Presentation on Capital Market and Topic Related to It - DOC

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					                         FINANCIAL SERVICES COMMISSION

              First Global Financial Services Information Exchange
                     The 2007 Outlook: Investments and You

                                The Jamaica Pegasus, Kingston

                                     Monday, April 23rd, 2007

                                             Brian Wynter
                                           Executive Director

     The Role of the Regulator in Protecting the Jamaican Investor


Good evening ladies and gentlemen, I welcome this invitation to
participate in the first of the First Global Financial Services (“FGFS”) 2007
series of Information Exchanges under the topic “The 2007 Outlook:
Investments and You.” We are happy to be a part of this event as it
provides us with an opportunity to inform you about the role that the
Financial Services Commission (“FSC”) plays in protecting investors.


The Financial Services Commission (“FSC”) began operations in August 2001 as
an integrated financial sector regulator. Today the FSC has the responsibility for
supervising the securities industry, the insurance industry and private pension
funds industry.

Currently, there are five sets of statutes and associated regulations, which

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provide the framework for the FSC to effectively carry out its mandate of
protecting investors and promoting transparency through supervision of
these industries. These statutes set out the FSC’s obligations as well as
the requirements for the supervised industries. The five statutes are as

1) the Financial Services Commission Act, which outlines the responsibilities of the
      FSC as they pertain to all prescribed financial institutions;
2) the Insurance Act, which prescribes provisions for the regulation of insurance
      business in Jamaica;
3) the Securities Act, which provides requirements for the licensing, operation
      and supervision of entities dealing in securities;
4) the Pensions (Superannuation Funds and Retirement Schemes) Act, which
      provides requirements for the licensing, operation and supervision of private
      pension funds; and
5) the Unit Trust Act, which provides requirements for the licensing, operation
      and supervision of unit trust schemes.

The FSC Act states “For the purpose of protecting customers of financial services,
the Commission shall-
(a)    supervise and regulate prescribed financial institutions;
(b)    promote the adoption of procedures designed to control and manage risk,
       for use by the management, boards of directors and trustees of such
(c)    promote stability and public confidence in the operations of such
(d) promote public understanding of the operation of prescribed financial
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(e)   promote the modernization of financial services with a view to the adoption
      and maintenance of international standards of competence, efficiency and

In so doing, the FSC promotes transparency among the financial institutions it
regulates, which increases investor protection. Before getting into the specific
activities which the FSC carries out in order to protect investors I would like to
give you a sense of the size of the securities industry by sharing some statistics
with you.


Market Intermediaries:

 Years    Funds Under          Number               Number
         Management ($M)           of              of Dealers’
                               Licensees         Representatives
  2001               212,166               140                      317
  2002               317,864               127                      342
  2003               385,541               112                      489
  2004               458,207               102                      568
  2005               540,066                79                      664
  2006               580,553                72                      683

Since the inception of the FSC, company dealers’ funds under management
(FUM) have increased by 174% from J$212 billion in 2001 to approximately J$581
billion in 2006.    Cumulative inflation over the same period was 66.2%.
Meanwhile, the number of licensees fell by 49% from 140 in 2001 to 72 in 2006.

Collective Investment Schemes:
As at February 28, 2007, there are presently four unit trust managers managing
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assets totaling $15.7 billion. In addition, there are 18 overseas mutual funds that
have been approved for sale in Jamaica.        These mutual funds in aggregate
manage approximately US$7,024 million in assets on behalf of overseas and local

Capital and Money Markets:

 Years         IPOs           Private Placements     Commercial Paper
               ($M)                  ($M)                   ($M)

2001                  2,048
2003                                                               440
2004                                                               298
2005                    184                                         86
2006                    225                    14                  260

In 2006 there were two initial public offerings (Supreme Ventures Limited
ordinary shares and NCB Capital Markets Limited preference shares) valued at
$224 million and a further six securities issued in private placements valued at
$14 million. There were several issues of commercial paper during 2006 valued
at $260 million.

       Years          Market Cap. of Listed
       2001                          222,006
       2002                          292,298
       2003                          512,884
       2004                          866,181
       2005                          839,938
       2006                          822,862
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Market capitalisation of listed companies has increased by 271% from J$222,006
million in 2001 to approximately J$822,862 million in 2006, a cumulative increase
of 123.1% after adjusting for inflation over the same period.

