A CONCEPTS PAPER ON THE STRATEGIC PLAN FOR THE SECURITIES MARKET IN THE CSME BY KELVIN A. SERGEANT JULY 2009

A CONCEPTS PAPER ON THE A CONCEPTS PAPER ON THE STRATEGIC PLAN FOR THE STRATEGIC PLAN FOR THE SECURITIES MARKET IN SECURITIES MARKET IN

THE CSMETHE CSME

BY KELVIN A. SERGEANTBY KELVIN A. SERGEANT

JULY 2009JULY 2009

THE ROLE OF THE SECURITIES THE ROLE OF THE SECURITIES MARKETMARKET

• A well functioning securities market promotes price A well functioning securities market promotes price discovery, and the development of an active marketdiscovery, and the development of an active market

• The securities services sector aids in savings The securities services sector aids in savings mobilization by providing investors with mobilization by providing investors with alternatives for investment and risk diversificationalternatives for investment and risk diversification

• The securities services sector allows companies and The securities services sector allows companies and governments the ability to raise long-term governments the ability to raise long-term resources resources

• The sector can promote efficiency and The sector can promote efficiency and competitiveness in the financial sectorcompetitiveness in the financial sector

The Regional Securities Services SectorThe Regional Securities Services Sector

• There is a distinct preference for bank loan financingThere is a distinct preference for bank loan financing

• Maturities in the securities market has been narrow; Maturities in the securities market has been narrow; characterized by some issues at the short and long characterized by some issues at the short and long maturities, but with few intermediate maturity maturities, but with few intermediate maturity instrumentsinstruments

• Secondary market activity remains low; Construction Secondary market activity remains low; Construction of yield curves difficultof yield curves difficult

• Major securities in issue in the region are bonds, Major securities in issue in the region are bonds, equity securities, debt and credit derivatives, equity securities, debt and credit derivatives, collective investment vehicles, stock options (ESOP)collective investment vehicles, stock options (ESOP)

The Regional Securities Services SectorThe Regional Securities Services Sector

• Trinidad, Jamaica and Barbados are the main focus when it Trinidad, Jamaica and Barbados are the main focus when it comes to raising debt and equity capitalcomes to raising debt and equity capital

• Collective Investment Vehicles are now the prominent Collective Investment Vehicles are now the prominent vehicle for raising capital in both Trinidad and Tobago and vehicle for raising capital in both Trinidad and Tobago and Jamaica. In Trinidad and Tobago, funds under Jamaica. In Trinidad and Tobago, funds under management in CIVs are almost the same level as bank management in CIVs are almost the same level as bank deposits. (40% of GDP)deposits. (40% of GDP)

• In the equities market, there has been increased market In the equities market, there has been increased market capitalization, cross listings accommodation, the capitalization, cross listings accommodation, the introduction of electronic trading and modern settlement introduction of electronic trading and modern settlement systems has been introduced.systems has been introduced.

• Nevertheless, the market continue to offer only a limited Nevertheless, the market continue to offer only a limited range of products. The markets are also characterized by range of products. The markets are also characterized by low liquidity and low turnover. low liquidity and low turnover.

CROSS LISTINGSCROSS LISTINGS

Cross Listed Securities on the TTSECross Listed Securities on the TTSE

2.442.442.442.4412.10.0412.10.04276,825,714276,825,714Dehring, Bunting & Golding Limited)Dehring, Bunting & Golding Limited)

14.0014.0012.8612.8624.08.0424.08.04260,029,748260,029,748Sagicor Financial Corporation Sagicor Financial Corporation –– (Merger of (Merger of Life of Barbados and Barbados Mutual LifeLife of Barbados and Barbados Mutual Life

2.502.501.551.5521.11.0321.11.032,466,762,82,466,762,82828

National Commercial Bank of J amaicaNational Commercial Bank of J amaica

2.602.60.84.8401.10.0301.10.03584,500,000584,500,000Capital and Credit Merchant Bank LimitedCapital and Credit Merchant Bank Limited

1.651.65.64.6407.02.0307.02.031,463,386,71,463,386,75252

J amaica Money Market Brokers LimitedJ amaica Money Market Brokers Limited

9.509.508.658.6522.11.0222.11.021,478,870,31,478,870,31212

First Caribbean I nternational Bank Ltd First Caribbean I nternational Bank Ltd --

formerly CIBC (West Indies) Holdings Ltdformerly CIBC (West Indies) Holdings Ltd

21.0021.0020.0020.0020.04.9920.04.9927,570,76127,570,761Barbados Shipping and Trading Co. LtdBarbados Shipping and Trading Co. Ltd

10.5510.553.303.3001.12.9801.12.98150,410,107150,410,107Grace Kennedy & Company LimitedGrace Kennedy & Company Limited

N/AN/A3.753.7508.01.9708.01.9743,002,72643,002,726Life of Barbados LimitedLife of Barbados Limited

N/AN/A3.243.2401.11.9401.11.94177,309,583177,309,583CIBC (West Indies) Holdings LimitedCIBC (West Indies) Holdings Limited

Current Current PricePrice

(08.10.04)(08.10.04)

Listed Listed PricePrice

(TTD)(TTD)

Date Date ListedListed

Issued I ssued Share Share

CapitalCapital

CompanyCompany

Venture Capital FinancingVenture Capital Financing

• Venture Capital Financing is offered by a number Venture Capital Financing is offered by a number of companies, such as DFL and NEDCOof companies, such as DFL and NEDCO

• While these entities show prospect, there is While these entities show prospect, there is much room for improvementmuch room for improvement

• SME financing through use of equity and bonds SME financing through use of equity and bonds has tremendous scopehas tremendous scope

• But it needs to be carefully developed. Indeed, But it needs to be carefully developed. Indeed, NEDCO and DFL must now undergo major NEDCO and DFL must now undergo major changes to their structure and operationschanges to their structure and operations

Securities Services Sector Securities Services Sector ImpedimentsImpediments

• Large no. of family-owned business, where there is little Large no. of family-owned business, where there is little or no effective division of ownership and controlor no effective division of ownership and control

• Low level of investor educationLow level of investor education

• Inefficiencies in trading systemsInefficiencies in trading systems

• Inadequate regulationInadequate regulation

• Interlocking directorsInterlocking directors

• Limited market making function and weak development Limited market making function and weak development of institutional investors to drive the market.of institutional investors to drive the market.

