With much fanfare last month, the country’s Bureau of Treasury (BTr) listed so-called Small-denominated Treasury (SDT) bonds on the Philippine Stock Exchange (PSE) totaling Ps30 billion ($626 million). The SDTs come in denominations of only Ps5000 ($104), with a 13.625% coupon that is intended as a means of siphoning off excess cash from small investors.
However, since its listing on 15 January, ticker code SDT0704 has not been traded at all – okay, it has been traded only once – which flies in the face of a listing's ostensible objective, that is liquidity.
The first culprit is price. The market is sluggish and the previous closing trade on 24 January was only 92, way below the par price of 100. But then price levels alone should not stop traders from buying and selling SDTs because they can buy at 92 and sell at 93, for example. There must be a grave reason why there was only a single deal since the listing.
Inquiring into the causes of the stagnant market, it surfaced that the underwriters were delayed in transferring the investors' accounts to the brokers. In turn, the underwriters pointed the finger at the bondholders themselves, who blamed two factors: the low price of the bonds, and the red tape in selling the bonds.
The low price is not a strong enough reason to explain the single-trade scenario. Since most bondholders, such as small pension funds, would be using mark-to-market pricing, holding on to a bond does not offer an advantage over selling it at a loss. Of course, individual investors who do not adopt such fancy accounting techniques would find holding on to their bonds better than realizing a loss.
But perhaps the most compelling reason why investors are not selling is the red tape involved. Apparently, in another momentary lapse of market reason, the government instituted onerous administrative requirements more resembling the Treaty of Paris (wherein Spain sold the Philippines and its people to the US for $10 million) than a ticker being sold in the stock exchange.
Unlike selling stocks, where an investor can execute two trades in a second, SDT spot orders can not even be executed in a single day. The investor who sells must first affix his signature to a masterpiece of a document called the "transfer sans consideration form". This form authorizes the broker to find a possible buyer, and that the investor undertakes his willingness to pass on the bonds to him. At the same time, the investor undertakes to open an account with the broker to facilitate the transaction.
The Philippines is a land of lawyers and they certainly put good use of it by documenting each step, starting with the above form. That is not the end of it, though. The underwriter sends over the document to the broker. At least, we are about to see the end of the process. Hold on, the broker then has to send over the same document to the Bureau of Treasury for final approval.
You must not forget that the Philippines is an archipelago, so how is the poor broker in Manila going to execute a transaction if the investor is in Davao City in the south? Will he send a Concorde to deliver the form for his signature to wrap up the transaction in a day?
What a perfect cycle. The BTr has collected all the cash when it sold the bonds in the first place and now it wants to know who are buying and selling the bonds before they eventually approve the sale. Why doesn’t the Bureau of Treasury simply take the money and run?
Indeed, bureaucracy works in mysterious ways.
Furthermore, SDT transactions are on a T+0 basis, meaning payment must be done on the same day it was sold. How can this be practically achieved given the paper chase? Ironically, stock transactions that are done at the touch of the keyboard have a longer settlement period of T+3.
Having seen the administrative nightmare, it is not entirely unexplainable that only a single trade has been done since the listing of the SDTs. On the other hand one must appreciate the ingenuity of the Philippine finance bureaucrats. They have concocted a solution but applied it to the wrong problem.
How is this so? Imagine if this nightmare was the procedure to be followed in currency transactions. The number of currency transactions would be drastically reduced. Since about 90% of currency transactions are speculative, this red tape would practically eliminate speculative transactions. If there were no speculative trading, there would be no volatility. No volatility means the peso will be stable.
All told, apparently without being aware of it, the Philippines has invented the best fashion to eliminate currency speculation. Yet, with brilliance comes the unwelcome complementary talent – the genius to apply it to a wrong problem.
