Definitions
- Commission: Securities and Exchange Commission (SEC).
- Futures Exchange / Contract Market: Authorized corporation for futures trading.
- Futures Contract: Agreement for future purchase/sale of commodities or foreign currency with cash settlement.
- Commodity: Agricultural/mineral products, financial instruments approved by the Commission.
- Member of Contract Market: Those with membership seats, brokers for client trading.
- Futures Broker: Licensed corporation soliciting futures orders, collecting margins.
- Locals: Individuals trading exclusively for own account.
- Trading Advisor: Licensed advisory person, excluding banks, journalists, publishers, exchanges.
- Fund Manager: Person managing pooled funds for futures trading.
- Clearing House: Central agency clearing and guaranteeing transactions.
- Margin: Percentage of contract value required.
- Futures Association: Composed of licensed brokers, locals, fund managers, etc.
- Foreign Principal: Clearing member of foreign futures exchange contracting with local broker.
- Branch Office: Licensed futures broker office other than principal office.
Registration and Licensing of Futures Exchanges
- Must comply with self-regulatory organization (SRO) requirements including:
- Membership qualifications ensuring financial soundness and integrity.
- Organizational guidelines, hiring rules and business conduct rules.
- Trading rules preventing abuses, audit trails, surveillance, compliance.
- Disciplinary procedures and customer protection systems.
- Risk management and procedures for suspension or liquidation.
- Board must include at least one-third non-brokers; President must be non-broker.
- Must have adequate facilities, communication, and public price transparency.
- May require warehouse access for surveillance.
- Must promote public interest.
- Application includes undertakings about foreign exchange provisions.
Additional Requirements for Domestic Futures Exchanges
- Submit rules, resolutions, including:
- Screening for fit members.
- Prevention of false reports, price manipulation, cornering.
- Delivery notices and standard grade provisions.
- Acceptance of warehouse receipts.
- Financial standards for brokers.
- Arbitration for customer claims.
- Penalties for inactive members.
- Educational programs approved by the Commission.
- Customer access to lists of brokers and sales representatives.
- Submit reports, keep records for 5 years.
- Rules amendments require prior approval.
Application, Disciplinary Action, and Withdrawal for Contract Market Designation
- Futures Exchange applies to SEC for contract market designation.
- Denials afford hearing opportunity.
- Failure to comply with rules may lead to suspension (max 12 months) or revocation.
- SEC can summarily suspend trading for public interest.
- Voluntary withdrawal requires 90-day prior notice, re-designation possible.
Publication of Contract Markets Data
- SEC may investigate and publish data/statistics excluding confidential business or customer information.
Clearing House Qualifications
- Must be independent, credible, preferably a reputable bank.
- Confirm transactions upon request.
- Implement and specify margin requirements and buffer deposits with exchanges.
Futures Association Qualifications and Registration
- Rules must prevent fraud, promote fair trade, protect public, ensure discipline with fair procedures.
- Membership eligibility subject to SEC approval; disqualify members with suspensions or violations.
- Articles, by-laws, and rules submitted for approval.
Disciplinary Review and Rule Amendments
- SEC reviews disciplinary actions against members or membership denials.
- Can amend or abrogate association rules after notice and hearing.
Revocation, Suspension, and Removal Powers
- SEC may suspend or revoke association registration for violations.
- Can expel members or remove officers for abuse or failure to enforce rules.
- Associations may petition for revocation.
Registration and Licensing of Futures Brokers
- License required to solicit orders, with application including:
- Details of officers, foreign principal, contracts, experience, references.
- Contract with foreign principal including guarantees on order execution, settlements, and data verification.
- Board resolutions, membership proofs, client agreements, surety bond (Php5M), financial statements.
- Public notice of filing, opposition period of 10 days.
Financial and Bond Requirements for Futures Brokers
- Minimum paid-up capital of Php10 million, Php2 million must be cash operating capital.
- Surety bond of Php5 million to secure against client loss.
- Buffer margin deposit with Clearing House.
- Fidelity Fund and per contract toll fees.
- Maintain net assets not less than 20% of liabilities.
- Commission may require higher capital or additional bonds.
License Issuance and Renewal
- Commission registers and licenses qualified applicants.
- Licenses expire December 31 annually; renewal applications 30-60 days before year end.
- Branch offices require separate license.
Revocation of Broker or Salesman License
- License may be revoked for rule violation, false application, fraud, or unworthiness.
