178, or these rules, and may publish results and statistical information at its discretion, while excluding data that would separately disclose a person’s business transactions and trade secrets or customer names.

Clearing houses and futures associations

Section 8 prohibits registration of any applicant Clearing House unless it is shown to be an independent and credible institution, preferably a reputable bank acceptable to the market and the Commission.
Section 8 requires the Clearing House to be prepared to confirm transactions upon request of brokers or their customers.
Section 8 requires the Clearing House to specify, identify, and implement jointly with the Exchange:
- initial margin deposit required per contract,
- margin call (intraday) level,
- mandatory cut-loss level,
- and to collect and maintain buffer margin deposits of broker members.
Section 9 requires Commission finding before registration of any Futures Association, including that its rules prevent fraudulent and manipulative acts, promote just and equitable trade principles, protect public interest and remove impediments to free/open futures trading.
Section 9 requires Futures Association rules to provide discipline of members and persons associated with them by expulsion, suspension, fine, censure, or other fit penalties for rule violations, including suspension/bar from association with all members.
Section 9 requires fair and orderly procedures for discipline and for denial of membership or barring association.
Section 9 requires the Association be in the public interest and able to comply with Commission rules/regulations.
Section 9 permits membership for duly licensed local futures brokers, their foreign principals, and other persons the Commission designates, subject to exclusions under the discipline and qualification limitations in Section 9.
Section 9 provides that membership continuation is barred, except with Commission approval/discretion in appropriate public interest cases, if the person is suspended from being associated with any contract market member, is subject to a Commission disciplinary order, or has associated with someone excluded from membership in the Association.
Section 9 provides that no person may become a member or associated with a member unless qualified, including qualification in terms of training, experience, and other qualifications, subject to Commission approval.
Section 10 requires any association registering as a Futures Association to file with the Commission for review/approval its articles of incorporation and by-laws, and submit existing rules affecting members, a written undertaking to furnish rule amendments forthwith upon adoption, and other documents/information the Commission requires.
Section 11 makes Futures Association disciplinary actions, denial of membership, or barring/expulsion subject to Commission review on the Commission’s own motion or upon aggrieved application filed within thirty (30) days after the action, or longer if the Commission determines.
Section 11 requires the Commission, after due notice and hearing, to cancel, reduce, or require remission of excessive penalties, considering public interest.
Section 11 requires the Commission, in review of denial/barring grounds found factually valid, to dismiss the proceedings; otherwise, the Commission must set aside the Association action and require admission or permitting association.
Section 12 authorizes the Commission to abrogate, amend, alter, or supplement any Futures Association rule/regulation by rule or order after due notice and hearing if necessary/appropriate in the public interest.
Section 13 authorizes suspension (up to twelve (12) months) or revocation of registration for Association violations, failure to enforce compliance, or other activity tending to defeat purposes.
Section 13 authorizes suspension (up to twelve (12) months) or expulsion of members, suspension (up to twelve (12) months) or barring persons from association, after due notice and hearing, when members/persons violate Title V or rules or effect transactions for others with reasons to believe violation under Title; it also authorizes removal of officers/directors who willfully fail to enforce or willfully abuse authority.
Section 14 allows a registered Futures Association to petition for revocation by filing an application with the Commission in the prescribed form.

