A member-dealer/broker of the Jamaica Stock Exchange (JSE) continues to be in breach of the excess net free capital (ENFC) requirement as per the June 2022 monthly regulatory report which puts its operations in question with regulators.

The Regulatory and Market Oversight Division (RMOD) is the regulatory arm of the JSE which is governed by the Regulatory and Market Oversight Committee which consists of independent directors of the JSE’s board and no broker-appointed directors.

Before COVID-19, the RMOD would publish its monthly regulatory report for the prior month at the end of the current month. Thus, the August report would be published at the end of September. However, since the pandemic, there’s been a lag in the publication of reports especially with companies requesting the JSE’s extension to file their required reports. As a result, the May and June reports were only published on Monday.

In the May report, a member-dealer continued to exhibit a deficit in its ENFC as it remained below zero as of April 2022. The member-dealer first slipped into the regulatory breach at the end of March compared to February when it was in the zero to $299 million range. The breach continued into the June report as well for the May period. The remaining 14 member-dealers were in compliance with the JSE regulatory requirement and remained unchanged since the prior report for their ENFC classification.

Between February and March, one member-dealer’s ENFC slipped below zero, two slipped below the $300-million mark and one slipped below the $6-billion mark. There was one member-dealer addition between March and April in the zero to $299-million band which would have likely been FHC Investments Limited which was granted its member-dealer licence to commence operations in March and had its first trade on March 28.

As per the JSE’s Main Market rule book (October 2020), the net free capital before deductions is calculated by adding total active assets, non-current liabilities under mortgages or other enforceable agreements and subtracting total liabilities. After deducting for margin securities and overdue margin accounts, the amount of $5 million or five per cent of total liabilities, whichever is greater, is deducted to determine the excess (deficiency) of net free capital (ENFC).

Under the Statement B footnote, it states that on first occurrence of a deficiency, the broker must write to the managing director (Marlene Street Forrest) or chief regulatory officer (Andrae Tulloch) explaining the reason for the deficiency and plans to correct it within 30 days. With the broker remaining in breach and showing continued deficiency as of the June report, they would have had to submit proof that adequate capital has been injected into the firm since the April report or they would have been suspended from trading. No broker has been formally suspended by the JSE.

A securities industry executive had described the initial breach as a serious infringement and it potentially creating grave implications for clients. Based on the fact that there has been no public notice, she indicated that it means that the broker would have informed its regulators that it has a plan to deal with its capital deficiency with some form of external guarantee to remain in operation. Another executive said that the broker would have been suspended from the company level until the breach is rectified.

Up to the April report, only Stocks and Securities Limited (SSL) had been cited by the RMOD in its monthly reports as a member-dealer. In the May report, seven of the 19 citations were related to SSL and its monthly and quarterly return reports which were all submitted a day late past the submission deadline. Barita Investments Limited was cited for its July 2021 monthly return report which was incomplete on the initial submission date of August 27, four days before the deadline. The completed report was submitted on September 1. Proven Wealth was also cited for its February 2022 monthly return report being submitted a day late on April 1. These breaches fell under JSE Main Market Rules Rule 209 (A) which carries a $5,000 a day fine for late reports and (B) which carries a $2,500 fine for incomplete reports.

The June report had no member-dealer being in breach of the JSE rules.

SSL disposed of its 79.08 per cent interest in SSL Venture Capital Limited on May 25 for $29.99 million, but the transfer of shares was only completed on July 21 to MFS Acquisition Limited.

While the RMOD doesn’t publicly list the brokers in its reports for the ENFC, all brokers are licensed as securities dealers by the Financial Services Commission (FSC) and are required to be in compliance with capital adequacy ratios. The total regulatory qualifying capital to total risk weighted assets ratio (TRC) is the main regulatory indicator used among securities dealers with the minimum being 10 per cent. Thus, being in breach of the JSE ENFC requirement likely indicates that a dealer is in breach of FSC regulations which impacts licensing.

Barita, GK Capital Management Limited, JMMB Securities Limited, JN Fund Managers Limited (JNFM), Mayberry Investments Limited, NCB Capital Markets Limited, Proven Wealth Limited (PWL), Sagicor Investments Jamaica Limited, and Victoria Mutual Wealth Management Limited (VM Wealth) were all in compliance with this regulatory requirement at the end of June 30 as per publicly available reports. Barita had the highest TRC ratio of 44 per cent at the end of the period.

Scotia Investments Jamaica Limited had a TRC ratio of 47.24 per cent as of July 31.

The heightened volatility has pushed the parent companies of various firms to take proactive measures to maintain capital amid elevated risk in the environment. Victoria Mutual Investments Limited, parent company of VM Wealth, has reduced its total assets by $2.12 billion or 6.79 per cent up to June as it reflects the ongoing strategy to de-risk the balance sheet of its broker-dealer subsidiary. VMIL even noted at its investor briefing last week that it has decided to suspend dividend payments as the firm ensures there is enough capital to serve as a strong buffer. VMIL stated that it would be injecting $600 million of capital into VMWM in two tranches to support its expansion activities and did the first injection on March 31

Proven Group Limited (PGL), parent company of PWL, skipped a dividend declaration in June, the first in more than a decade, due to uncertainty in the financial markets and need to create a cushion to withstand further volatility. PGL declared a dividend of US$0.0011 which is a far cry from the US$0.0041 declared in February.

JNFM’s 2022 audited financials had a subsequent event note stating that it received a $1 billion capital injection from JN Financial Group Limited on June 20. JNFM’s equity base was $2.97 billion at the end of March and exceeded its regulatory capital requirements by twice the standard.

The financial securities industry has been hit hard by the rising interest rates and heightened volatility stemming from the various geopolitical and sovereign risks emerging globally for various financial assets. The S&P 500 in the United States fell into the technical definition of a bear market for the first half of 2022 while bond prices, especially emerging markets were crushed in the same period. The JSE Index is down 11 per cent year to date to 353,391.05 points.