46261 CENTRE FOR LATIN AMERICAN MONETARY STUDIES PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN TRINIDAD AND TOBAGO OCTOBER 2000 PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN TRINIDAD AND TOBAGO PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN TRINIDAD AND TOBAGO WORLD BANK CENTRE FOR LATIN AMERICAN MONETARY STUDIES WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT INITIATIVE First English edition, 2000 Publicado también en español © Centro de Estudios Monetarios Latinoamericanos, 2000 Durango 54, México, D.F. 06700 All rights reserved Derechos reservados conforme a la ley ISBN 968-6154-71-X Printed and made in Mexico Impreso y hecho en México Foreword Following a request from the Western Hemisphere Finance Ministers, the World Bank launched in January 1999 the Western Hemisphere Payments and Securities Clearance and Settlement Initiative. The World Bank ( WB) in partnership with the Centre for Latin American Monetary Studies (CEMLA) leads this Initiative. Its objective is to describe and assess the payments systems of the Western Hemisphere with a view to identifying possible improvement measures in their safety, efficiency and integrity. To carry out this mandate an International Advisory Council ( IAC) was established in March 1999 comprised of experts in the field from several institutions. In addition to representatives from the WB and CEMLA, this Council includes members from the Secretariat of the Committee on Payment and Settlement Systems (CPSS, Bank for International Settlements), Bank of Italy, Bank of Portugal, Bank of Spain, Council of Securities Regulators of the Americas (COSRA), European Central Bank, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, Inter-American Development Bank, International Monetary Fund, International Organization of Securities Regulators ( IOSCO), Securities Commission of Spain and U.S. Securities and Exchange Commission (SEC). To assure quality and effectiveness, the Initiative includes two important components. First, all studies are conducted with the active participation of country officials and the project builds on the existing work being undertaken in the respective countries. Second, the Initiative draws on international and national expertise on the subject, through the IAC, to provide guidance, advice and alternatives to current practices. The Initiative has undertaken a number of activities in order to respond to the Western Hemisphere Finance Ministers’ request. These include the preparation of public reports containing a systematic in-depth description of each country’s payments, clearance and settlement systems; the delivery of recommendations reports to country authorities on a confidential basis; the organization of IAC meetings to review country studies and provide input for future work; the organization of workshops focusing on issues of particular interest; the creation of a web-page (www.ipho-whpi.org) to present the outputs of the Initiative and other information of interest in the payments systems area; and the promotion of working groups to ensure a continuation of the project activity. CEMLA has been acting as Technical Secretariat of the Initiative and is playing a major role in making the process sustainable and capable of extension to all the countries in the Hemisphere. To this end, the Initiative has helped strengthen CEMLA’s in-house expertise. Additionally, practitioners in payments and securities clearance and settlement in some countries in the Region have participated in the studies under the Initiative, through CEMLA coordination, and this has contributed to the broadening of knowledge and the transfer of know-how within the Region. The endeavors of the working groups in coordination with CEMLA will main- tain the infrastructure created under the Initiative and provide a permanent forum for the countries in the Region to discuss, coordinate, and add a collective impetus to the work in the area of payments and securities clearance and settlement systems. This Report, “Payments and Securities Clearance and Settlement Systems in Trinidad and Tobago” is one of the public reports in the series and was prepared with the active support of the Central Bank of Trinidad and Tobago and the Trinidad and Tobago Securities and Exchange Commission (SEC). The Bank of Italy, the Bank van de Nederlandse Antillen, the Comisión Nacional de Valores of Argentina, the US Federal Reserve System and the US Securities Exchange Commission participated directly in its preparation. Sergio Ghigliazza David de Ferranti Manuel Conthe Director General Vice President, LAC Region Vice President, Financial Sector CEMLA World Bank World Bank Acknowledgements The mission preparing this report visited Trinidad and Tobago in February 2000 and consisted of two teams that worked on a coordinated basis in the area of payments and securities clearance and settlement. Massimo Cirasino (World Bank) was the overall coordinator of the mission as well as the payment group. The group focusing on securities issues was coordinated by Mario Guadamillas (World Bank). The payments team comprised of Paolo di Blasi (Payment System Consultant), Paola Giucca (Banca d’Italia), Derrelle Janey (US Federal Reserve System) and Ruthmilda Vos (Bank van de Netherlandse Antillen). The securities team comprised Andrea Salas (Comisión Nacional de Valores, Argentina), and Ester Saverson (US Securities and Exchange Commission). The payments team worked in close coordination with a local team composed of officials from the Central Bank of Trinidad and Tobago (CBTT) coordinated by Ms. Joan John (Senior Manager Research and Policy) and Ms. Caramae Farmer (Manager for Banking Operations). The team also included Ms. Anne Joseph and Ms. Allisha Abraham (Research Department). The securities team worked in close coordination with a local team composed of officials from the Trinidad and Tobago Securities and Exchange Commission ( SEC). Gloria Rolingson (Director of Research) coordinated the securities local team, which included Cecila J. Melville (Financial Research Officer), Denise Hackett (Director of Legal Advisory and Enforcement), Marlene Murray (Director of Disclosure Registration and Corporate Finance) and Cicelyn Burrowes (Director of Market Regulation and Surveillance). Trinidad and Tobago Report October 2000 PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN TRINIDAD AND TOBAGO 1 ECONOMIC AND FINANCIAL MARKET OVERVIEW ........................................................... 1 1.1 OVERVIEW OF RECENT REFORMS ..........................................................................................1 1.2 MACROECONOMIC BACKGROUND .........................................................................................3 1.3 THE FINANCIAL SECTOR ......................................................................................................3 1.4 THE CAPITAL MARKETS .......................................................................................................4 1.5 THE NATIONAL PAYMENTS AND SECURITIES CLEARANCE AND SECURITIES SYSTEM ARCHITECTURE: MAJOR TRENDS .................................................................................................................6 1.5.1 Future Developments .........................................................................................6 2 INSTITUTIONAL ASPECTS ..................................................................................................... 8 2.1 GENERAL LEGAL FRAMEWORK ..............................................................................................8 2.1.1 Payments ............................................................................................................8 2.1.1.1 Legislation pertaining to E-commerce ...................................................... 11 2.1.2 Securities ..........................................................................................................11 2.1.3 Derivatives .......................................................................................................15 2.2 THE ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS ............................................................... 16 2.2.1 The Banking Sector ..........................................................................................16 2.2.2 Other Institutions that Provide Payment Services ..............................................17 2.3 THE ROLE OF FINANCIAL I NSTITUTIONS: SECURITIES .............................................................. 18 2.3.1 Securities Market Participants ...........................................................................18 2.3.1.1 Issuers ................................................................................................. 19 2.3.1.2 Market actors ....................................................................................... 20 2.3.1.3 Securities companies ............................................................................ 21 2.3.1.4 Institutional investors and other market participants .................................. 21 2.3.2 Exchanges ........................................................................................................21 2.3.3 Securities Clearance and Settlement Institutions ..............................................22 2.4 THE ROLE OF THE CENTRAL BANK ..................................................................................... 22 2.4.1 Monetary Policy and Other Functions ..............................................................22 2.4.2 Involvement in Payments Systems .....................................................................23 2.5 THE ROLE OF THE BANKING SUPERVISORY AUTHORITY ......................................................... 24 2.5.1 Supervision of Financial Entities .......................................................................24 2.5.2 Oversight of the Payment System .....................................................................26 2.5.3 Anti-Money Laundering Measures ....................................................................26 2.6 THE ROLE OF THE SECURITIES AND EXCHANGE COMMISSION .................................................. 