By Dennise Williams, Staff ReporterTHE Jamaica Securities Dealers Association (JSDA) has emerged from an 'excellent' meeting with the Financial Securities Commission (FSC) clear on the direction of the industry and the regulations required to move forward.
President of the JSDA, Peter Bunting, sat down with the Financial Gleaner and spoke about some of the issues that came up at the June 3 meeting.
"Our objective is to have a cooperative and collaborative relationship with the FSC rather than an adversarial one. The objective on both our parts is to protect the investor and promote efficiency and competition in the market. The only differences that have arisen over the last year and a half are what specific mechanisms are needed to achieve this and how fast you introduce them."
We then asked if these mechanisms concerned over-regulation and onerous fees imposed by the FSC. Mr. Bunting stated an emphatic 'no' to each question. While admitting that on average regulatory fees increased by 100 per cent, Mr. Bunting believed that the fee increase was necessary. "A well run regulator needs resources. The Association has no problem with the fees at the current level. We have an interest in the FSC having competent staff."
Mr. Bunting explained that the main areas of discussion in last Thursday's meeting concerned technical issues that needed to be ironed out.
CAPITAL ADEQUACY
"The general concern is that you don't want any financial intermediary to become too leveraged." Mr. Bunting explained that a financial intermediary includes insurance companies, merchant banks, commercial banks, dealers, etc. "Too much leverage exposes the financial intermediary to the risk of shocks. For example, if bank x had a capital base of $10 million, but assets on its balance sheet of $110 million, its leverage would be 10 to 1." Mr. Bunting explains that commercial banks are highly leveraged at 25 to 1, but this is allowed under the Banking Act and the Financial Institution Act. Dealers have no such legal ratio to refer to. This is the bone of contention what is the correct leverage ratio for dealers? States Mr. Bunting, "We have been working with the FSC to implement guidelines that would grow to become regulations for capital adequacy."
INTERMEDIATION
"A related issue to capital adequacy intermediation," Mr. Bunting explained it this way. "A client gives me $100 and I give a certificate of participation in a security. In three months, I buy it back for $104. The FSC says that the underlying securities should exceed the amount of the contract. So the underlying security should be worth $105.
"The current practice now is to match the contract with the underlying security exactly, or maybe have a 10 per cent margin. It depends on what the underlying security is."
ACQUIRING SECURITIES
ON MARGIN
"Normally when Jamaican dealers buy Government of Jamaica euro bonds, they have to buy it from overseas brokers such as Bear Sterns. What they say is if you purchase US$1 million of bonds from me, you can pay me cash of US$500,000 and get the rest as a loan or on 'margin'. The FSC states that the use of margins should be limited. They don't want local brokers to have too much exposure to that lending practice."
Mr. Bunting explained that if interest rates spike, bond prices drop or the local currency comes under heavy pressure, as occurred last year. "When overseas dealers call in on the margins, this tends to increase volatility in the local market. Also, margins give lenders a first position against the particular asset. This then makes local investors subordinate to the overseas lenders. The FSC wants to protect our local investors."
Overall, Mr. Bunting states, "We want to work with the FSC in implementing the new regulations for the above issues. Our main concern is that the new regulations not be disruptive. However, at the end of the day, the FSC is under no obligation to do what we ask. They will use their judgement. But I think it is best for the FSC to work with the dealers."
The JSDA was set up in 2003. Peter Bunting is the second president and will serve a one-year term. Primarily set up as a lobby organisation, the JSDA has about 32 members in the association, or 95 per cent of the business in Jamaica. Besides negotiating with the FSC, the JSDA is also focused on investor education. "I think that Jamaica is still relatively dependent on commercial bank savings type products, which is limited. Through education, we want a wider cross-section of Jamaicans to see their option in the equities and money markets. We want to introduce Jamaicans to a more sophisticated form of investing."