I will now elaborate on some mechanisms which are employed by the FSC as it
seeks to protect investors. In so doing I will restrict my presentation to looking
at seven areas as follows:
   1. Fit and Proper Requirements,
   2. Filing Requirements,
   3. Minimum Capital Requirements,
   4. Examinations,
   5. the Registration of Securities,
   6. Continuous Disclosure and, finally,
   7. Identification and Prosecution of Market Abuse.

The first four areas in this list are focused on the supervision of market
intermediaries, whilst the last three address requirements related to disclosure
and other aspects of market conduct.

Securities market regulators supervise market intermediaries, such as licensed
dealers, to ensure that these service providers are financially sound and properly
managed. Regulators also pay close attention to conduct of all market players to
ensure that material disclosures of price sensitive information are being made
and also to ensure that no one person or group of persons is able to manipulate
or otherwise carry out market abuse at the expense of investors.
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   Fit & Proper Requirement
Directors and senior management of regulated institutions are required to
submit background information in order to ensure that they are fit and proper.
The officers of the Commission conduct background checks on persons
submitting an application for a securities dealer’s or an investment adviser’s
licence in order to ensure that the applicants are eligible to perform the task of a
securities dealer or an investment adviser. The objective of the FSC’s fit and
proper assessment is to ensure that the applicant is a person of sound probity
and is able to exercise competence, diligence and sound judgment in fulfilling
their responsibilities.   This screening process, affords protection to potential
investors in that it helps to ensure that only suitably qualified persons who have
a track record of competence and integrity are licensed to provide services
related to securities dealing and investment advice.

   Filing Requirements
A licensed dealer/investment adviser must comply with the FSC’s filing
requirements which involve the filing of reports such as audited financial
statements, a detailed financial filing (called a C1 form) and Management
Discussion and Analysis (“MD&A”) reports, which must be submitted to the
Commission on an annual, quarterly and in some cases monthly basis. These
reports when submitted by our licensees are analyzed through the computation
of financial ratios and other financial indicators and then compared with
industry standards and benchmarks in order to detect problems in the
companies. This allows the FSC to ensure that remedial action, where required, is
taken by the company’s directors and business owners before deficiencies and
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weaknesses in a company’s financial health develop into deeper problems with
adverse consequences for investor clients.

   Minimum Capital Requirements
The FSC always looks for evidence of risk exposures which threaten the capital
adequacy of regulated entities and which could ultimately lead to insolvency. As
such the FSC has utilized its risk based Interim Capital Standards to ensure that
licensees meet minimum capital requirements.

Interim Capital Standards
On July 30, 2004 the FSC released a guideline called the Interim Capital
Standards which was made effective on December 31, 2004. The Interim Capital
Standards has two components namely:
i) A Capital Adequacy Ratio based on the Basel I Accord
ii) Margin Requirements for Repurchase Agreements

The Securities (Licensing and Registration), Regulations, 1996 mandated that
Securities Dealers met a “free assets” requirement of J$5 million. The term “free
assets” is defined as the company’s net worth held in the form of cash and
readily convertible securities. Prior to the introduction of the Interim Capital
Standards this was the only capital requirement that a dealer was required by
law to maintain. This amount was inadequate as it did not take into account the
size of the company in terms of funds under management and the level of risks
different dealers carried based on their business models. There is also a growing
international trend where securities dealers are required to hold capital adequate
to buffer their risks.

The FSC’s Capital Adequacy Ratio standard requires that dealers maintain a
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capital base to risk weighted assets ratio of not less than 10%. In addition,
dealers are required to notify the FSC should the ratio fall below 12%.

