Amidst the continued pressure from higher interest rates, a member-dealer/broker of the Jamaica Stock Exchange (JSE) found itself in breach of the excess net free capital (ENFC) requirement in August 2024.

This was revealed in the JSE’s September 2024 regulatory report which revealed that a broker’s ENFC went below zero. The report which was published last week showed that one broker’s ENFC was below zero, another was in the $0 to $300 million bucket and the remaining 12 above the $900 million bucket. This contrasts with the July 2024 period where two brokers were in the $0 to $300 million bucket. The JSE doesn’t disclose which broker breaches this capital requirement.

Under the current JSE rules, every broker is required to have excess net free capital as per appendix 12. This JSE metric is determined by a series of calculations as outlined in the rule book which is meant to demonstrate a broker’s ability to have free capital to address potential shocks.

“The member-dealer who was the exception provided a plan to address the matter pursuant to JSE Rule Appendix 12 – Member/Dealers’ Report and Financial Information, Statement B – Footnote. Satisfactory action was taken during the month of September 2024 to resolve the issue. Consequently, there are no Member/Dealers who are currently below the ENFC requirement as at the publication date of this report,” the report stated.

The JSE’s Regulatory Market & Oversight Division (RMOD) used to publish it regulatory reports on a consistent monthly basis. This would see the September regulatory report being published at the end of October. However, the regulatory reports in 2024 were significantly delayed such as the July and August report being published in November and June report being published in October.

As a result, the period when the broker referenced earlier would have resolved their capital breach isn’t known since the September 2024 report was published in January 2025.

However, one key thing that can be deduced is that brokers are under more pressure in recent times. The last JSE time a JSE broker was in breach of the ENFC requirement was during March 2023 to May 2023, just months after Stocks & Securities Limited’s (SSL) member-dealer agreement was terminated. Prior to that, a broker was in breach of the JSE ENFC requirement for six out of 12 months during 2023. One must go back to January to March 2018 to find a time when a broker was in breach of this ENFC requirement.

According to the Financial Services Commission’s (FSC) September 2024 report for the securities sector, it was shown that core securities dealers capital adequacy ratio (Capital/risk weighted assets) had moved from 26 per cent in September 2023 to 21.55 per cent in September 2024. This is well above the FSC’s early warning signal of 14 per cent and regulatory minimum of 10 per cent. Return on equity also moved from 4.86 per cent to 2.90 per cent for the same period while capital to total assets grew from 14.15 per cent to 14.89 per cent.

The FSC defines core securities dealers as firms whose primary activity is dealing in financial securities. 26 out of the 33 securities dealers licensed by the FSC were classified as core securities dealers.

These core securities dealers had a combined net loss before tax of $0.91 billion for the nine months compared to the prior period where there was a profit before tax of $5.29 billion. The FSC’s report noted that this loss was driven by a reclassification exercise in non-interest expenses which jumped 18 per cent to $29.37 billion. It should be noted that the total expenses for the nine months period were up 14 per cent to $62.97 billion compared to the three per cent rise in total revenue to $62.29 billion. Net interest income increased 44 per cent to $6.14 billion despite interest expense rising 11 per cent to $33.60 billion.

The FSC report did point out that the net profit was $4.48 billion for the nine months period. There is no public September 2023 report for the securities sector by the FSC.

Despite the tough nine-month period, the FSC report revealed that the asset base of core securities dealers exceeded $1.03 trillion which was a 10 per cent improvement to the $938.88 billion in September 2023. Even though total liabilities rose nine per cent to $879.06 billion with repurchase agreement liabilities at $664.26 billion, capital/equity grew 16 per cent to $154.07 billion.

Although there was an improvement on balance sheet assets, funds under management decreased two per cent on a comparative basis to $1.698 trillion despite collective investment schemes (unit trusts and mutual funds) seeing a corresponding six per cent rise to $367.11 billion. The value of exempt distributions (XD) did improve to $44.68 billion with 34 XD’s registered and 20 registered issuers during the September period.