27 2.7 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES .................................................. 28 2.7.1 The Ministry of Finance/Treasury .....................................................................28 iii Trinidad and Tobago Report October 2000 2.7.2 Bankers’ Association ........................................................................................29 2.7.3 Deposit Insurance Corporation ........................................................................29 3 PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES ................................................... 30 3.1 CASH ........................................................................................................................... 30 3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH ...................................................... 30 3.2.1 Cheques ...........................................................................................................30 3.2.2 Direct Debits/Credits ........................................................................................31 3.2.3 Payment Cards .................................................................................................31 3.2.4 Postal Instruments ............................................................................................32 3.3 NON CASH GOVERNMENT PAYMENTS ................................................................................ 33 4 PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS ................................. 34 4.1 THE REGULATORY FRAMEWORK FOR CLEARINGHOUSES .......................................................... 34 4.2 LOW VALUE PAYMENT TRANSFER SYSTEMS ........................................................................... 34 4.2.1 Cheque Clearing Process .................................................................................34 4.3 LARGE VALUE PAYMENT TRANSFER SYSTEMS ......................................................................... 35 4.4 OTHER SYSTEMS AND T YPES OF SETTLEMENT ....................................................................... 36 4.4.1 ATM and Debit Card Clearing and Settlement ..................................................36 4.4.2 Credit Card Settlement .....................................................................................37 4.5 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED ............................................................ 37 4.5.1 ACH-Project......................................................................................................37 4.5.2 Automated Credit Bureau (ACB) .......................................................................37 4.5.3 US Dollar-denominated Cheque Clearinghouse ..............................................37 4.5.4 Inter-bank Foreign Exchange Trading ...............................................................37 4.5.5 Settlement of Security Payment for the Trinidad & Tobago Central Depository ...........................................................................................38 4.6 CROSS BORDER PAYMENT SETTLEMENT SYSTEMS ................................................................... 38 4.6.1 Intra-regional Payments ....................................................................................38 5 SECURITIES: INSTRUMENTS, MARKET STRUCTURE AND TRADING ............................... 39 INSTRUMENTS 5.1 FORMS OF SECURITIES ...................................................................................................... 39 5.2 TYPES OF SECURITIES ....................................................................................................... 39 5.2.1 Shares and Securities Representing Equity Rights .............................................39 5.2.1.1 Equities ............................................................................................... 39 5.2.2 Long-term Debt ................................................................................................40 5.2.2.1 Bonds .................................................................................................. 40 5.2.3 Money Market Instruments ...............................................................................40 5.2.3.1 Treasury bills and notes ......................................................................... 40 iv Trinidad and Tobago Report October 2000 5.2.3.2 Repurchase orders/Repurchases (Repos) .................................................. 40 5.2.3.3 Certificates of Deposits (CDs) ................................................................. 41 5.2.3.4 Bankers’ Acceptances ............................................................................ 41 5.2.3.5 Commercial Paper ................................................................................ 41 5.2.4 Derivatives .......................................................................................................41 5.3 SECURITIES IDENTIFICATION CODE ...................................................................................... 41 5.4 CLASSIFICATION OF SECURITIES ACCORDING TO TYPE OF TRANSFER ......................................... 41 5.4.1 Bearer Securities ..............................................................................................41 5.4.2 Registered Securities ........................................................................................41 5.4.3 Nominee and Beneficiary ................................................................................41 5.5 TRANSFER OF OWNERSHIP ................................................................................................ 42 5.6 PLEDGE OF SECURITIES AS COLLATERAL ............................................................................... 42 5.7 TREATMENT OF LOST, STOLEN , OR DESTROYED SECURITIES ..................................................... 43 5.8 LEGAL MATTERS CONCERNING CUSTODY ............................................................................ 43 5.8.1 Fungibility ........................................................................................................43 5.8.2 Elimination of Physical Delivery .......................................................................44 MARKET STRUCTURE AND TRADING SYSTEMS 5.9 PRIMARY MARKET ........................................................................................................... 44 5.10 SECONDARY MARKET ...................................................................................................... 45 5.11 STOCK EXCHANGE TRADING ............................................................................................. 47 5.12 OVER THE COUNTER MARKET (OTC) ................................................................................ 47 6 CLEARANCE AND SETTLEMENT CIRCUITS FOR CORPORATE SECURITIES ..................... 49 6.1 ORGANISATIONS AND INSTITUTIONS ................................................................................... 49 6.1.1 Clearing and Settlement Institutions .................................................................50 6.1.2 Trinidad and Tobago Central Securities Depository ..........................................50 6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES .......................................................... 51 6.3 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES IN THE STOCK EXCHANGE (CURRENT SYSTEM ) ......................................................................................................... 51 6.4 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES IN THE STOCK EXCHANGE: FUTURE ARRANGEMENTS (TTCD) ..................................................................................... 52 6.5 SECURITIES CLEARANCE AND S ETTLEMENT BY MUTUAL FUNDS ................................................ 53 6.6 BUYING-IN AND SELLING-OUT PROCEDURES ........................................................................ 54 6.7 MECHANISMS ESTABLISHED BY THE NEW SYSTEM TO REINFORCE SECURITY IN SETTLEMENT PROCEDURES .................................................................................................................. 54 6.8 SECURITIES LENDING ....................................................................................................... 54 6.9 DERIVATIVES CLEARANCE AND SETTLEMENT .......................................................................... 55 6.10 INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS .............................. 55 v Trinidad and Tobago Report October 2000 7 CLEARANCE AND SETTLEMENT CIRCUITS FOR GOVERNMENT SECURITIES .................. 56 7.1 MARKET ARRANGEMENTS ................................................................................................. 56 7.2 SETTLEMENT PROCEDURES ................................................................................................ 56 7.2.1 Potential Risks in Current Settlement Arrangements .........................................56 8 THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS .......... 58 8.1 THE RISK CONTROL POLICY ............................................................................................. 58 8.1.1 Low-value System Risks ....................................................................................58 8.1.2 Large-value System Risks ..................................................................................58 8.2 SETTLEMENT ................................................................................................................... 59 8.2.1 Settlement of Securities Transactions ................................................................59 8.3 MONETARY POLICY AND PAYMENT SYSTEMS ........................................................................ 59 8.4 THE ROLE OF THE CENTRAL BANK IN CROSS-BORDER PAYMENTS ............................................. 