FSC proposes tough reforms
Published:Friday | October 8, 2010 | 12:00 AM
Sabrina Gordon, Business Reporter
The Financial Services Commission (FSC) is proposing sweeping reforms of the financial-services sector for tough new restrictions, licensing, reporting and other requirements that would effectively tighten the operating screws on securities dealers, beginning in 2012.
The securities watchdog has just issued a consultation paper outlining the raft of changes, which form part of the Government's commitment to undertake financial reforms under a 27-month standby arrangement with the International Monetary Fund (IMF).
The document proposes broad changes to the prudential requirements for securities dealers and investment advisers.
There was no immediate feedback from securities dealers. Chief spokeswoman Anya Schnoor did not respond to request for comment.
And other investment houses said they needed time to review the FSC document, which was made public on Wednesday, and chew it over with other dealers, before commenting publicly on what it might mean for the conduct of business.
But if the FSC prevails, they will be subject to a large-exposure provision, previously omitted from the capital requirement guidelines under which these entities operate.
The Rohan Barnett-led FSC is contending that the new provision is necessary to minimise the risk of a dealer firm collapsing as the result of the failure of a counterparty or another entity.
The large-exposure provision will make it mandatory for companies to disclose exposures in excess of 10 per cent of capital, but allowing for exposure up to 25 per cent.
The financial services regulator also intends to restructure the licensing regime for securities dealers to create additional categories of securities firm to which licence can be granted.
These are in addition to the two - securities dealer and investment adviser - currently set out in the Securities Act.
The paper, on which dealers are expected to provide feedback by the end of November, did not indicate the number of new licencing categories being contemplated by the Government.
However, it said the creation of new categories would be based on the activities of each applicant. That is, whether they were advising on securities, dealing in securities, arranging deals in securities as agent, among others.
Capital requirements would not be the same across the board for all groups, but would be determined, the FSC said, after an assessment of the risks of each category.
The existing capital requirement for a security dealer is J$5 million in free assets, and $1 million for an investment adviser.
Also included in the FSC proposals is the reinforcement of other existing guidelines dealing with leverage ratio and risks related to market, withdrawal of capital and margin trading, among others.
The FSC has said it wants to have such measures with a direct quantitative impact on the capital necessary for securities firms to meet regulatory requirements, to be imposed in stages starting June 2012.
The proposed measures form part of an overall reform of the financial system which started with the Jamaica Debt Exchange (JDX).
In its letter of intent to the IMF outlining its short- to medium-term economic programme, the Government had committed to undertaking steps, including new financial legislation, to strengthen the financial system. While laws enforcing fiscal responsibility, particularly in relation to national debt levels, have already been passed, operational and liquidity risks were two of the main elements slated to be addressed under Jamaica's commitment in the 2010 IMF programme.
As the Government implemented the JDX to limit its internal debt stock several months ago, securities dealers, with their balance sheets skewed heavily towards Government of Jamaica instruments, were identified as major players in the system.
In a move designed to reduce this risk, in June this year, the FSC raised the risk weighting applied to holdings of foreign-currency bonds issued by the GOJ from zero to 12.5 per cent. This will be further increased over the next two years by a further 12.5 per cent each quarter, until it reaches 100 per cent by March 2012.
Before that, a freeze was placed on the issuing of licences to companies heavily into repurchase agreements-based products.
To further limit exposure to liquidity risks, the FSC said it intends to reissue a liquidity risk management guideline it had issued some six years ago. At the time of issue, in 2004, these FSC rules served as an informal guideline. Now, the securities dealers watchdog says it intends to make the guidelines enforceable along with attaching what it called quantitative metrics, to give effect to the requirements.
A version of the liquidity coverage ratio recommended by the Basel Committee on Banking Supervision (BCBS) is also to be adopted as well as a net stable funding ratio, a measure designed to establish a minimum accep-table amount of stable funding, based on the liquidity charac-teristics of a security dealer's assets and its activities over a one-year period.