President of the Jamaica Securities Dealers Association (JSDA) and CEO of Scotia DBG Investments Limited Anya Schnoor has criticised local regulators and the government for not creating a framework within which the securities dealers can benefit from risk diversification, even while blaming the industry for the perceived systemic weaknesses of the sector.

Schnoor, who was speaking at the Annual Members meeting of the JSDA held at the Terra Nova Hotel in Kingston, said the securities industry in particular had become “the beating stick for all that is supposedly wrong in the financial industry” while at the same time it is targeted as leaders in the financial sector turnaround.

The changing regulatory environment, brought on by Jamaica’s relationship with the International Monetary Fund (IMF) and the Jamaica Debt Exchange, while they have brought some important benefits to the industry has also wrought “a negative image of the industry” said Schnoor.

She noted that though the IMF has portrayed the securities sector as ‘inherently risky’ many have ignored the fact that it is the securities dealers that have facilitated the sale of Government of Jamaica (GOJ) debt which was the fuel which allowed the GOJ to borrow both locally and overseas, and plays a significant role in the debt management process.

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

However, in a report detailing the terms of the US$1.27 billion stand-by arrangement with Jamaica, the IMF recommended broad based reform of the financial sector based on what its said was a model fraught with inherent risks made worse by the repo business. However, Schnoor argued that despite the recommendation that the dealers move some of their risks off balance sheet; the framework has not been created for them to do so.

“How exactly are we to do this? Until February of this year securities dealers were prevented from issuing new unit trust products to our clients, a key product to aid diversification and reduce repo liability funding,” Schnoor said.

She argued that when the moratorium was lifted on unit trust products, restrictions remained on the type of unit trusts to issue, limiting the extent to which the sector could diversify.

Only Jamaican dollar denominated unit trusts can be issued by the local dealers, as the Bank of Jamaica Act prohibits the securities dealers from issuing US dollar denominated unit trust products even though 50 per cent of repos in the market are denominated in US dollars. Worse, securities dealers from outside Jamaica can issue USD mutual funds locally. Schnoor argued this limitation was backward.

“The old arguments of currency control and the risks of capital flight are just that-old. If Jamaicans never took their money offshore after the JDX then they never will,” she said.

Schnoor argued that if the restrictions on securities dealers were removed, it would create the framework for a reduction in interest rate and liquidity risks. She noted that in the interest of the stability of the financial sector, regulators should not impose the risk of “running ahead to meet arbitrary deadlines set in a vacuum, without careful analysis and discussion”.

“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 policies which exist in the financial system do not allow for the risks to be eliminated,” Schnoor said.

The Financial Services Commission (FSC) recently announced a 100 per cent increase in the risk weighting of GOJ global instruments, which will have to be borne by the securities dealers that hold the instruments. The increase in the risk weighting has moved from zero, to 12.5 per cent to be compounded each quarter. The increased weighting is in keeping with the Basel standard said the FSC.

To cover the risk, these firms will have to have a capital base that, at minimum, covers the cost of eight per cent of the value of its holding of the bonds. As at March 31, 2010, the Jamaican government had US$3.2 billion worth of global bonds and over US$1.2 billion of US dollar and US dollar indexed bonds in issue.

“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,” Schnoor argued.

“As the 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,” Schnoor said.