"IT'S A new time. We are in a new era and the Council of the Jamaica Stock Exchange (JSE) wants to make sure that any new members we admit will add value not only to the Exchange, but to the strengthening and to the expansion of the entire market."
This is how JSE chairman Roy Johnson summed up the Stock Exchange Council's attitude towards its resumption of reviewing new broker applications.
Mr. Johnson was speaking from his office following a press briefing on Wednesday February 7 on the Appeal Court decision handed down a week earlier. The decision halted the challenge of the level of fees that two previous applicants had been mounting through the Fair Trade Commission since 1994.
"We want to move ahead now very speedily," Mr. Johnson said, "employing an application and assessment procedure that is totally transparent, shared with each applicant in advance and designed to assist us on Council to make an informed business decision about whom should be admitted to membership".
Roy Johnson is general manager of Alpha Financial Services, whose parent company, Victoria Mutual Group, opted to meet the Stock Exchange's financial requirements in 1994, when it assumed membership.
"There's a lot of public misunderstanding about the financial requirements then and even now", Johnson said, "with many people erroneously including the net free capital requirement of the applicant as a part of the share price for membership."
There are three financial components: the cost of the share; a sum to be contributed to the existing Compensation Fund, which protects investors in the event of the failure or the misdeeds of a broker/member; and the broker member's paid-up capital.
At the time of Alpha Financial Services' membership, the share price requirement was $7.9 million, the contribution to the Compensation Fund was an additional $3.9 million and the company's opening balance sheet had to show paid-up capital of $10 million.
Valuing stock exchange
membership
Membership on a stock exchange, often referred to as a seat, is an important capital asset for securities brokers worldwide. It provides them with a centralised means for raising capital for their clients through Initial Public Offerings (IPO's) and for carrying out secondary trading of equity and fixed income securities on behalf of their clients or for their own account.
Exchange seat prices vary widely in accordance with several criteria such as market conditions, volume and value of trades, exchange efficiency and, not the least, expectations for the future with respect to stock market returns. Several models exist for valuing stock exchange seat prices, all of which take into consideration the factors mentioned.
The Jamaica Stock Exchange has commissioned a public accounting firm to determine the value of a share in the exchange.
JSE membership qualification procedures
"Our assessment of how they intend to expand the market will form the core of our review of each candidate's qualifications", Mr. Johnson said. "This is why we have allocated 60 points to the merits of their business plan to their financial strength."
The application procedure consists of the following:
Announce publicly the period for the receipt and review of applications.
Refer candidates to JSE Rules 201 - 203 and to Appendix 9 in the Rule Book, all of which have to do with the applicant's corporate data, the 'fit and proper' certification of its personnel and the documentation of the company's legal status.
Candidates submit a written business plan along with documentation of their financial strength.
JSE general manager, Wain Iton, advised that a points allocation formula has been developed for the evaluation of each candidate's documentation as follows:
Business plan 60 points
Executive Summary 5 points
Business Description 15 points
Marketing Plan 20 points
Risk Management 10 points
Novel Idea(s) 10 points
Financial strength 40 points
The strength of the Balance Sheet 10 points
Assessment of Cash Flow Projections 10 points
Assessment of Performa Income Statement 10 points
Assessment of assumptions used 10 points
Candidates now have until the end of February to submit their completed applications and Mr. Johnson says that he is, "looking forward to being able to welcome new energy and ideas for the growth of our securities market and for the benefit of our investors."
(This column is part of the on- going public education programme of the Council of the Jamaica Stock Exchange.)
