The Tribune

By NEIL HARTNELL 

Tribune Business Editor 

nhartnell@tribunemedia.net

THE Bahamas International Securities Exchange’s (BISX) top executive says he “doesn’t have the answers” for why this nation has created two separate facilities to clear and settle securities trades.

Keith Davies, BISX’s chief executive, told Tribune Business he was unsure why The Bahamas “has taken this route” of creating separate depositories for government debt securities and shares/bonds in private companies given it was “always the plan” to have one single, consolidated facility.

Affirming that this recommendation was made more than two decades ago, in the 2003 report that set out the road-map for BISX’s financial rescue, he added that one depository for clearing and settling all securities trades would “increase efficiency lower cost and instill confidence” among Bahamian investors and other capital market participants.

However, The Bahamas has moved away from the 20 year-old plan by creating the Bahamas Government Securities Depository (BGSD) to administer the registration and transfer of ownership in government bonds and Treasury Bills once they have been traded. It will also handle the clearing and settlement of trades in such securities.

Meanwhile, the Bahamas Central Securities Depository (BCSD) performs exactly the same functions for the trading of shares and corporate bonds that are listed on BISX. Its creation was one of the recommendations that came from the 2003 BISX report, with the BCSD jointly owned by the exchange, RF Bank & Trust and CFAL with a one-third interest each.

Now the International Monetary Fund (IMF), in its recent analysis of The Bahamas’ government debt market, has backed the original BISX report by raising concerns over two separate securities depositories. It warned that this could undermine market “efficacy”, and result in “fragmentation” that works against the development of more “liquid capital markets” and greater trading activity.

Mr Davies, effectively backing the IMF’s conclusions, also hinted that he disagreed with the Central Bank’s position against any near-term moves to privatise the government securities depository. Suggesting that such a stance was “typical” of central banks, he added that “it may not be the that “it may not be the best approach” because it can potentially stifle “innovation”.

The IMF had also called for “a bridge” to be established between the two securities depositories, and Mr Davies told Tribune Business: “I’m not surprised by that analysis and recommendation in terms of linkages so as not to fragment the market.

“If you remember your history, during the tenure of Julian Francis as governor of the Central Bank, one of the steps that was taken at that time, and recommendation coming out of the steps that were taken in collaboration between BISX and the Central Bank, was that there be the creation of a central securities depository (CSD).”

At that time, only RF Bank & Trust’s predecessor and CFAL were providing registrar and transfer services in the Bahamian capital markets. They were responsible for maintain- ing shareholder registers, recording trades of shares and bonds, and helping their clients and BISX to facilitate clearing and settlement of these transactions.

“The recommendation coming out of the study the Central Bank did with members of the financial community, the creation of the central securities depository, was recommended by the directors, by the Governor at the time,” Mr Davies recalled.

“The whole purpose of the central securities depository (CSD) was not just to provide services to the equity market but also to the Government debt market. The recommendation was that all government securities be listed and traded on BISX. And the natural progression was that the CSD would facilitate the clear- ing and settlement of that as well.”

As a result, Mr Davies said of the IMF report’s findings: “It’s nothing new, nothing surprising that that recommendation has been on place for over a decade. The fact it’s come full circle, I don’t have a comment other than to say this [one CSD] was always the plan. Why this route was taken, I don’t have the answers to that.

“It was not something that was recommended at the time for obvious reasons, which are now becoming clear from this report. Finding a solution that would meet the recommendation that was made some time ago, and the recommendation now being made, will be in everyone’s best interests.

“When you do things like that you increase efficiency, lower cost and instill confidence. Finding a way to do that would be a good idea.” However, both the IMF report and Mr Davies’ position on having just one central securities depository for the entire Bahamian capital markets is seemingly at odds with the Central Bank’s and the advice it has received from other consultants.

John Rolle, the present Central Bank governor, told Tribune Business earlier this month that 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 effciently operationalise other policy outcomes generated under the technical assistance programmes.”

This, though, was contradicted by the IMF’s more recent advice, which asserted: “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.

“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”. However, Mr Rolle also ruled out any move to privatise the BGSD in the near-term. The Fund had urged the Government and 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 Central Bank governor, though, responded: “This point has been raised in many of the past consultancies that the Central Bank has received. 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.”

Yet Mr Davies told Tribune Business: “That’s a typical Central Bank approach. It may not be the best approach as it does not allow for innovation and persons that do that for a living to demonstrate capacity and ability. The BCSD has far surpassed any demonstration of capacity and ability. There’s no question they could have done it.

“If that’s the direction we’re going to take, there’s no better entity to take the mantle and deliver superior service properly, more efficiently and at lower cost. This is not controversial, this is not new. It’s something that’s been the recommendation for a while. This [the IMF report] is not news to me. They’re preaching to the choir, so to speak.”