60 9 SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS ....................... 61 9.1 SECURITIES AND EXCHANGE COMMISSION SUPERVISORY AND STATUTORY RESPONSIBILITIES ........... 61 9.1.1 Responsibility over SROs (Stock Exchange, TTCD).............................................61 9.1.2 Responsibility over Participants in the Securities Clearing and Settlement Processes ..........................................................................................................62 9.2 SROS (STOCK EXCHANGE, TTCD) SUPERVISORY AND STATUTORY RESPONSIBILITY ....................... 62 9.3 SAFEGUARD AND SECURITY SYSTEM .................................................................................... 63 APPENDIX: STATISTICAL TABLES ............................................................................................ 65 LIST OF ABBREVIATIONS ........................................................................................................ 78 GLOSSARY ................................................................................................................................ 79 TABLES IN THE TEXT: TABLE 1: Trinidad and Tobago: Macroeconomic and Financial Indicators (1995 – 1999) ..3 TABLE 2: Financial System-Total Assets, 1995 – 1999 (%) ...................................................5 TABLE 3: Commercial Banks’ Deposit Balances (1995-1999) ........................................... 16 TABLE 4: Number of Registrants by Class of Business as at December 1999 ................... 19 TABLE 5: Securities Registered by the Commission (1999) ............................................... 19 TABLE 6: Capital Requirements for Market Actors ............................................................. 20 TABLE 7: Debt Securities Registered in 1999 ..................................................................... 44 TABLE 8: Government Bonds (1995-1999) ........................................................................ 45 vi Trinidad and Tobago Report October 2000 TABLE 9: Information on Market Turnover (1995-1999) .................................................... 46 TABLE 10: Secondary Market Transactions - Government Bonds ........................................ 46 TABLE 11: Stamp Duty for Exchange Transactions ............................................................... 48 TABLE 12: Purchases and Sales of Treasury Bills, (1995–1999) .......................................... 56 BOXES IN THE TEXT: BOX 1: Business of a Financial Nature ................................................................................ 10 BOX 2: Movements in Statutory Reserve Requirement ....................................................... 23 vii Trinidad and Tobago Report October 2000 1 ECONOMIC AND FINANCIAL MARKET OVERVIEW 1.1 OVERVIEW OF RECENT REFORMS Following the terms of trade shock of the early and mid 1980’s, the Trinidad and Tobago economy entered a period of severe fiscal and external disequilibrium which led to an adjustment and stabilisation programme under the auspices of the International Monetary Fund (IMF). The decline in the terms of trade had been precipitated by the oil shocks of 1981 and 1986. Nevertheless, the subsequent adjustment efforts and structural reforms that were initiated have paved the way for the economic expansion which has been underway since 1994. A key element of the adjustment and stabilisation process was the fact that Trinidad and Tobago undertook an important series of reforms – trade liberalisation, fiscal reform, financial reform and capital account liberalisation leading to the floating of the exchange rate in April 1993. The decade of the 1990s was characterised by wide-ranging reforms. The process of fiscal reform included a rethinking of the role of the State so that the government embarked on a privatisation programme, which involved the divestment of a number of state enterprises to local and foreign investors. Fundamental amendments were also made to the tax regime, the most important of which was the introduction of a value-added tax. The trade liberalisation measures included the dismantling of quantitative import restrictions and a gradual relaxation of exchange controls. This culminated in April 1993 with the removal of all controls on current and capital transactions and the adoption of a floating exchange rate, which ended a 17-year period of fixed exchange rates with the US dollar. Financial sector reforms were directed at removing restrictions in the banking and wider financial sectors, and at the same time, improving the already existing regulatory framework to meet international standards. To this end, a number of amendments were made to the banking and financial legislation. Efforts were also directed towards the broadening and deepening of the capital market. In addition to the removal of any restrictions on the movement of capital, the authorities amended key legislative provisions in order to modernise the regulatory framework and institutional arrangements to facilitate the continued development of the capital market. In this regard the Government has acted not only as a facilitator in promoting capital market development but also has been a direct participant in the process through its divestment program. Some of the key reform measures implemented during the 1990s were as follows: • the modification of foreign investment legislation; • the revision of financial sector legislation; • the enactment of new securities laws; 1 Trinidad and Tobago Report October 2000 • the launch of a venture capital incentive program; • the revision of the company laws; • the establishment of a Securities and Exchange Commission (SEC); • the strengthening of institutional arrangements. The new pieces of legislation provided the framework for the establishment of appropriate institutions to facilitate the development of the securities market.1 A major juncture in capital market development occurred with the establishment of the Securities and Exchange Commission (SEC) on the proclamation of the Securities Industry Act of 1995. According to its enabling legislation the mandate of the SEC is to provide for the regulation of the securities market in Trinidad and Tobago and for related matters. With the passage of the Venture Capital Act 1994, the Venture Capital Incentive Program (VCIP) was created. A number of current policy initiatives are expected to have a positive impact on the domestic capital market: i. Government’s ongoing divestment program; ii. social security and pension reform; iii. the creation of venture capital companies; iv. a credit union strengthening program; v. the appointment of committees to formulate legislation for mutual funds and employee stock ownership plans (ESOPs); vi. the formation of a central securities depository and the proposed introduction of electronic trading; and 2 vii. the establishment of a comprehensive regulatory body for the financial sector. 1 The Foreign Investment Act of 1990 replaced the Aliens Landholding Act. The Financial Institutions Act 1993 replaced the Banking Act (1964) and Non-Banking Act (1979). The legislative reform also included the Securities Industry Act of 1995, the Securities Industry By-laws of 1997, the Companies Act of 1995 and the Companies Regulations, 1997. In addition, the Venture Capital Act of 1994 provided the legal framework for the establishment of venture capital companies (VCCs). 2 Medium-Term Policy Framework, 2000-2002, Ministry of Finance, October, 1999. 2 Trinidad and Tobago Report October 2000 1.2 M ACROECONOMIC BACKGROUND The structural reforms initiated in the late 1980’s and early 1990’s set the foundation for the economic recovery which the economy has experienced since 1994. Economic activity accelerated to 4.0 per cent in 1998 and 5.1 per cent in 1999 following an average expansion in real GDP of 3.5 per cent per annum over the period 1994 to 1997. Both the energy and non-energy based sectors contributed to this robust economic growth. The petrochemicals industry has generated the expansion in the energy based sector with nine gas-based plants starting operations in the last four years. Among the non-energy based sectors, the construction and distribution sectors have led activity in the recent past. Consequently, employment levels have risen significantly such that the unemployment rate fell from 18.4 per cent in 1994 to 13.2 per cent in 1999. This macroeconomic stability over the last six years was also underpinned by a low inflationary environment as the Retail Price Index increased by an average annual rate of 5 per cent over the same period. Table 1: Trinidad and Tobago: Macroeconomic and Financial Indicators (1995–1999) 1995 1996 1997 1998 1999 GDP at market prices (US$M) 5,381.7 5,750.9 5,848.4 6,082.3 6,517.8 GDP at market prices (annual growth rate, %) 7.8 6.9 1.7 4.0 7.2 Consumption (annual growth rate, %) 14.1 9.5 9.0 20.4 0.3 Gross Investment (annual growth rate, %) -14.9 27.5 57.4 -18.7 -16.0 Imports (annual growth rate, %) 37.2 14.5 40.6 -0.9 -8.5 Exports (annual growth rate, %) 25.6 1.2 1.5 -10.9 24.3 Consumer Price Index (average annual rate, %) 5.3 3.3 3.7 5.6 3.4 Unemployment rate 17.2 16.3 15.0 14.2 13.2 Public sector surplus/deficit (% of GDP) 0.2 -0.5 0.1 -1.2 -3.1 Current account balance (% of GDP) 5.0 1.2 -10.0 -10.6 0.2 Public debt (US$M) 1,905.2 1,875.8 1,541.1 1,429.6 1,511.0 (a) Public securities issued (TT$M) 994.9 381.5 1,298.3 2,172.0 3,690.0 In local currency (TT$M) 994.9 381.5 1,298.3 1,230.0 2,247.9 In foreign currency (US$M) — — — 150.0 230.0 Narrow Money (M1A, US$M) 561.5 553.6 623.1 648.5 682.9 Broad Money (M3*, US$M) 2,656.2 2,688.8 2,895.3 3,366.6 3,700.5 Source: Central Bank of Trinidad and Tobago and Central Statistical Office. (a) Include bonds issued by central government and state enterprises. 1.3 T HE FINANCIAL SECTOR The financial sector in Trinidad and Tobago has shown impressive growth over the last twenty years. In the decade of the eighties, the Central Bank was the prime mover in the creation of new financial institutions such as the Stock Exchange (1981), the Unit Trust Corporation (1982), the Deposit Insurance Corporation (1986) and the Home Mortgage Bank (1986). 