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JSDA Annual Membership Luncheon
June 30, 2010

The Hon. Bruce Golding, Prime Minister of Jamaica, Mr. Rohan Barnett, Executive Director of the Financial Services Commission, Executives and Members of the Jamaica Securities Dealers Association, Other distinguished guests, clients and friends, thank you for coming today to share what is an important event in the calendar year of our Association. This luncheon is an opportunity for us to reflect back on the previous year and the accomplishments and challenges that we have each faced. It is also an opportunity to look forward to what activities we need to do to make this industry first world in its regulatory standards, transparency and accountability.

The Theme of last year’s luncheon was “Resilience - the key to surviving 2009 and beyond”. How prophetic could we have been! The past 12 months have been some of the most challenging for us, both economically as well as politically as a nation. It is a year when we had to look at ourselves in the mirror and realize that the reflection staring back at us was not very pretty. We had to grow up and face the hard cold realities that we could not continue to bury our heads in the sand and pretend the problems Jamaica faces would simply disappear. It was a year which required difficult decisions and choices. A year we will soon not forget.

As we left last year’s luncheon we entered a period of protracted negotiations for an IMF agreement. This coupled with a series of budget revisions and tax packages left the economy on the brink and confidence at an all time low. Clearly the mistakes made during the past had finally caught up with us as a nation as we could no longer turn to the international capital markets and borrow our way out of the inevitable. Our debt to GDP ratios had risen to levels of an unsustainable nature and the interest cost on the debt could not be met. The IMF clearly was not going to enter into any sort of program with Jamaica until we fixed our fiscal house. The fat lady as they say, had sung. We therefore were forced to make some tough and bold choices.

In the latter quarter of 2009 the GOJ entered into a series of discussions with major market players on various options to reduce interest rates and ultimately the interest cost on our ballooning debt. In fact the very debt exchange program suggested by members of the JSDA earlier in 2009, which was thought unthinkable at the time, resurfaced with even bigger ambitions. I want to publically use this opportunity to thank Keith Duncan for being bold and suggesting an idea which others were afraid to even contemplate. His commitment to this industry is unquestioned and we thank him for his contribution to the JSDA.

So in January 2010 the JDX was born. Its unprecedented success was a rare example of the public and the private sector partnering together for the good of the nation. Was it painful? Did it cost Jamaica its reputation as a country which had never renegotiated it debt?  Yes. But it also has given us a golden opportunity. An opportunity to take a new path and make new choices which can lead to sustainable growth and development. The success of the JDX quickly lead to an IMF agreement and the reduction in the interest costs on GOJ debt. It has also importantly lead to the reduction of real interest rates to levels which in my 18 years of working in this industry, I really can’t recall before.

This opportunity should not be wasted. Some have tried to paint the return to the IMF as a negative, telling stories of the past and outlining negative consequences for their assistance. But what exactly does the IMF want? They want us to make the tough choices we have ignored for a number of years. They have indicated that running fiscal deficits and high debt to GDP ratios are not sustainable. Can anyone disagree with this? Is it easier for us to blame the messenger without truly examining his message? I for one welcome the discipline of an IMF program and the constant monitoring and transparency it will bring to our annual budget process.

But do we agree with all that is contained in the IMF agreement. Of course not. For the securities industry in particular we seem to have become the beating stick for all that is supposedly wrong in the financial industry. While the implementation of the IMF program brought with it the fast track re-opening of the unit trust industry, for which we have advocated for so long, it has also brought a negative image to the industry and the prospect of major changes to the regulatory environment.

This negative image is something which has baffled me for a long time. Sometimes we forget history and how we got here and as someone who has worked in the industry for a relatively long time you will forgive me if I digress, just a bit, and remind us all how we got here, the role we played and where we see the future.

The securities industry really came alive in the latter half of the 1990‘s and into this decade. With the huge build up in GOJ debt, which occurred after the failure of the commercial banking and insurance sectors, there was an urgent need to meet the GOJ’s borrowing needs. This void could not be filled by traditional sources and the securities industry used its innovative spirit and developed a “retail” market for GOJ debt. In effect it was the fuel which allowed the GOJ to not only borrow locally, but also overseas. Let no one fool you, all those US$ GOJ Global Bonds that we floated in NYC with much fan fare, were eventual resold, with great profit to US broker firms, right back here to Jamaicans through the securities industry.

