Jamaica aims to cut repo liabilities in half by 2015

Marcella Scarlett, Business Reporter

Jamaica aims to cut its repo liabilities by 50 per cent within two years relative to 2010 levels. The "aspirational" target for 2015 is referenced in the IDB Country Strategy with Jamaica 2013-214 report released by the Inter-American Development Bank on November 1.

This is similar to the expectation by the International Monetary Fund, which proposes the securities dealer sector be reformed by 2016 under its Extended Fund Facility with Jamaica.

The IDB is Jamaica's major source of bilateral funding. The bank functions as a major source of development financing for the Latin America and Caribbean region, providing loans at concessionary rates, grants and technical assistance.

The 2010 industry data was not unavailable up to press time.

But according to a January 2010 publication by the regulator of the securities industry, the Financial Services Commission, in 2009 the industry had total repo liabilities of just under J$375 billion, held by 33 licensed firms.

The dealers held assets totalling J$514 billion and had a combined capital base of J$45 billion. Total funds under management were J$734 billion.

Also in 2009, there were adequate assets backing clients' investment the regulator noted, evidenced by the low risk asset to repo liabilities of 129 per cent. This compares to the regulatory benchmark of 100 per cent.

"The business model of securities dealers in Jamaica is mostly based in the repo model by which securities dealers finance their long-term investment with repos of very short-term maturities with retail clients. The business model exposes dealers to significant interest rate and liquidity risk," said the IDB report.

"In a negative scenario, a rapid unwinding of repos would affect the liquidity position of dealers and potentially that would create major disruption to government financing."

The FSC's latest newsletter issued last month shows that the securities industry had 32 players with combined assets of J$522 billion and capital base of J$68 billion, with funds under management of J$716 billion up to June. Their repo business was valued around J$400 billion, which is about seven per cent above the 2009 levels.

Additionally, the ratio of low risk assets to repo liabilities has fallen to 103 per cent. This is still above the regulatory minimum of 100 per cent and the regulator still holds that the sector "is adequately capitalised".

Under the IMF programme an "orderly phase out" of the retail repo business model is built into the EFF agreement.

This is to be achieved by establishing conditions that would encourage securities dealers to pursue alternative business models likely to pose less risk to financial stability.

In the meantime, there will be a phase out repo licences issued to securities dealers, and a freeze on new licences to securities dealers whose business model is based on retail repos.

marcella.scarlett@gleanerjm.com

The industry's repo business was valued at J$400b at June, which is about seven per cent above 2009 levels