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

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

2. THE ROLE OF THE SECURITIES MARKET • A well functioning securities market promotes price discovery, and the development of an active market • The securities services sector aids in savings mobilization by providing investors with alternatives for investment and risk diversification • The securities services sector allows companies and governments the ability to raise long-term resources • The sector can promote efficiency and competitiveness in the financial sector

3. The Regional Securities Services Sector • There is a distinct preference for bank loan financing • Maturities in the securities market has been narrow; characterized by some issues at the short and long maturities, but with few intermediate maturity instruments • Secondary market activity remains low; Construction of yield curves difficult • Major securities in issue in the region are bonds, equity securities, debt and credit derivatives, collective investment vehicles, stock options (ESOP)

4. The Regional Securities Services Sector • Trinidad, Jamaica and Barbados are the main focus when it comes to raising debt and equity capital • Collective Investment Vehicles are now the prominent vehicle for raising capital in both Trinidad and Tobago and Jamaica. In Trinidad and Tobago, funds under management in CIVs are almost the same level as bank deposits. (40% of GDP) • In the equities market, there has been increased market capitalization, cross listings accommodation, the introduction of electronic trading and modern settlement systems has been introduced. • Nevertheless, the market continue to offer only a limited range of products. The markets are also characterized by low liquidity and low turnover.

5. CROSS LISTINGS

6. Venture Capital Financing • Venture Capital Financing is offered by a number of companies, such as DFL and NEDCO • While these entities show prospect, there is much room for improvement • SME financing through use of equity and bonds has tremendous scope • But it needs to be carefully developed. Indeed, NEDCO and DFL must now undergo major changes to their structure and operations

7. Securities Services Sector Impediments • Large no. of family-owned business, where there is little or no effective division of ownership and control • Low level of investor education • Inefficiencies in trading systems • Inadequate regulation • Interlocking directors • Limited market making function and weak development of institutional investors to drive the market.

8. Strategies to Develop the Market • Measures to boost investor preference for stocks, bonds, venture capital and other securities market instruments are needed • Government – Fiscal Incentives • Pension Funds and Insurance Companies need greater latitude to invest in securities • There must be harmonization of: • Listing of securities and restrictions in shareholding • Trading and settlement cycle

9. Currency and settlement cycle • Central Clearing • Withholding tax • Certification of all market actors across cross-border • Regionalization of ownership • Takeover code • Dispute resolution • The Companies Act

10. There is an urgent need to expand the range of financial products • On the supply side, privatization of State-owned Enterprises should be actively pursued.

11. Market Infrastructure and Institutional Arrangements • Legal, taxation and accounting systems to be strengthened • Credit ratings are now an absolute necessity • Disclosure regulations, minimum standards for capitalization, and for registration of market participants • Enforcement provisions

12. Strategic Plan for the Sector Recommendation 1 • Strengthen the legal framework by upgrading the Securities Industry Laws across the region to ensure that the Securities Commissions are given effective powers to regulate the securities market in accordance with internationally accepted standards.

13. Recommendation 2 • Modernize and consolidate the regulatory framework in accordance with international best practices. Emphasis must be placed on an enforceable take-over code. The CARICOM Financial Services Agreement must see to this issue.

14. Recommendation 3 • Improve Corporate Governance in accordance with international best practice by ensuring that there are rules to deal with interlocking directors, voting rights of trustee and management of collective investment schemes in the region.

15. Recommendation 4 • Ensure that principles-based accounting is introduced as opposed to rules-based accounting in line with international accounting standards so as to reduce the occurrence of creative accounting.

16. Recommendation 5 • Ensure international standards for information disclosure and reporting so as to improve transparency. Amend the relevant laws to allow for information sharing regionally and internationally, to facilitate effective regulation of institutions operating across markets and borders.

17. Recommendation 6 • Redress the fiscal bias that currently supports business development by way of debt financing. This could encourage the use of equity-based financing as a viable alternative and/or complement.

18. Recommendation 7 • Strengthen the human resource base, management of information systems and institutional capacity of the Securities Commissions so that they can enforce compliance.

19. Recommendation 8 • Implement a structured programme of Investor Education across the region.

20. Recommendation 9 Develop commercial vendors for information

21. Recommendation 10 • Encourage the development of institutional relationships between the various markets actors (regulators, investors, professional intermediaries and producers of services) of the securities markets regionally and internationally. In this regard, the role of IOSCO and COSRA becomes even more critical.

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