Feedback given by: Chanda Shahani While the professor, Mr. Augusto M.

Cosio was unquestionably competent in terms of his overall knowledge of the advanced market product of derivatives, REITs and ETFs; I must respectfully register my objections to the emphasis placed by the institution itself on the module on the purely mechanical aspects of understanding derivatives with no information given to us on the downsides of derivatives especially in terms of the Philippine context in terms of the history and regulation of derivatives in our country. To not mention this in any level of meaningful detail results in a kind of historical revisionism that is not good, because a well-rounded securities specialist will inevitably encounter people who are well-versed in the history and regulation of derivatives in this country, and that securities specialist must be armed with the tools to answer these concerns, so as to allow the investor to make a meaningful and educated decision. This is to urge the curriculum committee for the securities specialist course to consider referring to the Securities Regulation Code (RA 8799) itself for the relevant provisions with respect to derivatives and to integrate this in the handouts the next time the SSC is conducted. For example, Section 11 (Commodities Futures Contracts) states No person shall offer, sell or enter into commodities futures contracts except in accordance with rules, regulations and orders the Commission may prescribe in the public interest. The Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market is important. So is Section 25, which puts severe legal limits on a securities specialist to endorse any option product on any exchange: (Regulation of Option Trading): No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. By the way, RA 8799 as it stands does not specify whether any security registered on a securities exchange is limited to the securities on the PSE, or whether we may include foreign exchanges. The need for legal research on this matter is pat is now possible paramount, because it is now possible to buy and sell international derivatives online from the Philippines, seemingly without few legal restrictions. The PSE itself is trying to revive interest in a new version of the now-defunct MIFE. But realistically, more emphasis could have been placed on how a securities specialist is bound, under existing SEC restrictions from endorsing a product that essentially has two functions: to hedge portfolio and operations risks and as a speculative gamble. Additionally, the undersigned found the material handouts wanting about the role of derivatives in the Philippines equity market. I had to research elsewhere to elicit the finding that derivatives are also regulated by Bangko Sentral ng Pilipinas (BSP) and that currently the only way to avail of these instruments (aside from online) within the Philippines is through the over the counter market via accredited banks with derivatives licenses. The handouts also contained no reference whatsoever to the closure of the Manila Futures Exchange (MIFE) in 1997, and what was the reason for its closure by the authorities. I am pointing this out not to douse cold water over derivatives as a product, but simply keeping in mind the words of the author, George Santayana, that those who forget the past are condemned to repeat it. Lastly, while derivatives are a highly volatile instrument and this was admitted as such during the module, it would have been preferable, if references were also made to the role that derivatives have placed in recent financial disasters such as the collapse of Barings Bank in the 1990s caused by rogue derivatives trader Nick Leeson and the role that derivatives played in the more recent housing meltdown in the U.S.A. We cannot just think happy thoughts about derivatives and pretend that none of

this happened. While derivatives remain a useful instrument for hedging currency risks for exporters, for example, it is mentally dishonest if we do not acknowledge the concerns of financial luminaries such as Warren Buffet, who has described derivatives thus, I view derivatives as time bombs, both for the parties that deal in them and the economic system. Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. For example, if you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction, with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration, running sometimes to 20 or more years, and their value is often tied to several variables (Please refer to Annex B in the accompanying PDF file for Mr. Buffet's complete thoughts on derivatives).