The second component of the Interim Capital Standards is the Margin
Requirements for Client-Dealer Repurchase Agreements (or “Margin R”

Margin Requirements
The Margin R guidelines are designed to supplement the capital adequacy ratio
requirements in the Guidelines for Interim Capital Standards. The Margin R
guidelines stipulate that dealers must maintain a cushion or margin on the
underlying securities for repo transactions.       The guideline prescribes the
   i)     Dealers can only do unsecured borrowings with entities such as
          another dealer (local or foreign) or where the borrowing is for capital
          support purposes, and is compliant with the guidelines for issuers of
          securities and other applicable laws. Dealers are not permitted to
          borrow investor’s funds on an unsecured basis.
   ii)    The underlying asset of a repo transaction must be an allowable asset.
          Allowable assets are securities as defined by the Securities Act except
          stocks and shares of a company, rights, options and certificates of
          participation in profit sharing schemes. BOJ instruments are also
          included in the definition of allowable assets.
   iii)   Dealers have to maintain a minimum margin on each repo transaction.
          The minimum margin is currently 5% for repos done with securities
          issued by “qualified issuers” and for repos done with any other issuer
          the margin required is 15%. Qualified issuers recognized by the FSC
          are: the Governments of Jamaica, Barbados, Trinidad and Tobago, and
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          some G-10 countries, specifically - United States, United Kingdom and

   Examinations
The FSC conducts onsite examinations of regulated institutions to ensure that the
provisions of the law are being complied with, the institution is in a sound
financial condition and appropriate standards of conduct and performance are
maintained. These examinations may sometimes be conducted as targeted
examinations which focus on specific areas of the institution. However, the scope
of the examination could be expanded depending on suspected problems or
irregularities identified within the company.
Two broad types of examinations are conducted:
    i)    Onsite Examinations (which may be targeted or full scope) and
    ii)   Desk Examinations using a framework which we call the “CAMEL

Onsite Examinations
Onsite examinations are primarily focused on looking at the market conduct of
the entity examined to determine that it is complying with the requirements of
the Securities Act and its attendant regulations.   Findings from these exams
some times identify areas of potential risk exposure, for example, exposures to
operational risk due to a breakdown in internal controls.           When these
deficiencies are identified the dealer is required to put in place effective
corrective measures.

CAMEL framework
CAMEL is an acronym in which each letter stands for an area of a company
which analyzed in order to assess its financial soundness and determine its
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exposure to particular risks. The “C” stands for Capital Adequacy, “A”
represents Asset Quality, “M” -        Management, “E” - Earnings, and “L” -
Liquidity and interest rate risks. Each area is assessed using a combination of
ratio analysis and evaluation of qualitative information about the company and
the company’s compliance history. At the end, based on the ratings given to
each letter of the acronym, the company is given an overall rating. As with the
on-site examinations, once deficiencies are identified the FSC takes steps to
ensure that the dealer puts in place appropriate action plans to address the
concerns arising from the CAMEL examination.

   Registration of securities with the FSC:
    i)     A public offering of securities must be registered with the FSC
           pursuant to section 26 of the Securities Act which requires that every
           issuer of security should within a prescribed time before issuing any
           security and in a format prescribed by the FSC apply for registration of
           the said security. The format used by the FSC for registering securities,
           except commercial paper, is outlined in the Guidelines for Issuers of
    ii)    Before issuing or offering a security to the public, issuers should
           submit to the FSC a registration statement (in the form set out in the
           Guidelines for Issuers of Securities) and a prospectus which must
           disclose all material information about the issuer and should contain
           among other things:
              A description of the issuers business;
              Its audited and un-audited interim financial statements and;
              A Management Discussion and Analysis (“MD&A”)
    iii)   Another requirement is for issuers of equity securities to comply with
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                parts I and II of the Third Schedule of the Companies Act1

      Continuous Disclosure
The Securities (Disclosure of Interest) Regulations set out the continuous
disclosure requirements that an issuer of traded securities should meet. These
requirements are as follows:

i) Material Disclosure
Where a material change occurs in the affairs of an issuer of traded securities,
that issuer should:
       a) issue and file a press release authorized by an officer disclosing the nature
           and substance of the change, and
       b) file a report with the Commission of the material change not later than ten
           days after the change occurs.

ii) Filing of Financial Statements
Every issuer of traded securities is required to file quarterly unaudited
statements within forty-five after the end of the quarter and annual audited
statements within ninety days after the end of the financial year.

