THE Securities and Exchange Commission (SEC) is proposing a minimum capital requirement of P150 million for market makers under a draft framework covering equity and fixed-income securities.
The proposed rules require prospective market makers — SEC-licensed firms that continuously post both buy and sell prices for listed securities to keep trading active — to maintain unimpaired paid-up capital of at least P150 million or a higher amount that the regulator may prescribe.
The SEC en banc approved the release of the draft memorandum circular last week and comments, suggestions and inputs from concerned parties will be accepted until Aug. 28.
Under the proposed rules, only SEC-licensed trading participants of an exchange may act as market makers. They must be accredited or recognized by the relevant exchange, subject to SEC oversight.
The draft will apply to market-making activities involving equity and fixed-income securities listed, traded or enrolled on an exchange under the SEC’s jurisdiction.
Government securities covered by the Bureau of the Treasury’s Primary Dealer/Government Securities Eligible Dealer framework will not be covered unless the SEC, in coordination with the Treasury, expressly extends the rules to such.
For equity securities, market makers will have to post and maintain firm two-sided quotes for a minimum prescribed period during the trading session. The relevant exchange will set maximum bid-ask spreads and minimum quote sizes based on factors including liquidity, public float and trading activity.
For fixed-income securities, the exchange will determine whether quotes should be firm, indicative or on a best-efforts basis and will establish the applicable quoting parameters based on the market structure and characteristics of the security, trading mechanisms and prevailing market conditions.
The draft also requires each market maker to designate at least one qualified individual responsible for performing market-making obligations. The specialist must have at least five years of relevant securities trading or market-making experience, in addition to other qualifications set by the relevant exchange and approved by the SEC.
Market makers will be required to maintain sufficient inventory, liquidity resources or appropriate securities-borrowing or repo arrangements to support market-making obligations, subject to the requirements applicable to the relevant asset class.
The proposed rules allow exchanges to provide incentives to market makers, including reduced transaction fees, liquidity rebates and access to enhanced trading facilities. These will be subject to SEC review and approval.
The draft also prohibits market makers from engaging in market manipulation, fraud, insider trading and other prohibited conduct, including wash sales, matched orders, fictitious transactions, artificial prices or misleading market activity and collusion.
Exchanges will be required to maintain surveillance systems for market-making activities and monitor compliance with quoting requirements, trading patterns, inventory positions and potential market abuse.
The proposed rules aim to promote the development of the capital market, enhance liquidity and price discovery, protect investors and maintain fair, efficient and orderly markets, the SEC said.
