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Repo $1m limit to have minor impact

Published:Thursday | October 1, 2015 | 1:36 PM
Kwame Brooks
Devon Barrett, general manager of VM Wealth Management Limited.

The Financial Services Commissions (FSC) estimates that just about one per cent of retail repos on the market, or about $3 billion, will be affected by its curtailment of small repo investments.?

The floor for retail repo investments is being raised in phases to $1 million or US$10,000 by December 31. It was last adjusted to $750,000 and US$7,500 this month, up from $500,000 and US$5,000.

The repo market had been expected to shrink under reform of the sector the broad goal of which was to reduce balance sheet risk and some investment houses have reported migration towards collective investment scheme products. The numbers indicate, however, that the repo market is so far holding relatively steady even as other investments grow in value.

"There has been some increase in the value of collective investment schemes," said the FSC. But: "We are unable to definitively say that the increase is as a direct result of persons moving from the retail repo product."

In the most current data quoted by the regulator, the repo market was valued at $334 billion. That is up moderately from $316 billion at December 2013.

Since this year, however, some firms have been complaining that the insertion of an intermediary, a trustee, into the repo market means that transactions will take more time and will be more costly to execute. Sterling Asset Management cited those reasons in September when it announced that it would discontinue trading in Jamaican-dollar denominated repos, while continuing with the foreign currency side of the business.

Meantime, the hard sell that investment houses are engaged in for collective investment scheme-type products, such as mutual funds and unit trusts, has been paying off.

The unit trusts market was valued at $111 billion by funds under management in December 2014, almost twice the level seen in December 2013 when total funds under management were $58 billion. Mutual funds investments were valued at US$177 million last year, an improvement over the US$165 million of investments at December 2013.

JMMB Group remains a top repo trader, but, it too, has seen a shift in business under the push for reform of the repo market.

"We have seen an increase in the demand for unit trusts, direct ownership of USD-denominated bonds both corporate and global; and equities local and regional; and to a lesser extent, listings on the major indices in the United States," said head of treasury and trading for JMMB Kwame Brooks.

Devon Barrett, general manager of VM Wealth Management, told The Financial Gleaner that affected retail repo clients are mostly moving their funds to their other product offerings, particularly, the company's managed bond portfolios, VM Wealth Edge.

"These portfolios are denominated in both Jamaican and United States dollars and consist of carefully selected government and corporate bonds," he said.

Barrett said the indicative yields on his company's bond portfolio was around 7.5 per cent for JMD investments and 7 per cent for USD, while drawing a contrast with repo yields, which he quoted as being around 4 per cent and 2.5 per cent, respectively.

Brooks of JMMB said that in general, Jamaican investors have expressed a preference for USD-denominated investments.

"With the depreciation of the currency, clients are seeking the preservation of the value of their investments. Recall fiscal year (FY) 2013/14 depreciation was 10.39 per cent, FY2014/15 depreciation was approximately 4.9 per cent, and this financial year to date depreciation is currently 3.4 per cent," he said. "Given this trend, investors continue to hedge against the depreciating currency."

NCB Capital Market's communications arm noted that clients anticipating the change in the repo floor "are moving towards the unit trust product, in particular, the Money Market Fund." The investment company, whose timed entrance into the unit trust market two years ago has vaulted it into the top three fund managers, also said its USD denominated unit trust funds and bond funds are in demand because the funds are held for just 30 to 90 days and so provide "liquidity to clients".

"Global bonds have also gained popularity and are the most in demand at this time," NCB CapM said.