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JSE to facilitate trading in foreign shares, plans to launch depository receipt market

Published:Wednesday | June 24, 2015 | 6:06 PM
JSE general manager Marlene Street Forrest.
A section of the Jamaica Stock Exchange, Harbour Street, Kingston.

The Jamaica Stock Exchange (JSE) is to launch within weeks a depository receipt market, which will allow local investors to trade in the shares of foreign companies.

A depository receipt is a negotiable financial instrument issued to represent a foreign company's publicly traded securities.

Jamaica will become the second in the Caribbean region, alongside the Cayman Exchange, to offer such securities.

JSE General Manager Marlene Street Forrest said the depository receipt market would go live in July, but no listing is likely before August, as the Financial Services Commission must approve each issued prospectus and the foreign custodian who will hold the shares.

Most of the exchange's member dealers have expressed interest in adding foreign securities to their offerings, and high participation is anticipated, she said.

"It's a new product and the value is not ascertained, but the market could be significant as there is a large basket of foreign securities," she added.

Under the Jamaica Depository Receipt (JDR) market structure, stockbrokers will purchase shares from foreign stock exchanges, which they will hold through an FSC-approved custodian bank, such as Citibank, said Street Forrest. The bank then issues the depository receipts to the stockbroker. Shares cannot be sold as long as there is a depository receipt attached to it.

The broker can then apply for the shares to be listed on the Jamaican exchange.

According to the JSE, depository receipts facilitate the buying of shares in foreign companies, without the shares having to leave the home country.

"This now means that shares of companies that are listed on a reputable stock exchange, such as the New York Stock Exchange and London Stock Exchange, can be traded on the Jamaican Stock Exchange, without these shares actually being listed on the Jamaican Stock Exchange," the exchange indicated on its website.

suitable for

younger generation

President of the Jamaica Securities Dealers Association, Julian Mair, said the new JDR product would be particularly suitable for a new demographic of investors, those being "younger people, a generation which has grown up very aware of the international markets and the companies which are operating within them.

"We applaud the steps being taken by the JSE to deepen and expand the capital markets, and also expand the relevance of the products to the market," said Mair.

For pension funds, use of the JDR market comes with a caveat.

"If the currency in which we pay or settle is Jamaican dollars, pension funds which are now valued at over $300 billion can get portfolio diversification," said pension market expert and managing director of Prime Asset Management Limited, Rezworth Burchenson.

"Based upon currency restriction - Section 22 of the Bank of Jamaica Act - funds are restricted from investment in US dollars, which precludes the major markets in the United States, Canada and the United Kingdom. However, if a local broker can offer participation in J-dollars, we can get portfolio diversification," he said.

Explaining the process for JDR listings, Street Forrest said the local purchaser of shares will first apply to the FSC stating its intent to offer and list the security. If the FSC has no objection, then the JSE's listing committee will review the application.

"The firm will then go through the process of a prospectus, inviting the market to buy into the depository receipts," she said.

No two member dealers will be permitted to list the same JDR. "So, for example, if an investment house/brokerage buys Pepsi, no other dealer can list Pepsi," the head of the JSE said.

Dealers may offer depository receipts which are either issued on a one-to-one basis, reflecting the full price per share, or other ratios which will make the shares more affordable to local buyers. For example, any share, or Pepsi which is now priced above US$95 on the NYSE "could have 30 receipts allocated which makes it more manageable for a local person to buy," Street Forrest said.

The JSE indicated that its depository receipt market would still require a company to meet the stock exchange's specific rules to qualify for listing of the stock.

"For example, a company must transfer shares to a brokerage house in its home country. Upon receipt, the brokerage uses a custodian - in this case the Jamaica Central Securities Depository - connected to the stock exchange to custody the depository receipts. This connection ensures that the shares or stocks actually exist and no manipulation occurs between the foreign company and the international brokerage house," the exchange said.

Street Forrest added Thursday that depository receipts can either be sponsored - that is, by the company itself in which the shareholding resides - or unsponsored. The JSE will be offering unsponsored receipts.

The unsponsored process, she explains, involves the "member dealer buying a bank of securities - for example, 300,000 shares in Google. These are the underlying securities which are lodged with a custodian. From these the depository receipts are issued."

As part of the listing process, member dealers are expected to advise the market of the foreign company's financials and the price at which the shares are being offered.