3 Trinidad and Tobago Report October 2000 In the economic environment of liberalisation and globalisation in the 1990s, there were further developments in the sector, including the updating of the legislative framework for the Central Bank and deposit-taking financial institutions. The banking and non-banking laws were updated and merged to allow these institutions to operate more competitively. The Central Bank Act was amended to allow for more pro-active regulation and supervision in line with international standards. The commercial banking industry in particular met this new challenge through mergers and acquisitions, both in the domestic and regional markets, and with the introduction of new services and products that are both financial and non-financial. This sub-sector dominates the financial sector in terms of assets and the mobilisation of financial resources. The banking industry held 44 per cent of the financial sector’s total assets in 1999 and provides banking services to a wide cross- section of the population.3 The number of deposit accounts totalled over 1.4 million in 1998 with a per capita ratio of 1.1. At the end of 1999, total loans outstanding amounted to $12,325.9 million,4 over 90 per cent of which were distributed to the business (44 per cent) and consumer (49 per cent) sectors5. Of the six banks in operation, four are wholly or majority locally-owned, one of which is Government-owned, and two are foreign-owned. At the end of 1999 the commercial banks operated a total of 111 branches nation-wide. The licensed non-bank financial institutions, which comprise finance companies, merchant banks and trust and mortgage finance companies, held approximately 17 per cent of the financial system’s assets in 1999. There are ten finance companies and merchant banks operating in the system and they provide a range of services that cater primarily to the business community. Merchant banks manage and underwrite domestic bond issues on behalf of both public and private sector entities. There are five trust and mortgage finance companies which engage principally in mortgage financing activities. The other financial institutions in the system (including insurance companies, mutual funds, development and finance institutions), provide specialised financial services. 1.4 T HE CAPITAL MARKETS The Trinidad and Tobago securities market is dominated by a few firms. Many of the agencies that provide securities-related services are subsidiaries of the commercial banks. Although there are a few relatively developed market segments such as the Treasury bills, the primary market for bonds and the stock market, the secondary market for debt securities is still undeveloped. On the supply side, there are several reporting issuers. As of December 1999, there were 50 reporting issuers on the Securities and Exchange Commission’s (SEC ) register. There has been an increasing number of government and corporate issues in the primary market. However, the market for new 3The percentage is calculated on the assets of the Central Bank, the commercial banks, finance companies and merchant banks, trust and mortgage companies, thrift companies, development finance institutions, the Unit Trust Corporation, the Deposit Insurance Corporation, the Home Mortgage Bank, life insurance companies and the National Insurance Board. 4 In the report, the $ symbol refers to the domestic currency (TT dollar). 5 All dollar values are denominated in Trinidad and Tobago dollars, except where otherwise indicated. 4 Trinidad and Tobago Report October 2000 Table 2: Financial System - Total Assets, 1995–1999 (per cent) 1995 1996 1997 1998 1999 Central Bank 17.5 14.8 15.6 14.6 14.7 Commercial Banks 45.9 49.9 49.9 45.0 43.6 Finance Companies & Merchant Banks 4.8 4.8 4.4 6.8 7.4 Trust & Mortgage Finance Companies 8.6 9.7 10.2 8.3 10.0 Thrift Institutions 0.2 0.2 0.1 0.1 0.1 Development Finance Institutions 2.3 2.1 1.9 1.7 1.7 Unit Trust Corporation 3.0 2.9 3.9 4.8 4.8 Home Mortgage Bank 1.5 1.7 1.4 1.3 1.3 Life Insurance Companies 8.3 5.6 4.8 8.6 7.6 Deposit Insurance Corporation 0.4 0.5 0.5 0.5 0.5 National Insurance Board 7.5 7.8 7.3 8.2 8.3 TOTAL 100.0 100.0 100.0 100.0 100.0 Source: Central Bank of Trinidad and Tobago. securities is dominated by debt instruments, which are usually denominated in the local currency. In recent times, issues have also been in US dollars or other foreign currency. On the investment side, there are approximately 102,000 shareholders (about 8 percent of the population) on the registers of listed companies. Institutional investors dominate the market, accounting for over 90 percent of the value traded. Of the 29 companies listed on the Trinidad and Tobago Stock Exchange Limited, 23 reported that they had at least one or more controlling shareholders (i.e. shareholders with holdings equal to or larger than 20 percent of the company’s capital). Thus, more than two-thirds of the listed companies have shareholders with significant influence. Until recently, six brokerage firms were registered with the SEC . However, in December 1998 a commercial bank acquired one of the brokerage houses. This was followed in February 1999 by the merger between this brokerage house and another firm. As at June 2000 five brokerage firms were on the SEC register.6 The SEC is the chief regulator of the securities market. The SEC regulates the conduct of all market actors, reporting issuers and self-regulatory organisations and monitors activities in the primary and secondary markets. While the SEC has overall responsibility for the regulation of the securities market, the Trinidad and Tobago Stock Exchange Limited, as a self-regulatory organisation (SRO), has the responsibility for supervising and regulating the conduct and activities of its members. The SEC is responsible for the registration of all securities issued to the public. 6 The brokerage firms registered with the SEC are Bourse Securities Limited, Caribbean Stockbrokers Limited, Reliance Stockbrokers Limited, Trinidad and Tobago Stocks and Shares Limited and West Indies Stockbrokers Limited. 5 Trinidad and Tobago Report October 2000 Many of the institutions registered with the SEC are also registered under the Financial Institutions Act, 1993 and are therefore regulated by the Central Bank. As a result, the Central Bank regulates mutual funds sponsored and distributed by commercial banks. Joint supervision of mutual funds is provided by the SEC . However, it is to be noted that legislation to govern collective investment schemes is currently being drafted. 1.5 T HE NATIONAL PAYMENTS AND SECURITIES CLEARANCE AND SECURITIES SYSTEM ARCHITECTURE: MAJOR TRENDS Cash and cheques are the major forms of making payments in Trinidad and Tobago. However, the use of debit and credit cards is constantly increasing. The Central Bank operates a cheque clearinghouse for small value transactions on a deferred net settlement basis. Large value transactions are settled within a ‘special clearings’ paper-based system, operated by the Central Bank and the commercial banks. Settlement occurs on the reserve accounts held at the Central Bank. In 1994, a private clearinghouse operated by a company owned by four of the country’s six commercial banks, Infolink Services Ltd. (ISL), was established to process and settle electronic funds transfers i.e. ATM and EFTPOS transactions. 1.5.1 Future Developments Priorities for the development of the payments system in Trinidad and Tobago include: 1. Provision of a secure, efficient and automated system in which payments transacted with the Central Bank will be completed in a speedy and accurate manner, thereby reducing credit and liquidity risk. It is recognised that an electronic funds transfer system allows for a more convenient and secure mode of payment than cheques, particularly for large values. Since most commercial banks are already members of SWIFT, serious consideration is being given to use of this infrastructure as a platform for developing the new automated system. 2. Development from a mainly cash and paper-based payment system to a more electronic system. The system would be developed with mechanisms which reduce the risk of fraud and the costs inherent in the production of cash and cheques. The use of automated systems for paper-based instruments, based on imaging of physical items, has already been established and has helped to increase efficiency and minimise the float and associated risks. 3. Establishment of an automated clearinghouse for low value transactions with a view to enlarging the range of payment services offered to the clientele. 4. Use of efficient mechanisms for funds transfer to accommodate government benefits and consumer bill payments. The above will necessitate the creation of standards and guidelines for message formats which will facilitate the path to future development. 6 Trinidad and Tobago Report October 2000 On the securities side, there is no centralised system for effecting the clearance and settlement of the several investment products traded in Trinidad and Tobago. Each market segment maintains its own trading, clearance and settlement arrangements. Many debt instruments and equities are issued in a certificated form. However, the clearance and settlement systems for Treasury bills and notes, and also mutual funds, are dematerialised. The Central Bank provides clearance and settlement for Treasury bills and notes while the Stock Exchange performs similar functions for bonds (both Government and Corporate) and equities. Mutual funds promoters, which are mainly subsidiaries of commercial banks, handle the clearance and settlement for mutual fund transactions. Some of the clearance and settlement systems are manually operated while others are computerised. The Trinidad and Tobago Stock Exchange Limited is in the process of implementing an electronically based central securities depository. The company, Trinidad and Tobago Central Depository (TTCD) was established by the Trinidad and Tobago Stock Exchange Limited and its member firms in 1998 as a clearing facility for securities transactions. Incorporated as a private company, the TTCD is expected to improve the efficiency of clearing and settling securities transactions by implementing a computerised book entry system. Currently, the TTCD is in the process of elaborating its rules and operating procedures. The establishment of the TTCD is part of a wider regional initiative to link the five stock exchanges in the Caribbean and to harmonise capital markets in the region.7 7 The Bahamas, Barbados, Dominican Republic, Jamaica and Trinidad and Tobago. 