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FSC expects market attrition under new repo model

Published:Friday | September 18, 2015 | 9:00 AM

The Financial Services Commission (FSC) indicated on Wednesday that it expects some attrition in the more than $300-billion retail repo market, because of the additional administrative complexities and attendant costs introduced under the reform.

One player, Sterling Investments Limited, has already announced that it is pulling out of the Jamaican dollar side of the repo market, citing as one drawback the additional processing required for investors to cash in their repo investments.

What would have been a direct transaction between broker and client now requires the intercession of the repo trustee, JCSD Trustee Services Limited, as the body tasked to hold repo investments on behalf of investors became effective on August 31, 2015.

The trustee may sell repo holdings on clients' behalf were the dealer to go bust.

Market shrinking

The FSC said this week that the repo market was valued at $334.5 billion at December 2014. That indicates that the market has been shrinking - a year before, repo liabilities amounted to $398.6 billion.

FSC previously reported in its most recent Compass newsletter that repos at December 2014 totalled $416 billion, then putting them on an upward trajectory. However, the agency's manager of communication & international relations, Keron Morris, said Thursday that since then, their reclassification to 'retail repos' under amendments to the securities law has led to an adjustment of the estimate to $334 billion at that date.

Under the Securities (Retail Repurchase Agreements) Regulations 2014, the term 'retail repo', which traditionally refers to all repo liabilities in transactions between a securities dealer and clients, has been redefined to incorporate all repo arrangements between a dealer and its investors, wherein the title to the underlying securities is not transferred to the investors, the Compass newsletter said.

Still, the financial watchdog would not go on record with a targeted reduction figure.

The dealers themselves are facing new costs for trustee services, while higher transaction fees are expected to dissuade some clients.

"Given that the retail repo market is now operating under a new legislative framework, it is expected that there will be some reduction in the market due to the new regulatory requirements. The FSC will be continuously assessing the market and a determination will be made regarding the size of the retail repo market going forward," Morris said.

All dealers engaged in the retail repo business are now required to do business through the Bank of Jamaica-operated depository for securities as well as JCSD Trustee.

"All dealers are required to be JamClear-CSD participants, as long as JamClear-registered securities [are] used as the underlying securities. All securities underlying a retail repo contract must be immobilised or dematerialised in approved CSDs," said the FSC. A security is dematerialised when held only in electronic form, while immobilised securities are physical certificates kept in a central location but their information is captured electronically.

"Dealers will be required to open a retail repo account with the JCSD for each retail repo investor. Dealers will be required to create and upload transaction files as per the operating schedule, containing transaction details for the retail repo clients in the format specified by the trustee," the regulator said.

Additionally, dealers will be required to maintain a retail repo transactions file for validation of trades, and their back-office systems must interface with JCSD Trustee's back office to facilitate the transfer and validation of transaction files.

Each securities dealer must also have their own account with the trustee for immobilised securities, that is, they are unencumbered or unallocated.

New costs which dealers will now face include fees associated with becoming a participant of the JCSD, for trustee services, and transaction costs, but the FSC insists that they "are not intended to be prohibitive".

The new market structure for retail repos requires transfer to the trustee. Failure to complete the migrations constitutes a breach of the law.

Previously, dealers were required to supply the taxpayer registration number of all repo clients to JCSD Trustee Services by August 31, but the date was extended to December 31, while the identification supplied may either be a client's TRN or any other unique number.

FSC is still trying to ascertain how much of the $334-billion repo holdings have migrated to the trust arrangement so far. As of December 31, repo investments will be limited to no less than $1 million or US$10,000.

The current requirements of $500,000 and US$5,000 remain in effect until then.

avia.collinder@gleanerjm.com