Oran Hall How the JCSD has revolutionised stock market trading
Participants in the local stock market – people and institutions – often take for granted the ease with which they are able to buy and sell listed securities.
This was not always the case, and much credit must be given to the Jamaica Central Securities Depository Limited, JCSD, a wholly owned subsidiary of the Jamaica Stock Exchange, for making it possible for the smooth and quick trading and settlement of transactions.
I can recall when there were three stock broking companies. Trading was conducted by traders who physically went to the trading floor on the Bank of Jamaica building, and there was only one trading day.
Clients called in their orders to their broker and, depending on the relationship between them and the broker, they could place a buy order without making a deposit, or place a sell order without delivering a certificate or signing a transfer form. There was a great degree of trust between broker and client and there were very few problems.
When an order was executed, the transfer forms were completed and sent to the clients to be signed and witnessed. Clients whose stocks were sold returned the signed transfer forms if they had not signed at the time they placed the order. They would also deliver the stock certificates if they had not done so when they placed the order.
Buyers would complete payment for the shares they bought and return the signed transfer forms. The transfer forms were then sent to the Jamaica Stock Exchange to be certified, then to the Stamp Office to be stamped, and upon being returned to the office of the stockbroker, were matched with the relevant certificates and sent to the registrar and transfer agent of the relevant company.
Then, it was time to wait for the return of the new certificates from the registrar and transfer agent. Sometimes the wait was a long one, as could be the wait for the transfer forms from the Stamp Office, although it was a same-day affair in some cases.
Sometimes shareholders lost their certificates and had to complete a form of indemnity to be able to get a replacement certificate, after which they could sell.
Over time, the stock market has seen several developments. There has been a significant increase in trading volumes and transactions through an increasing number of stockbroking companies – 15 today. A very significant development was the shift from floor trading using the open cry auction to an electronic trading system. The old paper-based settlement and transfer system was incongruous with the new trading system. The solution was the JCSD.
The JCSD, which started to operate in 1998, makes it possible for sellers to be paid two business days after the sale of their stock, and for buyers to have the securities they purchased registered in their name in the same time frame – T+2.
Thus, sellers have money quickly in their hands to use as they plan to and buyers also are able to do with their stock what they want. They are, for instance, able to borrow against them as many lenders tend to accept them as security against loans.
Key to the effectiveness of the JCSD is the book entry system that it employs. This is an accounting system which facilitates the change of ownership of securities between parties without the need for the physical movement of documents. The system, then, is an electronic means of recording the ownership of securities.
Investors open an account at the JCSD through their broker. The accounts are credited when they buy and debited when they sell, increasing or reducing their holdings respectively.
Apart from the speed with which transactions are settled, this system makes it possible to place orders quickly, there being no need to make physical delivery of certificates and transfer documents before the order is executed. Additionally, the risk of certificates being damaged, misplaced, stolen or lost is eliminated and the risk of human error at various stages of the transaction is reduced.
Additionally, it facilitates the settlement of large volumes of transactions at low risk and thus gives an additional fillip to the market.
There is one big advantage to the Jamaica Stock Exchange itself: it is now in line with international standards for the settling of transactions executed on it. This gives confidence to international investors to invest in securities listed on our stock exchange, thereby contributing to its growth.
The statements the JCSD issues to investors help them to keep an eye on their portfolio, thereby knowing what they own while being able to track movements in the portfolio. For investors, this is good reason to have confidence in the stock market.
If you are able to make quick decisions regarding your listed securities, are satisfied with how quickly your transactions are settled and can sleep well because you are confident in the system, give credit to the JCSD.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com