IN response to recent changes in capital requirements for financial institutions in Trinidad and Tobago, the Trinidad & Tobago Stock Exchange (TTSE), CFA Society of Trinidad & Tobago, and Caribbean Information and Credit Rating Services Limited (Caricris) are teaming up to create a liquidity index that will help regulators better evaluate the equity holdings of financial companies, making it easier for them to better judge the capacity of their licensees while encouraging companies to invest more capital into equities.

Financial institutions — such as banks, securities dealers and insurance companies — must follow rules to ensure they have enough money set aside to meet their regulatory obligations and handle unexpected events. These rules are called capital adequacy requirements (CAR) and they require institutions to hold a certain amount of capital, based on the level of risk in their investments. This helps protect the institution and its customers.

Equities or stocks in most jurisdictions tend to be given a higher capital charge or the minimum amount of capital that must be held by the financial institution. That’s due to the fact that while publicly listed equities in most cases can have a buyer available at the right price, it also creates a risk in the context of the availability to readily liquidate or sell those stocks. Proposed changes to the risk-based capital and liquidity by-laws on brokers and institutional investors would see the capital charge on equity holdings increase from 8 per cent to 16 per cent if the current framework is enacted. Insurance companies have seen their risk factor on equities move up to 20 per cent since the implementation of The Insurance (Capital Adequacy) Regulations in 2020. According to LSD.Law, “A risk factor is an estimated cost of present and future claims based on a mortality table used in life-insurance rate-making. It is one of the elements that a life insurer uses to calculate premium rates.

“Subsequent to the implementation of the requirements of the Insurance Act, the market witnessed a sell-off of equity positions by institutional investors which has, in turn, affected stock prices. However, these weaker stock prices don’t reflect the solid financial performance of our listed companies but are largely the result of reduced participation of major players in the market,” said Nicola Vickles, TTSE senior market operations officer at the third TTSE Capital Markets Conference held on October 30 at Hyatt Regency Hotel, Port of Spain, Trinidad and Tobago.

The All T&T Index, calculated using the ordinary shares of companies whose primary jurisdiction is in T&T and is not included in the non-sector category, peaked at 1,868.97 points at the end of 2019 before it dipped to 1,772.61 in 2020. It then hit a new peak of 2,084.81 points in 2021 before closing Tuesday at 1,565.93 points, a 25 per cent cut over three years in the index. The market capitalisation has also been reduced from TT$102.78 billion (US$15.18 billion) to TT$77.17 billion (US$11.40 billion). However, the profitability and balance sheet of the largest domestic companies has substantially increased over this period as they expand beyond their domestic borders.

“The liquidity index is designed to be a tiered system that assesses risk on a relative basis. It rewards investors holding stocks with high liquidity by lowering the capital charges associated with holding them. This index aligns our capital regulations with international standards and incentivises quality, making it easier for institutional investors to maintain their positions in liquid stocks,” Vickles stated.

Vickles added, “We will utilise TTSE’s market data to construct the index. It will provide several key benefits such as improving capital allocation for institutional investors, provide a clear insight into the most liquid stocks, and ultimately promote informed decision-making. Additionally, it encourages listed companies to enhance liquidity through improved financial performance, increased transparency, and stronger engagement with investors. This market-driven approach offers an alternative to the challenges currently faced by institutional investors and aims to foster a healthier, more competitive market environment”

An example of a CAR calculation can be shown through VM Wealth Management Limited, a licensed broker in Jamaica. According to VM Investments Limited’s (VMIL) 2023 audited financials, VM Wealth’s total risk-weighted assets were $17.93 billion in 2023. The regulatory minimum is 10 per cent which would translate to having a minimum regulatory capital of $1.79 billion. VM Wealth’s regulatory capital was $4.07 billion which was substantially improved due to the issuance of preference shares to VMIL which brought in $1.5 billion in qualifying regulatory capital. This resulted in VM Wealth’s CAR being 22.72 per cent in 2023.

An increase on the capital charge for equities would increase the minimum amount of regulatory capital that would need to be held on the books by the company; this would potentially affect how the broker would make other decisions in its business. While a stronger capital framework by a regulator can help further protect the financial system, it can in turn stymie efforts to encourage greater investments by market participants. This is even more important in smaller markets where the prescribed capital charges don’t adequately reflect the reality of that market compared to larger North American and European markets.

With an aim to help attract capital back to the TTSE, the exchange, CFA Society of Trinidad & Tobago and Caricris signed a memorandum of understanding (MOU) to develop this liquidity index and collaborate with Trinidad & Tobago Securities & Exchange Commission (TTSEC) to ensure the project meets the necessary standards and contributes to creating a regulatory framework that benefits all stakeholders.

This is the latest announced initiative by TTSE which is lead by CEO Eva Mitchell. The Caribbean Exchange Index (CXNI) was launched at TTSE’s first capital markets conference in 2022, in collaboration with Jamaica Stock Exchange (JSE), Barbados Stock Exchange (BSE), Eastern Caribbean Stock Exchange, and Guyanese Stock Exchange. The CXNI acts as a benchmark for an international investor to gauge the performance of these markets all at once. Mitchell also announced at JSE’s 19th Regional Investments and Capital Markets Conference in January that there would be further collaboration between the five exchanges to develop sub-indices for specific sectors across the Caribbean.

TTSEC published its responses to the second round of consultations with regulated entities yesterday, as it also published its third-round draft of the proposed by-laws. TTSEC’s responses included comments and proposed revisions along with context on some of the definitions included in the by-laws. This third round of consultations period will end on January 24, 2025, with responses to be forwarded to rbcal@ttsec.org.tt.