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Sterling Asset exiting JMD retail repo market

Published:Thursday | September 10, 2015 | 3:29 PMMcPherse Thompson
Charles Ross, CEO of Sterling Asset Management Limited.

Sterling Asset Management has decided to exit the Jamaican dollar retail repurchase business, saying the restructuring of the market has resulted in significant added costs to the execution of the business model.

However, chief executive officer Charles Ross said Sterling Asset's clients in that line of business have found other investments in which to place their funds. The company will focus on foreign currency products.

Addressing a Sterling investors' forum on Wednesday evening, Ross said the 2014/15 period "was a great year for us - the company did extremely well", but that the first quarter of 2015/16 "has been a little challenging" because of market volatility and a fair amount of nervousness among investors.

"However, volatility also presents opportunities and for those who have been brave enough to dip their feet in the water there have been some good opportunities in terms of purchasing investments at attractive yields," Ross told investors.

At the same time, he said, "We can, I think, look forward with some amount of confidence to a return to a greater level of stability in the markets, and we expect that there really won't be any significant long-term fallout and that our investments will continue to do well."

Ross suggested that "for those investors who are a little more conservative it's a good time to accumulate some resources and put funds into safe, stable fixed income investments and to be in a position ... to be able to take advantage of investment opportunities that come along once markets have stabilised somewhat".

He said the local market has been affected by some fairly significant regulatory changes that occurred in the first quarter of the 2015/16 fiscal year.

One major change taking place relates to the repurchase agreement regime that has been brought in by the Financial Services Commission (FSC) as part of the government's commitment under Jamaica's economic support programme with the International Monetary Fund.

That change, Ross said, has resulted in a whole new environment for the custody of local repurchase agreements and the assets associated with them.

"This has added considerable cost to that business model and Sterling has decided to exit the Jamaican dollar repo business," he said.

However, "we will also be bringing some new investment opportunities on the US dollar side which will, we think, provide attractive alternatives to the traditional repurchase agreement. What that means is that there will be, we think, more attractive investments from a return point of view and also investments which still offer a high degree of security and credit quality to the investor", the Sterling Asset Management CEO said.

In its July to September newsletter, Sterling Asset Management said that with the restructuring of the retail repo market there are significant changes not only for the investor but also for the institutions involved.

Under the new dispensation, all investors will need to maintain accounts with JCSD Trustee Services Limited the primary trustee for securities dealers to which investors' physical security will be transferred and held on their behalf.

In addition, the way in which money is encashed from a repo will change. Before a dealer pays out to an investor, the dealer must send the money to the trustee, the trustee then sends the underlying security back to the dealer along with the cash.

Sterling said encashments will take longer and cost more and there is likely to be more fees as money must now be transferred twice before reaching the investor.

"This is likely to result in higher fees and lower interest rates," said the newsletter. "It also means that investors will directly bear the full credit risk of the underlying security that collateralizes their repo."

Investors must now inform themselves about the quality of the securities that are securing their repo agreements and make sure that these are liquid investments of reasonable credit quality.

The FSC said this offers protection and transparency to the investor from a legal and practical perspective as the security is now in the possession of a trustee.

As part of the reform of the repo market, the FSC has also raised the floor to $1 million for JMD investments and US$10,000 for foreign currency products.