Big brokers disclose their foreign risk - FSC says $720b securities industry sound, defends JMMB's strength

Published: Wednesday October 1, 2008

Regulators yesterday gave unequivocal endorsement to the strength of Jamaica Money Market Brokers (JMMB) as part of a broader, robust defence of the health of the island's securities firms in face of fears among investors of contagion from America's credit crisis.

"We are confident that the effects of the turbulence (in the United States) can be managed by our system," George Roper, acting executive director of the Financial Services Commission (FSC), told reporters at a briefing.

Limited exposure

Roper felt driven to unfurl his agency's good house keeping seal in the face of filings with the Jamaica Stock Exchange by two firms - NCB Capital Markets and Mayberry Investments - of what they characterised as limited exposure to troubled US markets, and rumours that have swirled in recent days about the strength of JMMB, the first company to declare its position after the failure of Lehman Brothers.

NCB Capital Markets told the exchange that at the end of August its net exposure was US$19.93 million, or 2.1 per cent of its total assets.

The net position, however, did not reflect all the Jamaica government bonds held by the company, a hefty chunk of which was used to back loans.

"We know that there is a lot of discussion, but we don't hold any bonds from any of those foreign brokerage houses," said managing director of NCB Capital Markets, Chris Williams, last night.

"We invest in Government of Jamaica bonds."

Material losses

In the case of Mayberry, its current holdings is US$189 million, almost all of which it expects to retain in its coffers.

"The company does not project any material losses or impairment of capital arising from its foreign currency holdings, at this time," the JSE said in a posting after market closure.

In the last two weeks the stock market has lost 2.7 per cent of its value. The JSE Index dropped 309 points yesterday, and more than 2,800 points in two weeks.

Nearly a fortnight ago JMMB's CEO Keith Duncan told the company's annual shareholders meeting that approximately three per cent of the company's own-account investment portfolio was exposure to the collapsed American investment bank, Lehman Brothers.

But Duncan calculated that should a hit materialise, it would be at no more than one per cent of the total exposure Ñ an amount that could be easily absorbed by the company more than $6.6 billion.

But after a more than a week of relatively quiet trading, a rumours about JMMB's health erupted, forcing company bosses to assuage investors.

Yesterday Roper joined the act, declaring: "The company is solvent and have been meeting all its obligations to clients."

In his prepared statement, from which he ad-libbed Roper Roper had branded rumours about JMMB as "false".

In his industry-wide assessment Roper conceded that the Jamaican securities industry Ñ 52 companies and 10 individuals with an estimated $720 billion under management Ñ was not totally immune from the US banking meltdown, triggered by the sub-prime mortgage crisis. The 10 largest companies manage 70 per cent of the assets.

"We have some exposure, not just with the US but elsewhere in the world," he said.

He declined, however, to give what the global picture would be, until the FSC was clear whether institutions are going to make a call".

Strong regulations

In the event, though, Jamaica's strong regulatory environment, Roper argued, would limit the impact of that exposure.

"We are confident because years ago the FSC implemented certain requirements for securities dealers," he said.

Dealers, for instance, have to maintain a capital base that is 10 per cent of their risk-rated assets. Additionally, repurchase agreements must carry a five per cent margin of safety if the asset is a government of Jamaica bond, or 15 per cent if the asset is not a government instrument.

The FSC prescribes stringent equity-to-assets ratios for securities dealers.

Roper pointed out that the kind of exposure local securities may have to foreign counterparts would differ, depending in the kind of relationships that exist between them.

Assets maybe under a custodian arrangement while others may have borrowed money to buy assets. Exposed assets, most typically would low-risking Jamaica government bonds, which is the case with NCB capital markets.

That investment house, for example, the Jamaica Stock Exchange that it it used US$42.72 million in Jamaica government-backed assets to back borrowings.

"Consequently, the net exposure is US$19.93 million," its posting said, suggesting that NCB Capital Markets net obligations against those instruments now stands at just under US$23 million.

The company said that it had another US$5.05 million in Jamaica government assets, which was not used to back debt and which it expected to have been returned on Monday. It was not immediately if this happened.

KEEN monitoring

"With respect of the GOJ assets, NCB Capital Markets plans to issue a release after the company has completed making the claimed and received a response," the stock exchange said.

"We are monitoring and have been monitoring these financial institutions and we are satisfied that they have adequate capital to whether the effect of the turbulence," he stated.

Meamtime, Roper aid the FSC would continue to would continue to closely monitor the market was was upbeat about the environment.

"As we are able to get more information from the dealers, study it, categorise it, then we will be in a better position to give more information," he said. "But what we are seeing ... we are looking very good."


Source: Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20081001/business/business1.html