      Identification and Prosecution of Market Abuse

Market Surveillance Activities

The FSC undertakes various activities geared towards the protection of the
market and investors through various surveillance methods. The following are

1   The Third Schedule of Companies Act deals with Matters to be specified in Prospectus and Reports to be set out
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some of the surveillance activities:
   i)     Event studies are conducted on trading activities of stocks surrounding
          the announcement of material events such as mergers and acquisitions
          and upon the release of quarterly and annual financial statements.
   ii)    Monthly Equities Statistics are completed which look at the movements
          in particular elements of the stock exchange including; average trade
          size, market capitalization (both local and total), volume, market
          concentration among others. The movements are examined over set
          periods and changes are noted.
   iii)   A quarterly report is prepared which looks at individual stocks listed on
          the exchange and examines movements in volume and price over set
          periods.   Any unusual trading activity noted during the period is
   iv)    Surveillance activities are conducted during the periods leading up to
          the generation of the reports. The Horizon trading system, which is the
          Jamaica Stock Exchange’s trading platform, is monitored daily and
          unusual activities noted. A number of alerts have been formulated and
          trading activities are investigated based on the triggering of these alerts.
   v)     At the beginning of the financial year, companies are selected for a
          comprehensive annual review which includes an analysis of trading
          activities over a one year period, financial statement analysis including
          trend analysis, etc.
   vi)    Benchmarks related to price and volume have been set and companies
          monitored against these. Exception reports are prepared for companies
          whose trading activities are found to be outside the benchmarks and
          surveillance of these companies is increased.
   vii) The FSC also conducts examinations of brokers’ trading operations.

   viii) Market sources such as the newspaper, internet etc. are reviewed for
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           information which may affect the prices of securities and the pattern of
           price movement is compared with the release of this information to
           assess whether there are any anomalies in the market.

Types of Market Abuse

There are several types of abuse listed under the Securities Act (“the Act”, which
are as follows:

   i)        false trading and market rigging transaction (section 44)
   ii)       stock market manipulation (section 45)
   iii)      making false or misleading statements (section 46)
   iv)       fraudulently inducing persons to deal in securities (section 47)
   v)        unethical inducement to purchase or sell securities by dissemination of
             information (section 48)
   vi)       employment of manipulative and deceptive devices (section 49)
   vii)      insider trading (section 51)

Sanctions for Market Abuse

A person who violates any provision within Act which relate to insider trading

or other forms of market abuse is guilty of an offence and is liable under section

52 of the Act on conviction before a Judge of the Supreme Court sitting without a


         in the case of an individual, to a fine or to imprisonment for a term not

          exceeding ten years; or

         in the case of a company, to a fine.
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It should be noted however, that even with the best surveillance system geared at

preventing or detecting market abuse or manipulation success is not guaranteed

in every case. Even in the United States many offences are detected after the fact

and even more go un-recognized.


The increased funds under management, market capitalization of listed
companies, commercial paper issues and private placements have underlined the
importance of the FSC’s role as a regulator and has highlighted a need for greater
diligence in the monitoring of financial institutions as a failure in a market of this
size would have a catastrophic effect on individual investors and the economy
on a whole.

The world of investing is a fascinating and complex one, and it can be very
fruitful. But unlike the banking sector, where deposits up to an amount of
JA$300,000 are guaranteed by the Jamaica Deposit Insurance Corporation, quite
often with a securities investment there is no guarantee that an investor will not
lose some or all of his principal investment.         The FSC in carrying out its
functions helps to ensure that investors receive all the information they need in
order to make prudent investment decisions. But you cannot rely on the efforts
of the FSC alone in order to ensure that your funds are safe.

By far the best way for investors to protect the monies they put into investment
instruments is to do research and ask questions. The laws and rules that govern
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the securities industry are derived from a simple straightforward concept; that is,
all investors, whether large institutions or private individuals, should have
access to certain basic facts about an investment prior to buying it, and as long as
they hold it.

In order to facilitate this, it is incumbent on companies to disclose meaningful
financial and other pertinent information to the public. Only through the steady
flow of timely, comprehensive, and accurate information can people make sound
investment decisions. Consequently, it is necessary for investors not only to rely
on regulators but also to embark on their own methods of protection and seek
information on any company or investment in which they are interested or
already invested in.

Investors can contact the FSC regarding any security or firm to ascertain their
registration status. It is never wise to engage in any investment without being
armed with at least this minimum knowledge.
Ladies and gentlemen, thank you.

Brian Wynter
Executive Director
Financial Services Commission

Description: Presentation on Capital Market and Topic Related to It document sample