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JSDA Council Bulletin (February 01, 2005)

In an effort to promptly disseminate to our members, information on critical issues in the securities sector, we have developed a Bulletin. This will be a monthly publication highlighting issues from our Council Meeting. We hope you will find this useful and we look forward to your feedback. From the President’s Desk
Financial Services Commission
The general membership of the JSDA was invited to the JSDA Council meeting in February 2005 for an update on the activities of Council in the past year and particularly on matters relating to the FSC as under: Representatives of the JSDA met with the FSC on January 21, 2005 regarding issues related to the FSC’s Guidelines for Interim Capital Standards and Margin Requirements for Repurchase Agreements. It was reported that the FSC had not accepted any recommendations to amend or delay the implementation schedule as outlined in the document, rather, the need for regulation of the securities industry was strongly emphasised by the FSC. The FSC also highlighted that the securities industry has a poor record of submitting reports and it was noted that this posture has served to undermine the JSDA’s credibility and weaken its negotiating power with the FSC. Members are being encouraged to reverse this trend and to indicate any difficulty/challenge in complying with the FSC’s proposed standards and implementation dates. While establishing that custodial assets are to be included in the process of determining capital requirements, the FSC has indicated a commitment to examine whether subsidiary accounts should be similarly included. The JSDA is currently in the process of engaging PricewaterhouseCoopers as consultants to research and propose an alternate Capital Adequacy Requirements model. The JSDA has written to the FSC expressing disagreement with the definition of the term ‘fair value’, as it appears in the Guidelines for Margin Requirements for Repurchase Agreements, as the ‘clean price’ of an asset. The letter had outlined that the JSDA had assumed that the definition of ‘fair value’ was the same as obtains in standard repurchase agreements internationally, citing references from Moorad Choudhury’s ‘An introduction to Repo Markets’ and ‘The Global Repo Markets: Instruments and Applications.’ The FSC, in their response, has indicated that the use of the ‘clean price’ for calculation of margin requirements for repurchase agreements was deliberate as it was their intention to better protect the investing public. This development represents a significant difference to the original interpretation. Council has examined the FSC’s discussion paper on ‘Guidelines for Audit Committees’ and has found sections of the guidelines and by extension the PSOJ’s Corporate Governance Code to be incompatible with the Jamaican environment as they are geared towards organisations which are much larger than any Jamaican company. The definition of the term, ‘independent members of the Audit Committee’ as it appears in Section 4.1 (b.) of the guidelines and specifically the implication that shareholders and any other parties having any direct or indirect relationship with the company or its subsidiaries should be excluded from membership was questioned. It was agreed among Council members that a shareholder would be an ideal candidate for membership as he would be primarily concerned about the well being of such a company because of his vested interest. Council also found Section 5d, sub-clauses 1-5 - quite onerous.
Strategic Initiatives For Year 2005

The JSDA will embark on the following strategic initiatives for the year 2005:

  • Public Education on scope of the securities industry
  • Website Development
  • Engagement of consultant to research and recommend an alternate Capital Adequacy Requirements model for the industry.
    Tax Treatment For Unit Trusts And Mutual Funds
    The JSDA has written to the Minister of Finance (copied to Hon. Shirley Tyndall and Messrs. Clive Nicholas and Brian Wynter) calling for an alignment of the tax treatment of Mutual Funds and Unit Trusts. Recommended amendments to the Income Tax Act, which would achieve that alignment, were also forwarded to the recipients. The Minister of Finance has replied in a letter dated January 5, 2005 welcoming the initiative and stating that he would contact the JSDA shortly with a definitive position.
    Jcsd Fixed Income Project
    Members were informed of the drafting of a MOU which was being examined by the Central Securities Depository Consultative Group to facilitate the project going forward. It was noted that a 2005 implementation date of the project was highly unlikely judging from the pace at which negotiations have taken place so far.
    Market Analysis

    A yield curve, developed from information gathered from ten (10) of the players in the market, was generated as shown in the graph below:

    CIt was reported that the Central Bank reduced repo rates on February 7, 2005 and that there was a 5 year and 7 year LRS tender being offered in the market. Based on a sample of the current brokers within the market, the yields on the 5 year and 7 year paper is expected to be in the range of 16.25% - 16.75% and 16.75% - 17.50% respectively. A comparison between recent and current issues was highlighted for the period February 2-4, 2005 and February 8, 2005 as follows:
    February 2-4, 2005                   

    February 8, 2005

    Tenure - 48 months Tenure 5 years 7 years
    Maturity date – February 4, 2009 Maturity date Feb. 11, 2010 Feb. 10, 2010
    Coupon - 16.125% p.a. Coupon 14.125% 14.75%
    Interest payment frequency – Quarterly Offer volume $500,000,000 $300,000,000
    Amount issued - $4.2 billion      

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