The Tribune

By NEIL HARTNELL 

Tribune Business Editor 

nhartnell@tribunemedia.net

THE Central Bank’s governor yesterday said there are currently no plans to privatise the newly-created government securities depository (BGSD) as called for by the IMF.

John Rolle, responding to the International Monetary Fund’s (IMF) report on the government debt securities market, told Tribune Business that while numerous consultants have suggested outsourcing the Bahamas Government Securities Depository (BGSD) to the private sector such a move would only occur “over a reasonable medium-term horizon”.

The Fund’s recommendations, in a report released earlier this week, urged the Government and the Central Bank to “consider privatising the BGSD to allow the private sector to take responsibility for a key component of the capital markets infrastructure”.

The BGSD acts as a clearing house for the settlement of trades involving government securities, typically Bahamas Registered Stock (BRS) bonds and Treasury Bills, but Mr Rolle signalled that the Central Bank reacted as coolly to the IMF proposal as it has previous ones. He added that any private sector operator would need to have “very mature and transparent governance structures”.

“As to privatization of the BGSD, this point has been raised in many of the past consultancies that the Central Bank has received,” he said in replies to this newspaper’s questions. “What has been made clear, though, is that the ideal private arrangements would need to have very mature and transparent governance structures. Spinning off the CSD is not currently under consideration

“That is a transformation process that The Bahamas would need to embrace over a reasonable medium-term horizon.” The IMF, though, while noting that

the Government securities depository is still in its infancy, voiced concern that this nation now two separate clearing and settlement mechanisms due to the existence of the Bahamas International Securities Exchange’s (BISX) very own such platform.

“Currently, The Bahamas has two CSDs (clearing and settlement depositories) - one for government securities owned by the Central Bank that has only recently adopted automated processes, and another CSD (the Bahamas Central Securities Depository or BCSD) operated by BISX for corporate securities and equities,” the IMF report said.

“While the current BGSD system is in its infancy and is cautiously welcomed by market participants, the future efficacy of the market infrastructure may be negatively impacted by the existence of two CSD systems.

“Institutions seeking to execute cross-market trades - selling corporate bonds to purchase government securities - might face delays and potential operational and settlement risk as the two systems are not connected electronically. Capital markets liquidity will be separated into different market segments. This fragmentation of market sectors is inimical to the development of liquid capital markets.”

As a result, the IMF called on The Bahamas to “consider establishing a bridge between the BGSD and BCSD for efficient cross-market settlement”. Mr Rolle, though, said the need to establish a separate government securities depository, the BGSD, arose from technical assistance that The Bahamas has received since 2016 from the Commonwealth Secretariat and UN Development Programme (UNDP).

“Two major early outcomes of that technical assistance were the need to establish a centralised securities depository (CSD) specifically for government securities and the listing of Government securities on BISX,” Mr Rolle said.

“Deployment of the CSD was required to automate parts of the primary and secondary bond market operations, as well as efficiently operationalise other policy outcomes generated under the technical assistance programmes.”

And, despite the IMF noticing that Bahamian capital markets operators seem opposed to paying any fee for services provided to them, the Central Bank governor said the implementation of charges to recover the cost of operating the BGSD have only been pushed back by one year - from 2024 to 2025.

“Fees to recover operational costs for the CSD (BGSD) are planned for 2025,” Mr Rolle affirmed. This came after the IMF, in its report, said: “Currently, the BGSD does not charge custody or registry fees. Market participants welcome this, as they appear averse to paying fees of any nature at any stage of the investment process.

“However, the Central Bank is contemplating the introduction of platform fees from 2024 onwards to cover running costs on a cost-recovery basis.” The IMF report added that the BGSD can also establish a settlement guarantee fund to guarantee the clearing and settlement of trades in government securities, but this is not operational yet.

“BGSD may also establish and maintain an Investor Protection Fund (IPF) for the protection of the client’s interests in the event that clients suffer pecuniary losses arising from negligence of BGSD or by its members/participants while carrying out the instructions of the client,” the Fund added.

It noted potential resistance to change, and the concern that the proposed debt market reforms could raise the Government’s financing costs in the short-term, but argued that this would be more than offset by medium and long-term gains.

“The authorities are concerned about the possibility that measures to develop

the domestic debt market may result in temporarily higher funding costs, but this should be offset with medium and longer term gains,” the IMF argued.

“This is a necessary investment in the process and will likely be offset in the medium to long-term by a deeper and more liquid government securities market with lower financing costs and larger volumes. A fundamental shift will need to take place in the mindset of the authorities from a pricemaker, tap-sales approach to government bonds towards a market clearing, price-taker, auction based approach.

“It will also be important for the authorities to ensure the fees for trading securities, especially for future trades on BISX, are

not a barrier to developing secondary market liquidity. The recommendations in the report should be implemented sequentially. The initial phase should focus on eliminating the most critical bottlenecks, as well as the ‘quick win’ reforms to catalyse market development,” it added.

“These recommendations are largely concentrated on the primary market and investor relations building blocks. Progress in other areas, such as the secondary market, should be tackled afterwards. A challenge to developing the local market in The Bahamas includes difficulties in attracting qualified staff and lack of coordination across various stakeholders, including the Ministry of Finance, Central Bank and BISX.”