As the GOJ continued to borrow so too did the securities industry continue to lend to them. It today holds a significant % of GOJ debt and continues to allow the GOJ to roll day after day the debt outstanding.

Why then the negative perception portrayed in the IMF agreement? The positions put forward are that the industry needs to diversify and reduce the risks associated with its repo business. How exactly are we to do this? Until February of this year security dealers were prevented from issuing new unit trust products to our clients, a key product to aid diversification and reduce repo liability funding. Of course the lifting of the moratorium only applies to JA$ unit trust products as we are still prohibited from issuing, by the Bank of Jamaica Act, US$ unit trust products. This is despite the fact that almost 50% of repos in the market are denominated in US$. How strange it is also that foreign companies can come into Jamaica and issue US$ mutual funds but Jamaican companies are not allowed to do the same. The old arguments of currency control and the risks of capital flight are really just that – old. If Jamaicans never took their money offshore after JDX then they never will. We have long advocated for the removal of the restrictions placed on securities dealers to allow them to truly diversify into non GOJ assets. If we want to reduce liquidity and interest rate risks then this is the critical ingredient to allow that goal to become a reality. The time has come for the Bank of Jamaica to sit and discuss with the industry how we move forward on this important issue. One cannot speak about risk when the very policies which exist in the financial system do not allow for the risks to be eliminated.

While we anticipate changes to the regulatory environment as a consequence of the IMF agreement, we urge all parties to think carefully about the overall consequences as we move forward. The risk of running ahead to meet arbitrary deadlines set in a vacuum, without careful analysis and discussion, could create the very destabilizing scenario the regulators hope to avoid. Let us not forget that the dooms day scenarios and the supposed need for “stability funds” after the JDX program were based on a lack of understanding of how the securities industry works. The JSDA is appreciative of the collaborative approach the FSC is taking to the discussion surrounding new regulatory proposals. However adequate time is needed for careful analysis of each proposed change. As the continued Basel III discussions have shown, not even the international regulatory minds are in agreement on the way forward on some of the key proposals which we are now trying to implement locally. We need to tread carefully.

It is also critical that we not forget that we have a huge debt burden and fiscal deficit. This debt needs to be rolled every day and new funds found to meet new borrowing demands. Let’s also keep this in mind as we charge ahead to implement sweeping regulatory changes on an industry which play a significant role in the GOJ’s debt management process.

The theme of this conference is ”The shift in business models, the new post JDX paradigm.” We do believe that change is inevitable and that our industry will evolve to meet those changes. As we look forward we recognize that players will innovate and adjust their business models to meet the new realities of a low interest rate environment. Surviving on interest margins will not be sustainable over the long term and if we manage to keep our fiscal deficits low, the reliance on the trading of GOJ debt will also diminish. In a low interest rate environment clients will come to rely on securities dealers for investment advisory services and we will move our business model to a true wealth management intermediary role. We are excited about the opening of the junior stock exchange and the growth it can bring to companies looking to expand and develop. This is where securities dealer will play a critical role in developing small and medium size companies which are traditionally the engine for economic development. There are great opportunities ahead and we are confident that working together we can continue to build and industry which has so far played a critical role in our nation’s development.

So in closing all I can say is that it has been a hell of a year. I guess if I left here today without commenting on the events of the past few weeks and months I would be chastised for not speaking out as the head of a major private sector association. To say that the JSDA has been disappointed at the events of the past few weeks and months is perhaps an understatement. It is clear as a country we don’t have the luxury of making any more mistakes. Jamaica has but one opportunity to get this right. Personally speaking I am embarrassed when the country I love is now referred to as a Norco State. I believe we are better than that and I believe we need to take our country back from the criminal elements that seem hell bent on destroying it.

Let’s not waste this precious opportunity. That spirit of togetherness that created the conditions for the JDX can be created elsewhere as we come together to make this country a better place. It is the spirit that created a Usain Bolt and a Shelly-Ann Frazer, and it is the spirit which will sustain us as we boldly go where no man or woman has gone before.

I want to thank you all for coming here today. I want to thank the council, executive and secretariat of the JSDA for their support during the past year. We look forward to working with the industry and the FSC as we strive to develop and become even better.

Thank you ladies and gentlemen.

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