7 Trinidad and Tobago Report October 2000 2 INSTITUTIONAL ASPECTS 2.1 G ENERAL LEGAL FRAMEWORK 2.1.1 Payments The legal framework for payments is outlined in five major pieces of legislation: the Financial Institutions Act, 1993, the Central Bank Act, Chapter 79:02, the Bills of Exchange Act, Chapter 82:31, the Dishonoured Cheques Act, 1998 and the Securities Industry Act, 1995. However, those which govern payment instruments per se are the Bills of Exchange Act, Chapter 82:31 and the Dishonoured Cheques Act, 1998. The framework of the Trinidad and Tobago payment system and the relations between financial institutions, consumers and retailers, have been established principally through convention. The Bills of Exchange Act states that the law recognises three types of cheques: ordinary, post-dated and ante-dated cheques. It also deals specifically with the treatment of promissory notes and cheques. Promissory notes, in order to be valid must be endorsed. A promissory note is considered incomplete until delivery thereof to the payee or bearer and, where a note is payable on-demand, it must be presented for payment within a reasonable period of time, if not, the endorser is discharged. The law also differentiates between generally and specially crossed cheques. Cheques that are crossed ‘not negotiable’ should not be encashed, but rather, be deposited with a banker into the payee’s account. ‘Payee only’ cheques must not be endorsed to a third party. The bank executing the transaction becomes liable in the event of loss of funds by the drawer. The Dishonoured Cheques Act of 1998, refers to cheques which cannot be covered due to insufficient funds (Section 2 (2)). This Act makes it illegal for a person to acquire goods or services by use of a dishonoured cheque (Section 3). Use of a dishonoured cheque occurs when: (a) A person as drawer or representative drawer: (i) obtains property or services by uttering a cheque knowing that he or his principal has insufficient funds with his bank to cover it and other outstanding cheques; (ii) believes that at the time of utterance payment will be refused by the drawee upon presentation; and (iii) payment is refused by the drawee upon presentation. (b) As a payee, holder or bearer: (i) he passes a cheque knowing that the drawer has insufficient funds with the drawee to cover that cheque and other outstanding cheques; (ii) he believes that at the time the cheque is passed payment will be refused by the drawee upon presentation; and (iii) payment is refused by the drawee upon presentation. 8 Trinidad and Tobago Report October 2000 (c) As a drawer or representative drawer, he obtains property or services by uttering a cheque knowing that he or his principal, as the case may be, at the time of the utterance, intends, without the consent of the payee, to stop or countermand the payment of the cheque, or otherwise to cause the drawee to disregard or dishonour the cheque, and payment is refused by the drawee upon presentation. (d) He obtains property or services by passing a cheque knowing that payment of the cheque has been stopped or countermanded, or the drawee of the cheque may disregard or dishonour the cheque, and payment is refused by the drawee upon presentation. The Financial Institutions Act, 1993 outlines the legal framework within which commercial banks and other non-bank financial institutions operate. It is therefore intended “to provide for the regulation of banks and other financial institutions, which engage in the business of banking or business of a financial nature”. It replaced two previously existing pieces of legislation: the Banking Act (Chap 79:01) and the Financial Institutions (Non-banking) Act, 1979 (Chap 83:01). The legislation defines the term ‘banking business’ as the business of receiving deposits of cash from the public on current account or deposit account which can be withdrawn on demand, by cheque, draft, order or notice, and the making of loans or the granting of credit facilities, and generally the undertaking of any business appertaining to the business of commercial banking. ‘Business of a financial nature’ is defined as the collection of funds in the form of deposits, shares, loans, premiums and the investment of such funds in loans, shares and other securities and includes the performance for reward, of the functions and duties of a trustee, administrator, executor or attorney as well as the types of business set out in the First Schedule to the Act. The First Schedule is reproduced below. The Central Bank (Amendment) Act, No. 2 of 1986 provides, in Part VA, Sections 44C-44I, special emergency powers of the Central Bank when “the Bank is of the opinion: that the interests of depositors or creditors of an institution are threatened; that an institution is likely to become unable to meet its obligations or is about to suspend or has suspended payment; or that an institution is not maintaining high standards of financial probity or sound business practices”. The mentioned special powers, “in addition to any other powers conferred on it by any other law” (e.g. the Financial Institutions Act, Part VI, Sections 30-36) can be utilised by the Central Bank in order to control, also through the take-over of the property, the activities of the institutions that are in difficulty. In these cases, the Deposit Insurance Fund, established under Section 44K of the Central Bank (Amendment) Act, No. 2 of 1986, can be activated according to the criteria established by the same Act. The Act also provides rules about the financing of the Fund, its management, administration and insurance payment procedures. The Financial Institutions Act, Section 32 (2) vests the Central Bank with the power to “order the licensee to suspend business forthwith”. This rule should be interpreted, or integrated, in order 9 Trinidad and Tobago Report October 2000 Box 1: Business of a Financial Nature Class Activities 1. Confirming House or Acceptance House Confirming, accepting or financing import and export bills. 2. Finance House or Finance Company Hire purchase and installment credit, accounts receivable, trade and inventory financing, factoring, block discounting. 3. Leasing Corporation Lease financing. 4. Merchant Bank Floating and underwriting stocks and shares, loans syndication, dealing in gold, providing consultancy and investment management services, acceptance credit, project development, lease financing, foreing exchange dealing, inter-bank financing. 5. Morgage Institutions Mortgage lending. 6. Trust Company Managing trust funds, performing duties of trustees, executor or administrator and attorney, administration of pension funds, mortgage lending. 7. Unit Trust Providing facilities for the participation by persons as beneficiaries under a trust or other scheme, in profits or income arising from the acquisition, holding, management or disposal of securities or any other property whaever. 8. Credit Card Business Issuing payment, credit or charge cards and, in cooperation with others including other financial institutions, operating a payment, credit or charge card plan. to apply it to the clearance and especially, settlement systems. This mechanism could be used to suspend the insolvent bank from making payments, and to avoid, or at least reduce, credit and liquidity risks. There is no specific legislation which addresses such issues as credit cards, clearance and settlement (large value and small value transactions), netting arrangements, credit and liquidity risks. In addition, the legal system of Trinidad and Tobago does not regulate explicitly matters such as antitrust, transparency and privacy for payment systems and services. 10 Trinidad and Tobago Report October 2000 2.1.1.1 Legislation pertaining to E-commerce A reform package to modernise the legislation with respect to electronic commerce is presently being discussed. A very preliminary draft bill called “The Electronic Funds Crime Bill, 1999” is part of the package. The proposed draft is limited to bank cards and credit cards and does not address several issues related to e-commerce. 