Futures brokers: registration, licensing, and branches

Section 15 prohibits any person from acting as a futures broker soliciting orders for delivery subject to rules of any Contract Market unless the person or firm is registered and licensed by the Commission.
Section 15 requires a registration application to be submitted in quadruplicate, sworn to by the applicant or authorized firm officer, containing items including applicant details; directors/officers; foreign principal details; foreign principal good-standing certificate; proposed futures contracts and terms; execution and margin settlement procedures for foreign-based Contract Markets; managing officer futures experience/competence; three (3) references who are Filipino citizens of good standing; and other Commission-required information.
Section 15 requires submission with the application of supporting documents including:
- contract between local broker applicant and foreign principal with specified salient features (ownership info; foreign principal officers/directors information; maximum margin advance/limited liquidation loss payments; credit/business guidance/technical services; order cancellation/execution confirmation timing using 7:00 p.m. for day trading and 7:00 a.m. for night trading Philippine time; authority for verification from the foreign exchange; monthly executed-orders list furnishing within the first fifteen (15) days of the following month; guarantee of servicing outstanding positions even upon abrupt termination; and empowerment for the Commission to amend/modify the trading agreement for investor protection);
- board resolutions authorizing signatories;
- proof of membership of applicant/foreign principal in the relevant futures exchange/contract market and clearing member arrangements acceptable to the Commission;
- bio-data and signed passport pictures of directors/principal officers;
- governing rules if contracts are foreign-based;
- board resolution designating a responsible Filipino officer and a resident signatory for checks and instruments;
- pro-forma customers agreement;
- a surety bond or cash/continuing surety bond of PHP 5,000,000.00 with no automatic termination, plus required clearances including Supreme Court and Regional Trial Court and OIC Form No. 1 and surety administrative authority; and
- latest audited financial statements, bank certification of cash balance as of application date, and monthly bank statements for immediate preceding six (6) months.
Section 15 requires the Commission to issue a Notice and Order upon filing for immediate publication at applicant expense in two (2) newspapers of general circulation, once a week for two (2) consecutive weeks, stating that an application was filed and that the papers are available for inspection during business hours or any business day, with copies furnished upon request for reasonable charges.
Section 15 grants interested parties the right to file opposition within ten (10) days from the last day of publication.
Section 16 requires minimum financial and bond requirements before licensing as futures broker: minimum paid-up capital of Php10,000,000.00, with at least Php2,000,000.00 as cash operating capital; a surety bond of Php5,000,000.00 in favor of the Commission; a buffer margin of 2% of outstanding contract or whichever is higher deposited with the Clearing House; a Fidelity Fund; and a toll per contract charged by the Exchange.
Section 16 requires brokers to maintain unimpaired paid-up capital of at least Php10,000,000.00, with cash operating capital at least Php2,000,000.00, and net assets not less than 20% of total liabilities.
Section 16 allows the Commission to prescribe higher capital/percentage requirements when necessary for investor protection.
Section 16 defines net assets to mean total assets excluding fixed assets (net of total accumulated depreciation), advances to/receivable from affiliates/subsidiaries/directors/officers/employees, acquisition value of exchange membership, while total liabilities include all liabilities.
Section 16 authorizes the Commission to require additional capital infusion if necessary/appropriate in the public interest or for investor protection, and may require posting an additional bond by futures commission merchants, brokers, and foreign principal/s in an amount sufficient to meet possible claims, considering volume of margin deposits.
Section 17 provides that the Commission shall register/license the applicant if satisfied of qualification and competence to engage in futures brokerage.
Section 17 provides license term/renewal: each license expires on December 31 and renewals require written application and payment of filing fee; renewal applications must be filed not less than thirty (30) days nor more than sixty (60) days before January 1, otherwise treated as original applications.
Section 17 allows branch office operations only upon filing by the broker, and requires the Commission to approve if requirements are met including filing fee, issuing a license co-terminus with the head office term.

Broker salesmen, associated persons, and qualification exams

Section 18 authorizes the Commission, after reasonable notice and hearing, to refuse registration or revoke any registration/licensing if the registrant committed violations of these rules/BP No. 178; made material false statements in the application; committed fraudulent acts in connection with sale of futures contracts or is about to engage in fraudulent or unlawful purchases/sales; or has demonstrated unworthiness.
Section 18 requires that if charges involve a salesman, notice must be given to the broker employing the salesman and the broker is sanctioned likewise for the salesman/agent act.
Section 18 authorizes pending hearing suspension of a broker’s or salesman’s/trader’s license, with the order stating the cause; suspension/revocation automatically suspends/revokes the license of all salesmen.
Section 18 provides confidentiality for suspension orders until a final order is entered, and states that suspension is not published unless it appears the suspension order has been violated after notice.
Section 19 prohibits it to unlawfully associate with futures brokers as an officer or employee in capacities involving solicitation/acceptance of customers’ orders other than clerical, or supervision of persons engaged, unless registered/licensed by the Commission with an active, not expired/suspended/revoked license; it is unlawful for a futures commission merchant to knowingly permit such association.
Section 19 requires applicants for associated-person licensing to submit an application in prescribed form with an affidavit of two individuals of unimpeachable reputation attesting to good moral character.
Section 19 requires that only sales representatives abiding by the Exchange’s Code of Conduct are licensed, and that the Commission must be satisfied the applicant is qualified for the position sought.
Section 19 prohibits a person associated with a futures broker or agent from simultaneously being associated with any other agent or any other futures broker agent as an associated person.
Section 19 prohibits brokers from employing fund managers within the company.
Section 19 makes brokers fully responsible for actions and representations made by their sales representatives.
Section 21 requires that all persons applying for first-time registration:
- attend a futures training course/seminar, and
- successfully pass the written examination conducted by the Commission or a deputized agency.
Section 21 provides that, upon written application by a registered/licensed broker, good character showing, and payment of the prescribed fee, the Commission registers/licenses applicants as salesman of that broker, and the registration/licensing ceases upon termination of employment.