- Notice and hearing required.
- Suspension may be confidential pending final order.
- Revocation of broker license suspends all salesmen licenses.
Licensing of Persons Associated with Futures Brokers
- Must be licensed to solicit/accept orders or supervise such persons.
- Separation of association between persons and other brokers or fund managers.
- Brokers responsible for actions of sales representatives.
Licensing of Trading Advisors and Fund Managers
- Must be registered and licensed to engage in futures advice or pooled fund management.
- Registration requires details of principals, trading methodology, client agreements, risk disclosure, surety bond (Php5M), and other documents.
- Public notice and opposition period apply.
- License expires annually with renewal procedures similar to brokers.
Qualifying Examination
- Applicants must attend training and pass written exam.
- Commission registers salesmen based on good character and fees.
- Registration terminates upon employment termination.
Handling of Customer Money and Property by Futures Brokers
- Customer funds treated as belonging to customers and kept separate from broker funds.
- Deposited in Customers Account.
- Commingling allowed only for convenience with clearing house or banks, subject to use only for customer trades.
- Must maintain cash on hand not less than sum of customer free deposits plus working capital (Php2 million minimum).
- Customer withdrawals payable within 2 banking days.
Recordkeeping, Reports, Documentation and Accounting
- Exchanges and Clearing Houses must maintain daily trading and margin reports.
- Brokers keep daily records per customer.
- Proof of execution for foreign based trades required.
- Risk disclosure statements from customers mandatory.
- Voice recording of all trading activities required.
- Monthly account statements mandatory.
- Advisors and fund managers maintain similar records and reports.
- Annual and semi-annual financial reports filed within 60 days, certified by independent CPA.
- Reports kept for at least 5 years.
- Commission notified of disciplinary action, margin call failures, auditors.
- Standardized documentation and accounting for effective auditing.
Penalties for Late Report Submission
- Fines imposed based on frequency and report type:
- Annual/semi-annual report first violation: Php10,000; third and subsequent: Php50,000.
- Weekly/monthly reports: Php1,000 plus daily fines.
- Commission may increase fines for compliance.
Locals Requirements
- Subject to Exchange interview for viability and loss tolerance.
- Subject to maximum trading limits.
- Trade only for own account, no client funds.
- Local rights are transferable subject to Exchange conditions.
Margin and Deposit Requirements
- Initial deposit of at least Php300,000 to open trading account.
- Minimum margin per contract set by Commission; brokers may require higher margin.
- Gross margin policy imposed.
- Minimum initial margin at least 5% of contract.
- Brokers cannot loan margin to clients.
Customer Requirements and Rights
- Required to attend an Exchange seminar or send an authorized representative.
- Undergo broker suitability interview.
- Must trade for own account.
- Customers may rescind contract if broker or salesperson unlicensed or unauthorized.
- Have recourse to fidelity funds in case of broker fraud or bankruptcy.
- Right to inspect investment books and financial statements.
Prohibited Acts
- Unauthorized futures transactions or solicitation are void.
- Unlicensed offices for futures dealings prohibited.
- False representation as broker or contract market member prohibited.
- Discretionary accounts prohibited except licensed fund managers.
- No in-house accounts, except owners/shareholders.
- No accepting client checks.
Regulation of Speculation
- Commission may impose limits on price fluctuation, trading amounts, position holding, delivery dates to prevent price shocks.
Fraudulent Transactions Prohibited
- Contracts intended to defraud or deceive prohibited.
- Cross sales outside exchange floor and bucketing orders prohibited.
Prohibitions on Trading Advisors and Fund Managers
- Unlawful to commit fraud or deceit or misrepresent Commission sponsorship.
Other Prohibited Transactions
- Wash sales, fictitious, accommodation trades to manipulate reported prices prohibited.
Foreign Currency Contracts
- Unlicensed foreign currency futures contracts prohibited, characterized by margin-only payments, cash settlement, rollover mechanism.
Enforcement Procedures and Penalties
- Commission may issue complaints upon suspected violations with notice and hearing.
- May prohibit violators from trading and impose fines (Php10,000 to Php50,000 per violation plus daily penalties).
- Cease and desist orders may be issued confidentially.
- Penalty amounts consider business size and violation gravity.
- Violations by Contract Markets or their officers may result in cease and desist orders and fines.
Commission Enforcement Power
- Power to enjoin violation