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Repo trust still under development as sector weakens

Published:Friday | November 28, 2014 | 12:00 AM

Repo trust still under development as sector weakens

The Financial Services Commission (FSC) has indicated that it is making progress on the technical details and administrative framework of the new retail repo transaction structure, which is intended to reduce risk to securities dealers.

The repo market is currently valued at about $418 billion, up from $394 billion a year ago.

Amid that expansion, the FSC has signalled concerns about the deteriorating asset quality among the sellers of repo products.

Sectorwide, "the asset quality computed as low-risk assets to repo liabilities was 5.9 percentage points below the FSC benchmark of 100 per cent, as 10 dealers failed to comply with the benchmark requirement," said the regulator.

"This is partly due to the fact that the total repo liabilities for the industry increased during the period," the FSC said in its newly released newsletter detailing the performance of the sectors it regulates

It's the second quarter of decline. Asset quality fell below the benchmark to 99 per cent in March and to 94.1 per cent in the June quarter.

An FSC advisory to securities dealers indicates that the new retail repo structure being developed will co-opt the JCSD Trustee Services Limited as trustee and registrar to hold the underlying securities for retail repos.

The Financial Gleaner was pointed to the advisory by the FSC in response to requests for an update on the repo trust.

Other information indicates that legislation is to be introduced in Parliament in December, and that the FSC was planning to pilot test the system next February and potentially implement it by April.

The JSCD as trustee and registrar, the regulator said, will ensure that these underlying securities are "held apart from the dealer's estate in the event of its default. It will also facilitate the trustee taking appropriate actions in the event of a transaction failure or default, to ensure that the beneficial interests of retail repo investors are adequately protected".

The FSC said a "universe of allowable securities" that can be used as collateral for retail repo transactions will be established and will include dematerialised and/or immobilised securities as specified by the FSC.

They include GOJ-issued and GOJ-guaranteed securities; securities issued and or guaranteed by United States, Canada and United Kingdom sovereigns; and foreign-currency investment-grade sovereign and corporate securities in keeping with the forex cap outlined by Section 22 of the BOJ Act.

Lawrence Crossley, senior director of securities with the FSC, said Thursday that dematerialised securities are created by electronic entry, with no share certificate issued.

In the case of immobilised securities, these are physical certificates that are kept in a central location but their information is captured electronically. In this case, the certificates can still be used.

Project deadlines

The repo trust is a benchmark of Jamaica's bailout agreement with the International Monetary Fund (IMF), which had set September 2014 as the date for finalisation of the repo transaction structure; and end-December 2014 for the supporting legal and regulatory framework.

"The transition of retail repos to the trust-based framework will be finalised by end-June 2015, taking into account evolving market conditions and ensuring financial stability. As interim steps, we will start a pilot by end-February 2015, and start the transition by mid-April 2015," as stated in the last IMF Letter of Intent in September.

The legislation will establish reporting requirements for the custodian/trustee and securities dealers, a master retail repurchase agreement and trust deed, and the treatment of retail repo client interests in the event of a dealer's insolvency.

FSC says the flow of retail repo transactions data will now pass directly to JCSD through JamClear.

"The net settlement of funds will occur in JamClear-RTGS, while the net settlement of securities will occur in JamClear-CSD for securities registered on JamClear-CSD; approved international custodian banks for global bonds; and JCSD for approved locally issued corporate bonds," the regulator said.

This, the FSC adds, should reduce the need for capital to purchase additional securities to clear transactions, and possibly reduce transaction costs for users.

The FSC states that all retail repos registered in the repo trust must meet the standard minimum transaction size as specified by the FSC.

New limits of $1 million on local-currency repos and US$10,000 on foreign-currency repos are now being phased in. The limits at October were $100,00 and US$1,000.

The FSC, in its advisory, proposed a standardised valuation methodology, namely the Bloomberg yield curve, to determine the market value for all underlying securities for retail repo contracts held by the trustee.

"The mark-to-market valuation of all securities held will be conducted at the start of each day by the trustee, using closing prices from the previous day," the advisory said.