BOJ deputy governor Livingstone Morrison is leading the reform of the national payment and settlement system for securities. He plans to tender the depository in two months. - file

Ashford W. Meikle, Business Reporter

Livingston Morrison, deputy governor of the Bank of Jamaica, has taken charge of the project to build out a new electronic fixed-income depository and settlement system for investment securities, similar to that established for stock certificates and transactions.

The central bank is currently in discussions with the Ministry of Finance, the dominant issuer of securities in the Jamaican market, and market participants to agree the specifications of the depository.

"This is in recognition of the fact that the depository will deal very specifically with fixed-income securities and will, therefore, significantly affect the work of the Ministry of Finance and Planning which has responsibility for administration of the GOJ securities portfolio," said Morrison.

"As soon as this exercise is completed, the Bank of Jamaica (BOJ) will move to the procurement phase covering both the RTGS and the depository."

Contracts going to tender

Morrison anticipates that the contracts to build out the systems are likely to go to tender in two months, but notes that full implementation of the current phase of the National Payments System (NPS), including the electronic depository as an integral component, won't happen before 2008.

It's the clearest timeline yet on the project.

The BOJ, since 2005, has been trying to reform payment and settlement systems to bring them in line with international practices, by building out a Real Time Gross Settlement System (RTGS).

Morrison, on his return to the central bank last year - he had been seconded to run the flagging Sugar Company of Jamaica Limited - was given the expanded portfolio responsibility for 'payment systems, investments, risk management, finance and technology' as the monetary authority stepped up the project.

His previous portfolio was finance and technology.

The fixed-income depository was conceived as a replicate of the Jamaica Central Securities Depository (JCSD), which is a register of stock ownership done by electronic book entry as trades occur on the market on a T+3 cycle.

Initially the project was being handled by JCSD, a full subsidiary of the Jamaica Stock Exchange, but after four years, had made little progress on the new repository originally announced as a US$2 million project.

Delays

Delays have been linked to procurement of appropriate software and cost overruns, as well as sectoral concerns that in a market of 48 registered investment houses, the depository was to be controlled by the 11 broker members of the JSE, a mutual company.

Then last year, the man who had been the face of the project, Roy Johnston, departed the exchange under circumstances still to be fully ventilated. That same year, BOJ stepped in. But none of the parties have given a clear timeline of the events, nor a clear reason for theswitch.

JSE's general manager Marlene Street-Forrest said the JCSD board, on which she sits, had opted not to continue with the project, having wrapped up phase one of the plans - the custodial system to record the ownership of securities. Phase two, she said, would have covered the settlement system for securities and high-end products.

"The board took the decision, after phase one was completed, to discontinue," said Street-Forrest. "That was in light of certain developments, which were really out of our control and we are aware that the project is [one] that interfaces with a lot of stakeholders."

Morrison was more precise on the pragmatics, suggesting that the project was pulled into his unit for reasons of compatibility, and that the infrastructure he was creating would 'replace' the plans already devised by the JSE, to ensure its fit with the settlement system he was in the process of reforming.

"During 2006, the scope of the reform project was expanded to include the establishment of a central securities depository as a replacement for the depository solution that was being developed by the Jamaica Central Securities Depository. The change became necessary to ensure that the CSD satisfies the critical requirements for full integration with the Real Time Gross Settlement System being established by the central bank," he told the Financial Gleaner.

"This solution will guarantee smooth functioning of the payments and securities settlement system in accordance with internationally established standards of safety and security in the reformed environment."

Flexible

It will be flexible enough, the deputy governor suggested, to accommodate cross border transactions.

Morrison's two-month timeline to tender and 2008 implementation date are likely to be closely watched by both local securities dealers as well as financial overseer, the International Monetary Fund.

In February, in its preliminary assessment of the Jamaican economy, the IMF, even with the activity underway atthe central bank, implied that regulators needed to treat the project more aggressively.

Said the IMF: "As regards infrastructure, emphasis could be given to the introduction of a real time gross settlement system, establishing a central depository for fixed income securities, and developing a framework for payment system oversight."

Like the JCSD, the new depository would allow securities transactions to be processed by book entry, utilising an accounting system that records change of ownership of securities without the need for the movement of the physical certificate.

"A fixed income depository would really revolutionise how the market does business and would bring a level of efficiency and cost reduction in terms of management and control of securities," said Street-Forrest. "For example, it would eliminate the need for bearers to be driving on the road with instruments to exchange from one broker to another or from a broker to BOJ. That's not efficient."

For companies without treasury departments, clients could quickly confirm their balances.

Board meeting

"The physical security would be, for want of a better word, 'hubbed' in a central location so that it could facilitate easy movement of securities from one individual or one broker to another," said the JSE boss.

Street-Forrest said that the JCSD's board would be meeting this month to discuss the way forward in terms of offering the custodial service for investment securities to the market, saying it could happen by year end.

"Clearly the customer element of it can be realised before year end," she said. "It is really for us to share it with the market."

If the JCSD presses ahead with that plan, it will eventually be in competition with the central bank when its system kicks in 2008.

Morrison said the depository he is building would initially be owned and operated by the BOJ, and later divested after full acceptance and utilisation of the system.

"The depository, interfacing seamlessly with the RTGS, will facilitate electronic transactions involving the purchase, sale, payment for and delivery of fixed income securities," said Morrison.

"All key stakeholders including the Ministry of Finance will be integrally involved in the operations and functioning."

ashford.meikle@gleanerjm.com