The knowledgeable investor may already be aware of what a Securities Dealer is and what institutions would fall in this category, but for many the term still conjures up images of armed men in uniforms, standing with dogs.
By definition, Securities Dealers are institutions or individuals that are licensed under the Securities Act and regulated by the Financial Services Commission. This, however, sheds little light on what a dealer is and what role dealers play in our economy.
Function of Securities Dealers
The main function of a Securities Dealer is to supply institutional and individual clients with all the pertinent facts to assist them in buying or selling stocks, bonds, commodities and options. In other words, Securities Dealers can be viewed as the link between investors and investment opportunities. For the purposes of this article, we will focus on dealers in bonds and other fixed income securities.
Formation of a Secondary Market
Securities Dealers became an active part of the Jamaican financial landscape in 1992, when small dealers began offering investor clients, attractive yields on bonds and promissory notes from debt issuers. Clients liked the transparency of the securities on offer and of course did not mind getting attractive rates of return on their investments, while debt issuers and borrowers enjoyed the speed and low cost associated with issuing bonds and notes versus going to the bank to negotiate a loan.
This efficiency carried over into Government issues of debt with the introduction of Bank of Jamaica Primary Dealers. Through these Primary Dealers,
investors were able to access Government issues of debt at more attractive rates and the Bank of Jamaica was able to execute monetary policy more effectively than before.
With an ever-expanding base of holders of various types of debt instruments, the natural and immediate result was the creation of a secondary market for debt securities – a market where previously issued securities are traded. This secondary market allowed individual and institutional investors the flexibility to trade investments for cash and provided an essential underpinning for the Jamaican economy as it provided Liquidity, which is an integral component to any advanced financial system.
Secondary Market used as a tool to stabilise Financial Sector
The cash crunch of the 90’s, although exacerbated by an erosion of confidence and the subsequent exodus of clients, was in the making for several years prior. Without venturing into the factors that led to the failure of many local companies, it is safe to say that the precipitous erosion of value of the Jamaican currency and the overall lack of confidence in our local financial institutions characterised the era of the 90’s.
The strength and efficiency of the secondary market became a critical factor in the strategy of Banks, Insurance Companies and the Government during the mid to late 90’s, a time that is acknowledged as the most challenging for Jamaica’s Financial Sector and by extension the country’s economy.
Most cash strapped financial institutions were able to delay the inevitable and gain access to liquidity to cover shortfalls by selling their assets on repurchase agreements. This strategy enabled some companies to hold on and weather the storm, as the secondary market lived up to its expectations and liquidity was restored. It is a matter of record that at that time of great distress, no Securities Dealer failed.
This is of course the short version of how the secondary market played its part in what has been to date one of the most serious challenges for our economy.
Today, as we write our country’s financial future, it is clear that Securities Dealers and the secondary market they helped to develop continue to serve us all in seeing a brighter tomorrow.