Investors’ fears have heightened once again as another member-dealer/broker of the Jamaica Stock Exchange (JSE) has found itself in a net capital deficit as of March 2023.

The JSE’s Regulatory Market & Oversight Division’s April 2023 report noted the anomaly which showed that a member-dealer was below zero for excess net free capital (ENFC). The other 13 brokers had excess net free capital, but one broker slipped from the $300 – $899 million range into the zero to $299 million range between February to March.

Under the current JSE rules, every broker is required to have excess net free capital as per appendix 12. On the first occurrence of a capital 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. If the broker continues to show deficiency, they would have had to submit proof that adequate capital has been injected into the firm since the prior report or they would be suspended from trading.

However, while this breach is quite severe, the application of suspension from trading has not been observed by the JSE over the last year. One broker was noted to have been in breach of JSE ENFC requirements for half of 2022, which includes March 2022 when the breach was first noted and December 2022 which was the last recorded occurrence.

While the Business Observer canvassed publicly available reports by different brokers and contacted the private brokers, only Stocks and Securities Limited (SSL) could not be contacted to confirm if they were in breach of JSE ENFC requirements in 2022. SSL was terminated as a member-dealer of the JSE on February 24 and sold all of its securities under its proprietary and relevant managed funds book on that day.

Thus, of the 14 remaining JSE brokers, which one has fallen into capital deficit for JSE capital requirements? While the Financial Services Commission (FSC) has a regulatory capital to risk weighted assets (TRC) ratio of 10.0 per cent, this is not one to one with the JSE’s ENFC requirements in the sense that a broker could be in breach of ENFC requirements but remain in compliance with FSC requirements.

Scotia Investments Jamaica Limited’s TRC ratio as of April 2023 was 63.43 per cent as per the latest quarterly release of its parent company, Scotia Group Jamaica Limited. Barita Investments Limited noted that its TRC was 34.4 per cent as of March with Mayberry Investments Limited also being 21.4 per cent for the same period. Sagicor Investments Jamaica Limited’s TRC was 15.3 per cent while VM Wealth Management Limited was 17.44 per cent in the first quarter.

NCB Financial Group’s second quarter report mentioned that all of its regulated entities meet applicable capital and liquidity ratio requirements. NCB Capital Markets Limited’s June 2022 TRC was 23 per cent which was above the FSC’s minimum 10.0 per cent and above the 14.0 per cent ratio for systematically important financial institutions as per a Caricris report.

Proven Group Limited and JMMB Group Limited’s 2023 audited financials have been delayed and should be published by June 16 and June 30, respectively. Proven Wealth Limited’s last publicly available regulatory measurement was in March 2022 at 19.25 per cent with JMMB Securities Limited’s TRC at 35 per cent in March 2022.

GK Capital Management Limited’s revenue and profitability was noted to have declined in the first quarter, but it received $156.63 million at the end of the period from the sale of its shares in Key Insurance Company Limited.

The remaining brokers are all private firms such as MVL Stockbrokers Limited, JN Fund Managers Limited, Ideal Securities Broker Limited, FHC Investments Limited and Cumax Wealth Management Limited. JN Fund Managers received $1 billion from its parent in June 2022, which is similar to what happened with VM Wealth Management which received $900 million from its parent VM Investments Limited in 2022.

This revelation of a broker being in capital deficit comes at a time when the equities market is down and business has slowed down for a number of securities dealers. One broker announced 10 redundancies last week with other brokers being nimble with cost.