2.1.2 Securities In Trinidad and Tobago the legal framework for the securities market is based on the following key pieces of legislation listed below in chronological order: • The Central Bank Act, Chapter 79:02 • The Treasury Bills Act, Chapter 71:40 • The Unit Trust Corporation of Trinidad and Tobago Act, 1981, Chapter 83:03 • The Financial Institutions Act, 1993 • The Companies Act, 1995 • The Securities Industry Act, 1995 • The Securities Industry By-laws, 1997 • The Companies Regulations, 1997 The Securities Industry Act, 1995 The key provisions covered under the Securities Industry Act are as follows: • Establishment, Functions and Powers of the Securities and Exchange Commission (SEC) • Membership of the SEC • Proceedings of the SEC • Financial Provisions • Regulation of the Stock Exchange and other Self-regulatory Organisations •· Registration of Market Actors 11 Trinidad and Tobago Report October 2000 • Registration of Issuers and Securities • Distributions • Market Conduct and Regulation • Regulations for the Operation of Clearing Facilities • Dealing by persons connected with issuers • Civil Liability • Enforcement The Securities Industry Act, Section 6 vests the SEC with wide-ranging powers. Details of these are provided in Section 2.6. The Act requires all persons or corporations that issue securities to the public to be registered with the SEC as reporting issuers. According to Section 64 (2) of the Act, a person who proposes to issue securities to the public shall register with the SEC as a reporting issuer and file a registration statement in the prescribed form and within the prescribed time. Further, no person is allowed to engage in securities business unless he/she is registered with the SEC . Thus, all market actors (including brokers, traders, dealers, securities companies, investment advisers), self-regulatory organisations and reporting issuers must be registered with the SEC . The Act also requires the registration of all securities distributed to the public. Section 65 (1) of the Act states that no security shall be offered to the public or listed with any self-regulatory organisation unless it is registered with the SEC . The law also stipulates a range of penalties and enforcement provisions to deal with breaches of the Act. The SEC may issue policy guidelines from time to time. In this regard the SEC has issued policy guidelines on the distribution of foreign mutual funds. Although the policy guidelines do not have the force of law and are not intended to have such effect, the SEC expects compliance with the guidelines unless compliance is waived. Guidelines may also be issued with respect to the following areas: • SEC Procedure and Related matters • Self Regulatory Organisations • Registration • Prospectus Requirements • Distributions under Prospectus Exemptions 12 Trinidad and Tobago Report October 2000 • Continuous Disclosure • Proxies and Proxy Solicitation • Takeover Bids and Issuer Bids • Insider Trading • Mutual Funds The Companies Act, 1995 The Companies Act, 1995 contains provisions which regulate some aspects of securities business.8 Some of the activities regulated under this Act are detailed below: • Incorporation of Companies • Corporate Capacity and Powers • Share Capital • Management of Companies • Shareholders of Companies • Proxies • Financial Disclosure • Corporate Records • Transfer of Shares and Debentures • Take-over Bids The 1995 Act addresses, inter alia, shareholders’ rights, the responsibilities of the Registrar, the procedures for the corporate restructuring of public companies and the disclosure obligations of public companies. The Companies Act, 1995 is therefore complementary to the securities legislation. The Central Bank Act, Chapter 79:02 This Act established the Central Bank to regulate, inter alia, the activities of all financial institutions (Sections 2.4, 2.5). 8 This was amended in 1997 (Act No. 5 of 1997). 13 Trinidad and Tobago Report October 2000 The Treasury Bills Act, Chapter 71:40 This Act empowers the Minister of Finance to borrow money by the issue of Treasury bills and to declare the conditions applicable to such borrowings. The Act does not specifically mention clearance and settlement. The Treasury Notes Act, 1995 This Act authorises the Minister of Finance to borrow by the issue of Treasury Notes and make specific amendments to the Treasury bills Act, notably to increase the ceiling for borrowing. The Unit Trust Corporation of Trinidad and Tobago Act, 1981 (Chapter 83:03) This Act regulates the activities of the Trinidad and Tobago Unit Trust Corporation ( UTC ) which was established by statute in 1981 although launched in November 1982. Until 1993 the UTC was the sole provider of collective investment schemes in Trinidad and Tobago, but with the abolition of exchange controls the industry was opened to foreign and domestic competition. As a result there was a dramatic increase in the number of mutual funds marketed in Trinidad and Tobago. Mutual Fund Legislation Apart from the above-mentioned legislation, which governs the activities of the UTC , there is no legislation that specifically regulates collective investment schemes. Mutual funds, also called unit trusts, and other collective investment schemes are mainly regulated under the Securities Industry Act. Mutual funds established by the commercial banks are currently regulated by guidelines issued by the Central Bank of Trinidad and Tobago entitled “Guidelines for the establishment and operations of mutual funds by institutions licensed under the Financial Institutions Act, 1993”. The SEC has also issued a document “Policy Guidelines 11.1: Distribution of Foreign Mutual Funds in Trinidad and Tobago” to regulate the distribution of foreign mutual funds. The SEC is in the process of reviewing its Guidelines for foreign mutual funds. According to the Guidelines issued by the Central Bank, unit trusts are deemed to be businesses of a financial nature. They provide the facilities for participation by persons as beneficiaries under a trust or other scheme, in profits or income arising from the acquisition, holding, management or disposal of securities or any other property whatsoever. This definition is sufficiently broad as to encompass open-end mutual funds, closed-end mutual funds and investment trusts. Currently all mutual funds are open-end funds, which means that there is no limit to the number of units that may be issued and investors will have an interest in the assets of the funds by means of Units of Participation. Each Unit secures an equal share in the distribution of net income and net capital gains and participates equally in all other respects. Mutual funds providers may operate Income and Growth or Money Market funds. Income and Growth Funds invest in stocks and shares, bonds and short-term debt securities, while Money Market Funds mainly invest in bonds and short- term debt securities. 14 Trinidad and Tobago Report October 2000 A Cabinet appointed committee is formulating legislation to regulate collective investment schemes in Trinidad and Tobago. Its final report is expected to be presented to Cabinet in 2000. The Financial Institutions Act, 1993 This Act regulates banks and non-bank financial institutions licensed under the Central Bank Act. However, the Act does not contain special clauses that address the specific concerns of the collective investments industry. Stock Exchange Rules Under the provisions of the Securities Industry Act, 1995, the Trinidad and Tobago Stock Exchange Limited is registered with the SEC as a self-regulatory organisation. This agency is charged with the responsibility of regulating its member firms in accordance with a body of rules approved by the SEC . These Rules detail the procedures by which the Stock Exchange conducts its activities, which include approving the licenses to brokers, dealers and traders; keeping and maintaining of a register of its membership; exercising disciplinary powers over a member company, broker, dealer or trader; ensuring the maintenance of minimum capital requirements; disclosure information related to listed companies; settlement of transactions taking place on the floor and other issues related to trading. The regulations issued in accordance with the Securities Industry Act are contained in the Securities Industry By-laws, 1997. The Securities Industry Act also provides for regulations to be issued by the Minister of Finance upon the recommendations of the Commission. Section 131 of the Securities Industry Act, 1995 empowers the Minister of Finance with the advice of the Commission to make by-laws on several matters including: • Classifying persons, securities, trades, distributions, registrations, applications and other matters and prescribing requirements appropriate to each class. • Prescribing the method of record keeping and the type and form of records to be kept by each category of person registered under this Act. • Prescribing the accounting principles and standards used in the preparation of financial statements. • Prescribing any matter or thing required by this Act to be prescribed. Section 131(2) specifically allows the Commission to make recommendations in respect of by-laws governing take-overs in respect of public companies. 2.1.3 Derivatives Futures and Options are regulated under the Securities Industry Act, 1995. However, the legal framework for derivatives is limited and does not address many issues concerning this market such as risk management and protection of investors. 15 Trinidad and Tobago Report October 2000 2.2 THE ROLE OF FINANCIAL INSTITUTIONS : PAYMENTS 2.2.1 The Banking Sector Commercial banks are the principal providers of payment services. They provide a relatively wide range of financial services such as normal bank teller services, cash dispensers (ATM s), chequing facilities, debit and credit cards. Cash and cheques are the main instruments used by non-financial agents, thereby making the payment system a largely paper-based one. Other instruments used to effect payments include funds transfers, standing orders, postal and money orders, vouchers/coupons, debit/credit cards, EFTPOS payments and travellers’ cheques. Bank customers may hold chequing and savings accounts in domestic or foreign currency. Table 3 shows deposit balances at commercial banks in the period 1995 to 1999. Table 3: Commercial Banks’ Deposit Balances (1995-1999) (TT$ million) Currency 1995 1996 1997 1998 1999 (a) TT 9,620 9,458 10,504 11,943 11,765 Foreign 2,194 2,968 3,352 3,885 4,158 Source: Central Bank of Trinidad and Tobago. (a) Demand, Savings and Time Deposits adjusted for deposits of the Central Government and non-residents. Commercial banks dominate the financial system, as indicated by their ownership of approximately 44 per cent of total assets of the system. Of the six commercial banks in operation, all but one of the head offices is located in the nation’s capital, while the other is situated in the central part of Trinidad. This close proximity between head offices facilitates easy communication among them. All banks employ their own in-house courier service to handle physical communication between their branches. The two largest commercial banks have expanded their operations to other Caribbean territories by establishing subsidiaries and off-shore equity funds. Commercial banks have also extended their range of operations to the mutual funds industry and to trust and asset management activities. All commercial banks hold accounts with foreign correspondent banks through which they facilitate transactions in foreign currency on behalf of themselves and their customers. Funds are received and payments are made via instructions on the SWIFT network as well as through the issue of drafts in foreign currency. Foreign currency drafts issued abroad for payment to Trinidad and Tobago residents are cleared through correspondent pay-through banks. Commercial banks also provide payment services for non-bank financial institutions. 