FOLLOWING heightened volatility in March, the month after the Russian invasion of Ukraine, a member-dealer/broker of the Jamaica Stock Exchange (JSE) had a deficiency of net free capital which nearly saw them being suspended for the breach.

A member-dealer is defined as a company authorised to trade in securities on the exchange and is licensed under the Securities Act as per the JSE’s Main Market rule book. A broker is required to have paid in equity capital of $10 million on admission to the JSE and is required to have a net asset worth held in the form of cash and readily convertible securities not less than $5 million at the end of the financial year.

Every broker is required to have excess net free capital. The net free capital before deductions is calculated by adding total active assets, non-current liabilities under mortgages or other enforceable agreements and subtracting total liabilities. After deducting for margin securities and overdue margin accounts, the amount of $5 million or five per cent of total liabilities, whichever is greater, is deducted to determine the excess (deficiency) of net free capital (ENFC).

In the JSE’s Regulatory and Market Oversight Division (RMOD) April report, one broker’s ENFC was below zero as of March, which an executive in the securities industry described as a serious infringement. Three brokers had ENFC between zero and $299 million, four had ENFC between $300 to $899 million, three had ENFC between $2 billion and $6 billion and three had ENFC above $6 billion. The report listed 14 brokers for the period while the JSE’s website lists 15 brokers. FHC Investments Limited and Ideal Securities Broker Limited are the newest brokers after being admitted in July and November 2021, respectively.

In February, two brokers were listed between 0 to $299 million, six were listed in the $300 to $899 million tier and four above $6 billion. Thus, one slipped below zero, two slipped below the $300 million mark and one slipped below the $6 billion mark over one month.

Under the Statement B footnote, it states that on first occurrence of a deficiency, the broker must write to the managing director (Marlene Street Forrest), or chief regulatory officer (Andrae Tulloch) explaining the reason for the deficiency and plans to correct it within 30 days. Although the May regulatory report has not been published yet, had the broker continued to show deficiency, they would have had to submit proof that adequate capital has been injected into the firm since the April report or they would have been suspended from trading.

A broker is considered in good standing once they’ve paid all subscription fees, fees in relation to trading on the JSE and is not in any breach of the rules. A broker is considered active once they transact not less than two per cent of the business transacted on the JSE or trades for a minimum of 125 days within a calendar year.

The only broker/member dealer which has been cited by the JSE this year has been Stock and Securities Limited (SSL). In the January report, SSL’s annual returns for the June 2021 period was filed on January 5 which was outside of the JSE’s extension relief window. In the February report, the firm’s monthly return for November 2021 was filed on January 4 which was after the December 31 deadline. In the April report, the firm’s monthly report for February was submitted on April 5 which was after the March 31 deadline. The firm had also submitted an incomplete broker report in February. The original deadline was for March 31 with the initial filing done on April 5. The complete filing was done on April 6. All of these breaches resulted in SSL being fined under JSE Rule 211 which prescribe fines ranging from $2,500 to $5,000 per day including public holidays and weekends until the information was submitted to the JSE.

Zachary Harding resigned as the chief executive officer of SSL on June 30 with Chairman Jeffrey Cobham temporarily taking up certain executive functions until a replacement is found. SSL disposed of its 79.08 per cent interest in SSL Venture Capital Limited on May 25 for $29.99 million.

While the JSE doesn’t list which brokers fall under each category for ENFC, all brokers are licensed as securities dealers by the FSC and are required to be in compliance with capital adequacy ratios. The total regulatory capital to risk weighted assets ratio (TRC) is the main regulatory indicator used among securities dealers with the minimum being 10 per cent. The tier one capital to total regulatory capital (TOC) must be greater than 50 per cent while the actual capital base to total assets must exceed six per cent.

Mayberry Investments Limited’s TRC and TOC as of March was 22.5 per cent and 98 per cent, respectively. Proven Wealth Limited’s (PWL) TRC and TOC was 19.25 per cent and 98.58 per cent, respectively. Its parent Proven Group Limited stated that no dividend was paid in the most recent quarter in order to create a cushion to withstand further volatility and ensure its regulated entities were sufficiently capitalised. Sagicor Investments Jamaica Limited and JMMB Securities Limited’s TRC was 15.6 and 35 per cent, respectively. Barita Investments Limited’s was 52 per cent as of March while Scotia Investments Jamaica Limited’s TRC as of April was 50.34 per cent. JN Fund Manager’s TRC was 17.93 per cent in March 2020 with the TOC at 84.90 per cent.

NCB Financial Group Limited’s second quarter (January to March) report stated that all of its regulated entities continued to meet all applicable capital and liquidity regulatory requirements which would include NCB Capital Markets Limited. GraceKennedy Limited’s 2021 audited financials stated that the group was compliant with the regulatory capital requirements to which it is subjected. GK Capital Management Limited is a JSE broker. Victoria Mutual Investments Limited’s (VMIL) audited financials stated its subsidiary that Victoria Mutual Wealth Management (VMWM) had a TRC of 14.97 per cent and TOC of 97.72 per cent. In its first quarter report, VMIL stated that it would be injecting $600 million of capital into VMWM in two tranches to support its expansion activities. The first injection occurred on March 31 which was stated to be used to exploit investment opportunities in the current environment.

The JSE Index was down 1.24 per cent in the first quarter while the Junior Market Index was up 23.19 per cent. The S&P 500 was down 4.60 per cent in the first quarter while the Nasdaq Composite and Dow Industrial Average were down 8.95 per cent and 4.1 per cent, respectively.