Money handling and customer account protection

Section 22 provides that futures brokers must treat all monies received for customer margin, guarantees, security of trades/contracts, or accruing from customer trades/contracts as belonging to the customer.
Section 22 requires customer money to be deposited in a Customers Account, separately accounted for together with securities and property, and prohibits commingling with broker funds or use to margin/guarantee or extend credit for other persons other than the one for whom held.
Section 22 allows, for convenience, commingling in the same Customers Account with any bank/trust company or with the clearing house, and allows withdrawal/application to margin, guarantee, secure, transfer, adjust, or settle contracts/trades/market positions with the clearing house or members, including payments of commissions, brokerage fees, interests, taxes, storage, and lawful charges connected to those contracts/trades.
Section 22 requires that at all times, total cash on hand and in bank of the commodity futures broker must not be less than the sum of the customer’s free deposit (including customer gains) plus Php2,000,000.00 as cash working capital or a higher amount prescribed by the Commission in the public interest.
Section 22 requires that withdrawals of customers’ free deposits be paid within two (2) business days upon demand during banking hours.
Section 28 requires customers to attend Exchange-sponsored seminars before trading is allowed (experienced clients may send authorized representatives), to undergo broker interview for suitability and loss tolerance, and to trade on their own account.
Section 29 grants customers rights including rescission of a contract agreement if the broker or salesperson is unlicensed, violated discretionary trading rules, or is unauthorized; recourse to fidelity fund/surety bond in broker bankruptcy or fraud; inspection of books/records relating to investments during regular business hours; and request for copies of financial statements of the company.

Records, reports, and reporting penalties

Section 23 requires each Contract Market and clearing house to maintain daily records of total volume traded, margin deficiencies, and other Commission/Exchange required records/reports.
Section 23 requires futures brokers to maintain daily trading records for each customer and keep books/records pertaining to transactions and positions, allowing house accounts subject to special Exchange accounting procedures.
Section 23 requires brokers executing orders on or under rules of a foreign-based Contract Market to have proof of execution of those orders.
Section 23 requires each customer to execute a risk disclosure statement in English and Filipino, signed in the presence of the responsible authorized broker officer, with a signed copy kept at the principal office for Commission inspection by authorized representatives.
Section 23 requires brokers to voice-record all trading activities.
Section 23 requires mandatory monthly account statements to clients.
Section 23 requires trading advisors and fund managers to maintain books and records and file reports containing, as applicable, the same information as broker reports.
Section 23 requires filing of financial condition statements:
- within 60 days after closing the fiscal/calendar year, and
- within 60 days after semi-annual books closing, by each Futures Exchange member and every broker transacting business through such member, filing statements as of the last day of the preceding period in the Commission-prescribed manner.
Section 23 requires annual and semi-annual financial reports/statements to be certified by an independent certified public accountant.
Section 23 requires all reports/records kept for at least five (5) years, open to Commission inspection even without broker/member approval.
Section 23 requires Commission notification of disciplinary actions taken against Exchange members.
Section 23 requires Commission notification by Exchange members who fail to meet a margin call.
Section 23 requires brokers to notify the Commission of the external auditor chosen and in cases of auditor change.
Section 23 requires Exchange standardization of documentation and standardization of accounting procedures, reports, and systems to enable efficient monitoring and auditing.
Section 24 imposes fines for late filing of the reports required in Section 23, with schedule:
- For annual and semi-annual reports:
  - 1st violation: Php10,000.00 basic fine and Php200.00 minimum fine per report,
  - 2nd violation: Php20,000.00 basic fine and Php400.00 minimum fine per report,
  - 3rd and subsequent violations: Php50,000.00 basic fine and Php1,000.00 minimum fine per report.
- For weekly and monthly reports: flat Php1,000.00 plus an amount not exceeding Php200.00 for every day of delay.
Section 24 authorizes the Commission to prescribe higher amounts to ensure compliance with reportorial requirements.

Locals and margin/deposit rules

Section 25 requires locals to undergo Exchange interview process for trading viability and loss tolerance, and requires Exchanges to impose a maximum trading limit