BOJ willing to deal on forex investments
Published:Friday | March 15, 2013 | 12:00 AM
Sabrina Gordon, Business Reporter
Bank of Jamaica Governor Brian Wynter has given new indications that the central bank will soon lift restrictions on investments in foreign securities.
He said it would assist with the initiative for portfolio diversification.
"We at the bank and the Financial Services Commission (FSC) are preparing to provide a plan later this year that will over time raise and, in due course, remove the cap on investments in foreign securities which will pave the way for the industry to further diversify the currency composition of its portfolio," said Wynter.
"There have been special representation in the past on this, and so we will be working together on it later this year," the central bank chief told members of the securities industry at a business luncheon hosted by the FSC on Wednesday.
Over the years, both pension-fund executives and securities dealers have been lobbying for a greater level of freedom to invest in foreign securities. Their persistence appears to be paying off, though it has taken a decade.
"Every time we meet with the governor, it is a matter that is raised," said Gary Peart, president of the Jamaica Securities Dealers' Association.
"We would love to see that happen, we have been lobbying for it over 10 years and it would fit with the diversification of not only our own portfolio but also clients. It can't happen soon enough," he said.
The FSC, which is the regulator of pension funds under the Pension Act of 2004, stipulates a cap of 20 per cent for foreign assets of total funds under managements, but pension funds have had to adhere to the lower five per cent restriction imposed by BOJ because the central bank has final say over foreign-exchange transactions.
Similarly, outside of Government of Jamaica instruments, securities dealers are restricted to investment in foreign securities from the United States, Canada and Britain.
"The governor mentioned that securities dealers have been advocating for this for a long time, so it's very good news and can't happen soon enough," said Charles Ross, managing director of Sterling Asset Management Limited.
"It's good news for long-term investors - more diversification in the portfolio of securities - and it's good news for the financial sector and investors who put money into pension funds," said Ross.
At the same time, the move to liberalise forex investments will also assist securities dealers who have been advised to reduce balance-sheet risk. The FSC has been guiding investment companies away from repo-based models, which carries heavy balance-sheet risk, to other products that offer less exposure to the firms.
Repos are short-term assets but they are often used to fund long-term obligations.
The repo model is seen as even more risky now, with yet another debt swap this year that has cut another five points off returns and lengthened the maturity profile of government securities.
"Lengthening the maturity structure of government debt increases the risks associated with a business model that funds long-dated assets with shorter-term liabilities," said Wynter.
"Regulators worry that the inherent risks in these models, that is, concentration risk, interest-rate risk and liquidity risk, may not be matched by sufficient capital to weather the more extreme adverse scenarios that experience teaches us may indeed evolve," he said.
The BOJ governor said that firms whose business model relies on earning a margin by funding government securities with repos, will need to find new sources of business as the supply of government debt slows.
"The industry will have to diversity its portfolio into non-GOJ assets. From our perspective, we would like these assets to be domestic, but recognise that they could also involve some high-grade foreign-currency assets," Wynter told the dealers - hence the BOJ's willingness to ease restrictions on forex investments.