BOJ Deputy Governor Living-stone Morrison is leading the reform of the national payment and settlement system. - Contributed
Securities dealers are not ready for the central securities depository for fixed-income instruments, which the Bank of Jamaica (BOJ) had committed to implementing two months ago, asked asked for more time to work out kinks in the system before the revised launch date in May.
"We have the system and it is ready to go live," said Livingstone Morrison, the BOJ deputy governor with responsibility for national payments.
"But the securities dealers have asked for more time before it becomes fully operational and we have agreed to it."
The electronic depository for BOJ and government securities is one component of three tasks in the first phases of a payment-system reform programme that the BOJ has been working on since 2005.
The other two are a real-time gross settlement system (RTGS), and a legal/regulatory framework for the payment system.
The central bank made real progress on the project last month with the February 27 launch of the RTGS, dubbed 'JamClear' - an electronic platform that allows commercial banks and primary dealers in open-market operations to settle payments to each other immediately a transaction takes place.
JamClear replaces a 'deferred settlement' system known as Customer Inquiry Funds Transfer System, or CIFTS, that was in place for 16 years, said Morrison.
More time needed
Anya Schnoor, president of the Jamaica Securities Dealers Association and chief executive officer of Scotia DBG Investment. - File
Meantime, Anya Schnoor, president of the 22-member Jamaica Securities Dealers Association (JSDA), continues to make the case for more time for the fixed-income depository.
"There were a few regulatory issues being discussed with the regulators along with some operational considerations being worked out," Schnoor told Wednesday Business.
The dealers want greater clarity on the treatment of repurchase agreements (repos), specifically the adjustment and approval of the general terms and conditions of master repo documents to capture the existence of the Central Securities Depository (CSD).
Another concern is the feasibility of the $1-million automatic clearing house limit being proposed.
"The proposed threshold would prevent dealers and their commercial banks from clearing cheques drawn by our clients that exceed the $1-million threshold, through the clearing house," said Schnoor.
This, she said, would require institutions to either go the route of 'direct presentation', that is, to physically take the cheque to the commercial bank on which it was drawn and cash it there; issue several cheques with amounts below the threshold; or instruct their commercial bank to transfer the funds to their broker dealer's account via the RTGS platform.
Essentially with RTGS, settle-ment will now be done on a transaction-by-transaction basis throughout the business day, whereas CIFTS settled obligations at the end of the trading day.
As part of the system, the BOJ has agreed to extend intra-day liquidity to the members of the RTGS who may not have sufficient funds to settle debts immediately, but which they would have to repay at the end of the business day.
The implication of a $1-million threshold for primary dealers, Schnoor pointed out, would be that brokers might be forced to either issue several cheques amounting to less than the threshold or make the payments using the RTGS platform, and in so doing commingle cambio and investment funds which goes against the BOJ's guidelines for cambio operations.
$5-million threshold
"We are working with the BOJ to resolve this concern," she said.
Schnoor, a vice-president of Scotia Group Jamaica and head of its investment arm, Scotia DBG, wants a threshold of $5 million, as does the JSDA.
It believes this is a workable figure to start with and one that is closer to Trinidad and Tobago's threshold of TT$500,000.
While securities dealers are already logged on to the RTGS, the real value to them is expected to come with the launch of the fixed-income depository, which will ensure delivery of securities traded, similar to the Jamaica Central Securities Depositor for equities.
"The CSD will provide a depository for all BOJ and Ministry of Finance-issued Jamaican dollar instruments, thereby eliminating the need for brokers to store physical certificates on applicable instruments in-house," said Schnoor.
The RTGS became fully operational last month, following user acceptance tests in January and currently has 23 participants, comprising commercial banks, merchant banks and primary dealers.
Participants have already entered into a memorandum of understanding with the BOJ on how it will operate.
The system allows participants to move large value and time-critical payments between each other in real time, with the value of a transaction passed to the bene-ficiary immediately.
But while players in the market acknowledge efficiency gains from the new network, they were unable to immediately quantify the gains.
"However, to the extent that this allows for straight-through pro-cessing, it should eliminate manual, inefficient and costly processes,'' said Bankers Association of Jamaica president and National Commercial Bank group managing director, Patrick Hylton.
Previously, under the CIFTS, members would net their daily payment obligations and settle at the end of the day against accounts held with the central bank.
Payment statistics published by the BOJ show large-value funds, totalling 23,906 and valued at approximately $2.3 trillion, passing through the CIFTS at the end of 2007.
In 2008, large-value funds moved to $2.9 trillion, with the biggest volume being recorded in the month of December.
"This enhanced settlement infrastructure is compliant with international standards and positions the financial sector to take advantage of the increased efficiency gains that will allow market participants to deliver same-day value to their customers," the BOJ's Morrison said.
"It brings the Jamaican financial market in line with international best practice, where rapid settlement, payment finality and irrevocability are the norm."
Additional benefits of the system are said to include enhanced transparency of banking operations, reduction in settlement risk, improved speed for settlement of obligations and improved financial stability.
Set-up fee
The costs associated with using the systems are still being refined but preliminary figures from the JSDA show that dealers are likely to incur a one-time set-up fee of US$406.59 (J$35,967) along with ongoing annual fees or yearly fees set for five year periods.
Primary dealers using the RTGS are likely to incur annual charges of US$4,052.43, or J$358,478; and for secondary dealers US$2,511.40, or $222,158.44.
The ongoing annual operating cost is also likely to be US$2,740.08, or J$ 242,387.47 for both primary and secondary dealers.
A variable cost of US 68 cents, or J$60.16, per transaction is also among the cost-structure proposals.
The legislative framework for the RTGS still remains to be ratified but the bill to give it effect is expected to be tabled in Parliament by mid-year.
sabrina.gordon@gleanerjm.com