Strategies to Develop the Strategies to Develop the MarketMarket

• Measures to boost investor preference for Measures to boost investor preference for stocks, bonds, venture capital and other stocks, bonds, venture capital and other securities market instruments are neededsecurities market instruments are needed

• Government – Fiscal IncentivesGovernment – Fiscal Incentives• Pension Funds and Insurance Companies Pension Funds and Insurance Companies

need greater latitude to invest in need greater latitude to invest in securitiessecurities

• There must be harmonization of:There must be harmonization of:• Listing of securities and restrictions in shareholdingListing of securities and restrictions in shareholding• Trading and settlement cycleTrading and settlement cycle

• Currency and settlement cycleCurrency and settlement cycle

• Central ClearingCentral Clearing

• Withholding taxWithholding tax

• Certification of all market actors across cross-Certification of all market actors across cross-borderborder

• Regionalization of ownershipRegionalization of ownership

• Takeover codeTakeover code

• Dispute resolutionDispute resolution

• The Companies ActThe Companies Act

• There is an urgent need to expand There is an urgent need to expand the range of financial productsthe range of financial products

• On the supply side, privatization of On the supply side, privatization of State-owned Enterprises should be State-owned Enterprises should be actively pursued.actively pursued.

Market Infrastructure and Market Infrastructure and Institutional ArrangementsInstitutional Arrangements

• Legal, taxation and accounting systems to Legal, taxation and accounting systems to be strengthenedbe strengthened

• Credit ratings are now an absolute Credit ratings are now an absolute necessitynecessity

• Disclosure regulations, minimum standards Disclosure regulations, minimum standards for capitalization, and for registration of for capitalization, and for registration of market participantsmarket participants

• Enforcement provisionsEnforcement provisions

Strategic Plan for the SectorStrategic Plan for the Sector Recommendation 1 Recommendation 1

• Strengthen the legal framework by Strengthen the legal framework by upgrading the Securities Industry Laws upgrading the Securities Industry Laws across the region to ensure that the across the region to ensure that the Securities Commissions are given Securities Commissions are given effective powers to regulate the securities effective powers to regulate the securities market in accordance with internationally market in accordance with internationally accepted standards.accepted standards.

Recommendation 2Recommendation 2

• Modernize and consolidate the Modernize and consolidate the regulatory framework in accordance regulatory framework in accordance with international best practices. with international best practices. Emphasis must be placed on an Emphasis must be placed on an enforceable take-over code. The enforceable take-over code. The CARICOM Financial Services Agreement CARICOM Financial Services Agreement must see to this issue.must see to this issue.


• Improve Corporate Governance in Improve Corporate Governance in accordance with international best accordance with international best practice by ensuring that there are rules practice by ensuring that there are rules to deal with interlocking directors, to deal with interlocking directors, voting rights of trustee and management voting rights of trustee and management of collective investment schemes in the of collective investment schemes in the region.region.


• Ensure that principles-based accounting Ensure that principles-based accounting is introduced as opposed to rules-based is introduced as opposed to rules-based accounting in line with international accounting in line with international accounting standards so as to reduce the accounting standards so as to reduce the occurrence of creative accounting.occurrence of creative accounting.


• Ensure international standards for Ensure international standards for information disclosure and reporting so information disclosure and reporting so as to improve transparency. Amend the as to improve transparency. Amend the relevant laws to allow for information relevant laws to allow for information sharing regionally and internationally, to sharing regionally and internationally, to facilitate effective regulation of facilitate effective regulation of institutions operating across markets institutions operating across markets and borders.and borders.


• Redress the fiscal bias that currently Redress the fiscal bias that currently supports business development by way supports business development by way of debt financing. This could encourage of debt financing. This could encourage the use of equity-based financing as a the use of equity-based financing as a viable alternative and/or complement.viable alternative and/or complement.


• Strengthen the human resource base, Strengthen the human resource base, management of information systems and management of information systems and institutional capacity of the Securities institutional capacity of the Securities Commissions so that they can enforce Commissions so that they can enforce compliance.compliance.


• Implement a structured programme of Implement a structured programme of Investor Education across the region.Investor Education across the region.


Develop commercial vendors for Develop commercial vendors for informationinformation


• Encourage the development of Encourage the development of institutional relationships between the institutional relationships between the various markets actors (regulators, various markets actors (regulators, investors, professional intermediaries investors, professional intermediaries and producers of services) of the and producers of services) of the securities markets regionally and securities markets regionally and internationally. In this regard, the role internationally. In this regard, the role of IOSCO and COSRA becomes even of IOSCO and COSRA becomes even more critical.more critical.

THE ENDTHE END

Documents

A CONCEPTS PAPER ON THE STRATEGIC PLAN FOR THE SECURITIES MARKET IN THE CSME BY KELVIN A. SERGEANT JULY 2009