Freeze on new repo traders
Rohan Barnett, executive director of the Financial Services Commission. -Rudolph Brown/Photographer
A temporary freeze on the licensing of securities dealers whose business models are skewed towards trading in repurchase agreement and other short-term liabilities will take effect next Tuesday as part of the financial-sector reform in adherence to International Monetary Fund (IMF) conditionalities for the 27-month standby loan to Jamaica.
Mechanisms to strengthen capitalisation and margin requirements of securities and incorporating elements dealing in liquidity and operational risks will be added to new financial regulations.
And the finance ministry will "press ahead with an initiative already under way" to strengthen the regulator, Financial Services Commission (FSC), giving it the tools for stress-testing the entities it regulates.
The new risk-based capital framework is to be developed by the FSC in conjunction with the IMF and finalised by August 2010 but until then, the repo market will be contained to current traders, except where they emanate from a merger or acquisition of new firms.
The regulation is to be fully implemented by March 2012, according to the 'memorandum of economic and financial policies' appended to the IMF letter of intent tabled in Parliament on Tuesday.
"The Government is committed to ensuring that any new applicants have robust financial resources, a well-diversified business model, and knowledge-able management and staff," read the memo.
Repurchase transaction forms a major part of securities dealers' balance sheets and have been described as the industry's 'bread and butter'
Last year, three of the largest brokerages had more than $200 billion of repos on their balance sheets.
But the FSC, has been troubled by the volumes of repos on securities firms balance sheets, saying last year that their portfolios were too heavily skewed to those instruments.
The FSC couched its concerns then as a need for dealers to diversify their product base, and downplayed suggestions that it was concerned about overexposure to repos.
The securities watchdog, however, encouraged dealers to re-align their business models to rely less heavily on repo transactions for earnings.
One broker, Mayberry Investment Limited, announced then that it was getting out of the business, citing uncertainty about interest rates and its effect on margins.
"A major problem with the security dealer sector as currently structured is that liquidity and maturity risk are held on the security dealers' balance sheet and capital requirements are not comprehensive," said the memorandum sent to the IMF on January 15, and tabled in Ministry Paper 9/2010 on Tuesday.
Under the new regulations being developed, dealers will also be required to register customer interest against underlying instruments in a central securities depository by September 2010.
"Dealers repo contracts are a source of risk," the financial memo read.