16 Trinidad and Tobago Report October 2000 2.2.2 Other Institutions that Provide Payment Services Credit and debit card companies (a) Infolink Infolink Services Ltd. (ISL) was formed in 1994 and is owned by the four wholly-owned or majority- owned local commercial banks in Trinidad and Tobago. ISL is a joint venture company which facilitates and oversees the country´s Debit Card network. The four commercial banks which are shareholders of the company are known as Members and have equal shares in the Company.9 ISL provides five major services to its Members: • Real-time on-line connectivity between the propietary ATM and EFTPOS networks of its Member Banks;10 • Next-day settlement of funds; • Processing of adjustments and charge-backs between Members; • Marketing of the LINX ® brand under which the ATM -Sharing and EFTPOS services are promoted; • Facilitation of Project Review Committees as requested by the Bankers Association of T&T. The LINX® Network currently connects over 250 ABMs and 6,000 EFTPOS Terminals throughout Trinidad & Tobago. LINX does not process ATM withdrawals operated through credit cards. (b) International Brands In Trinidad and Tobago, commercial banks exclusively issue Mastercard and Visa cards, which can be used both domestically and internationally. Both US dollars and TT dollars can be withdrawn from local ATM s. Credit Unions Of the 356 registered credit unions, only one provides ATM facilities at its branches. However, its system is not linked to the wider ATM network. 9 ISL functions on a consensus basis. Policy is set by the Board of Directors, on advice provided by a number of standing committees covering Marketing, Operations and Technical Issues. Each Member has one seat at each committee and at the Board of Directors. The issuing bank (the bank that issues the card) pays an Interchange fee to the acquiring bank (the bank 10 whose ATM accepts the card), while the cardholder is charged a fee by his bank. 17 Trinidad and Tobago Report October 2000 Mutual Funds The largest mutual fund, the Trinidad and Tobago Unit Trust Corporation, offers payment services such as payment of utility bills and foreign currency transactions. It also intends to issue debit cards to its unitholders (Section 2.3). Most other mutual funds are owned and operated by the commercial banks. The Postal Administration The postal services in Trinidad and Tobago are managed by a private company, TTPost. As of October 31, 1999, there were seventy-eight post offices throughout Trinidad and Tobago. Post offices are involved in the payment system through the issue of postal and money orders. A Post Office Savings Bank ( POSB ) exists and is managed and controlled by TTPost. The POSB is one of the oldest financial institutions in the system as it has been in existence since the nineteenth century. The Managing Director of TTPost, with the approval of the Minister of Finance, can open or close banking facilities at any post office.11 The POSB was established originally with the aim of encouraging savings among the working class. All deposits held at the POSB are guaranteed by the government. The Savings Bank has over 143,000 deposit accounts; however, only about 11,000 are active since there is a preference for the other financial institutions (Section 3.2.4). Retailers Retailers are not generally providers of third-party payment services. A few retail chains issue their own cards for use in their outlets only, but generally these are discount/membership cards. 2.3 THE ROLE OF FINANCIAL INSTITUTIONS: SECURITIES 2.3.1 Securities Market Participants In Trinidad and Tobago, securities related services are provided by securities companies, underwriters, traders, brokers, dealers, investment advisers and reporting issuers. Mortgage and trust companies, merchant banks and finance companies owned by the commercial banks have registered with the SEC as underwriters and securities companies. The commercial banks, through these subsidiaries, offer a wide range of services including investment banking, dealing in securities, advisory and registry services.12 Commercial banks and their subsidiaries also act as Paying Agents for issuers of securities and are responsible for distributing dividends to shareholders and making payments on maturing debt instruments. These services are executed on behalf of private 11TTPost is a new company formed in 1998 as a result of an agreement between the Government of T&T and New Zealand Post International, whereby the latter was commissioned to manage the postal services for a period of five years. 12The operations of the banks and their related financial institutions are also regulated by the Central Bank in accordance with the provisions of the Financial Institutions Act 1993, see Sections 2.2 and 2.5. 18 Trinidad and Tobago Report October 2000 corporations as well as the Government. Table 4 indicates the number of entities on the Register of the SEC as at December 1999. Table 4: Number of Registrants by Class of Business as at December 1999 Class of Business Number Investment Adviser 18 Securities Company 16 Dealer 2 Broker 10 Trader 7 Self-regulatory Organisation 1 Reporting Issuer 50 Underwriter 11 Total Registrants 115 Source: Trinidad and Tobago Securities and Exchange Commission. 2.3.1.1 Issuers The main issuers in Trinidad and Tobago are the Government, government agencies, quasi- government agencies, corporations, and financial institutions. Section 64(2) of the Securities Industry Act states that all issuers of securities to the public are required to register with the SEC as a reporting issuer and file a registration statement or prospectus. Government entities are required to register with the SEC but are exempted from filing prospectuses.13 However, issues made by these entities must be registered with the SEC . Table 5 indicates the securities registered by the Commission for the year 1999. Table 5: Securities Registered by the Commission (1999) Type of Security Registered Number of issues Pension Product 1 Equity 15 Mutual Fund 2 Derivatives, of which: 6 Certificates of Participation 5 Mortgage Investment Certificates 1 Debt Instrument, of which: 22 Corporate issues 9 Government/Quasi-Government issues 13 Source: Trinidad and Tobago Securities and Exchange Commission. 13Government entities refer to the Government of Trinidad and Tobago, the Tobago House of Assembly, the Central Bank and municipal corporations. 19 Trinidad and Tobago Report October 2000 2.3.1.2 Market actors Under the category of market actor, the Act includes underwriters, brokers, dealers, traders, securities companies and investment advisers. The legislation imposes capital requirements on the various classes of business. Table 6 shows the capital requirements for each market actor. The Securities Industry Act, 1995 provides the following definitions of a broker and a dealer. A broker is a person engaged in the business of effecting transactions in securities for the account of others, while a dealer is defined as a person engaged in the business of buying and selling securities for his own account who holds himself out, at all normal times, as willing to buy and sell securities at prices specified by him. There are no legal provisions debarring a bank or its subsidiaries from registering as either a broker, dealer or as any other market actor defined under the Act. In fact the prevailing trend is that the commercial banks, through their subsidiaries, provide investment banking and other securities activities, for example, the promotion and administration of mutual funds. These subsidiaries are duly registered as securities companies or underwriters or investment advisers. Table 6: Capital Requirements for Market Actors Provision Type of Securities/ Minimum Capital Class of Business registered under Business Conducted Requirement Broker Section 54(4)(a) Equity securities $50,000 Section 54(4)(b) Equity securities and $500,000 other securities or other securities only Dealer Section 56(3)(a) Equity securities $1,000,000 Section 56(3)(b) Equity securities and $5,000,000 other securities or other securities only Underwriter Section 59(3)(d)(ii) Equity securities and $5,000,000 other securities Investment Adviser Section 59(3)(d)(ii) Equity securities and $50,000 other securities Securities Company Section 60(2)(d) Broking business only $400,000 Section 60(2)(d) Equity securities and $1,000,000 other securities Section 60(2)(d) Other activities in addition $5,000,000 to broking for which registration under the act is required Source: Trinidad and Tobago Securities and Exchange Commission. 20 Trinidad and Tobago Report October 2000 2.3.1.3 Securities companies There are 16 securities companies registered with the SEC, seven (7) of which are the subsidiaries of commercial banks while six (6) are brokerage houses; the remaining 3 are merchant banks. Upon registering with the SEC, a securities company is allowed to carry on business as (a) a broker; (b) a dealer; (c) an underwriter; (d) an adviser as to the value of securities or as to investing in purchasing or selling securities; or (e) any combination of two or more of the foregoing. 2.3.1.4 Institutional investors and other market participants Institutional investors are defined as banks, mutual funds, pension funds, insurance companies, investment companies, credit unions and trust and asset management divisions of commercial banks. The Commission does not collect data on the investment portfolio, investment strategy of or capital requirements for institutional investors at this time. Some institutional investors are engaged in securities business and consequently are required to register with the Commission. The major institutional investors are the pension funds, the National Insurance Board and insurance companies. The institutional investors are both facilitators and direct participants in the capital market. The assets of pension funds are invested in government securities, mortgages, real estate, equities, fixed deposits and other local and foreign assets. There are four locally incorporated mutual fund providers in Trinidad and Tobago. With the exception of the Trinidad and Tobago Unit Trust Corporation, which is a statutory corporation, local mutual fund providers are commercial banks. Foreign mutual funds are also marketed and distributed in Trinidad and Tobago. The market for collective investment schemes is expanding, with new products being introduced on a regular basis. All the funds promoted by local mutual funds providers are open-ended. Funds are classified according to the Fund’s investment objectives. The Fund’s objectives also determine the selection of assets in the Fund’s portfolio. The largest mutual fund is managed by the UTC, which started operations in 1982. The UTC provides the full range of services associated with collective investment schemes. These services include underwriting, consultancy, foreign currency dealing operations, and other asset management activities. In 1998 the UTC held 80 percent of the total assets and accounted for 93 percent of the total number of unit holders in the industry. The number of holders was 232,267 in1998 up from 177,663 in 1997. On the investment side, individual investors dominate the market. However, institutional investors are playing an increasingly important role. The UTC manages a US dollar denominated fund, domiciled in the United States and which is under the oversight of the United States SEC. The UTC is to be transformed from a statutory corporation to a publicly quoted company incorporated under the Companies Act, 1995. 2.3.2 Exchanges The Trinidad and Tobago Stock Exchange Limited, founded in 1981 is the only centralised market place for buying and selling stocks. One of the key functions of the Exchange is the supervision of trading in the secondary market. 21 Trinidad and Tobago Report October 2000 The Exchange also reviews and approves applications for the listing of securities. Before a security may be admitted to trading it must be approved for listing by the Exchange and be registered under the Securities Industry Act, 1995. According to this Act, the Exchange shall not de-list any security admitted for quotation unless it obtains an order from the SEC authorising the de-listing and imposing the necessary conditions in order to protect investors. Further, the Exchange is responsible for regulating the conduct of its member firms and all listed companies. 2.3.3 Securities Clearance and Settlement Institutions The Central Bank of Trinidad and Tobago, the Trinidad and Tobago Stock Exchange Limited, mutual fund companies and other financial institutions provide clearance and settlement functions in their respective market segments. The Central Bank provides clearance and settlement for Treasury bills and notes. Mutual funds companies, which are mainly subsidiaries of commercial banks, handle the clearance and settlement for mutual fund transactions. The Stock Exchange performs clearance and settlement functions for trades effected on the floor of the Exchange. However, these functions are to be transferred to the TTCD (see Section 1.5 and Chapter 6). Some of the clearance and settlement systems are manually operated while other systems are computerised. 2.4 THE ROLE OF THE CENTRAL BANK The Central Bank of Trinidad and Tobago was established by Act of Parliament, Chapter 79.02 (No.23 of 1964) on December 12, 1964. It was given the specific mandate to “promote the necessary credit and exchange conditions that are most favourable to the development of the Trinidad and Tobago economy” (Section 3(3)). This legislation received a major overhaul when the Central Bank (Amendment) Act, 1994 was passed into law. Under the amendments of 1994, certain sections were repealed and others amended to provide for the strengthening of the supervisory and administrative functions of the Bank. 2.4.1 Monetary Policy and Other Functions The Central Bank has responsibility for monetary policy in Trinidad and Tobago. Prior to 1993, monetary policy was carried out largely through adjustment to the cash reserve and the discount rate. Since April 1993 with the floating of the TT dollar, the exchange rate is determined within an interbank market (comprised mainly of commercial banks - the authorised dealers) and open market operations play an increasing role in the conduct of monetary policy. The primary objective of monetary policy is to achieve price stability through containment of credit growth and maintenance of stability in the foreign exchange market. Therefore, focus is placed on short-term liquidity management. Treasury bills and notes are the major instruments used in the conduct of monetary policy. These instruments are traded either on an outright basis or through repurchase agreements. Commercial banks and non-banks licensed under the Financial Institutions Act, 1993 maintain cash reserve accounts at the Central Bank. In addition, the commercial banks can hold excess funds 22 Trinidad and Tobago Report October 2000 in a special deposit account, which currently attracts a return of 4 per cent per annum. The amount required to be held in the cash reserve account is normally defined as a percentage of the total prescribed liabilities. At present the cash reserve ratio stands at 21 per cent for the commercial banks and 9 per cent for the non-bank financial institutions. The authorities are currently seeking to reduce the cash reserve ratio to a level based on prudential factors. The reserve period covers one week from Wednesday to Tuesday. The commercial banks and non- banking financial institutions carry out inter-bank transfers by issuing instructions to the Central Bank. These instructions for transfers on their reserve accounts are sent via courier and must reach the Central Bank by 3:00 p.m. each day. Each bank is required to maintain a daily average balance which must not fall below its cash reserve requirement. Any violation of this regulation attracts a prescribed penalty on a daily basis. The commercial banks tend to meet their requirements since failure to do so is severely frowned upon. The Central Bank acts as lender of last resort to these institutions; however, any such lending must be fully backed by approved securities. Box 2: Movements in Statutory Reserve Requirement Jan 1997 A decrease by 1% for both banks and non-bans i.e. from 23% to 22% for banks and from 8% to 7% for non-banks. April 1997 A 1% decrease for banks and non-banks i.e. from 22% to 21% for banks and from 7% to 6% for non-banks December 1997 An increase of 3% i.e. from 21% to 24% for banks and from 6% to 9% for non—banks April 1998 The rate for banks was reduced from 24% to 21%, while it stayed at 9% for non-banks* * Central Bank extended the prescribed liabilities on which the statutory reserve requirement would be computed to include fund raising and other credit instruments placed with financial institutions. This was intended to strengthen significantly the effectiveness of monetary policy and enhance the Central Bank’s control over the growth of money and credit. 2.4.2 Involvement in Payments Systems The Central Bank is empowered to establish and maintain a clearinghouse for commercial banks operating in Trinidad and Tobago. A clearinghouse for small value cheques convenes each morning at 9:30 a.m. The clearinghouse is also the venue for the exchange of cheques representing large value transactions, which were settled on the previous business day (Section 4.2). The Central Bank Act, Chapter 79:02, bestows upon the Bank the sole right to issue notes and coins regarded as legal tender in Trinidad and Tobago. It is the responsibility of the Bank to arrange for the printing of notes and the minting of coins, the re-issue and exchange of notes and coins, the safe- keeping of unused currency and the destruction of unfit currency notes and coins. The Central Bank acts as banker to the Central Government. It is authorised to make temporary advances up to a prescribed limit to the Government. Section 46(2) of the Act specifies this limit as 23 Trinidad and Tobago Report October 2000 follows: “the total amount of outstanding advances made shall not, at any time, exceed fifteen per cent of that portion of the estimates of annual revenue of the Government, which comprises the total sum of total recurrent revenues and capital receipts (exclusive of local and external loans)”. The Central Bank also acts as banker to the commercial banks and as agent of and correspondent to some banks abroad (Section 38). The Central Bank Act, Chap. 79:02 (Section 36) specifies the functions of the Bank, which include: 1. Issue demand drafts and other kinds of remittances; 2. Open accounts for and accept deposits from: i. the Government, ii. local Government authorities and statutory bodies, iii. such other public authorities and such financial institutions in Trinidad and Tobago as the Minister may from time to time approve, iv. commercial banks and non-bank financial institutions; 3. Purchase and sell treasury bills and securities of or guaranteed by the Government and such other governments or international financial institutions as may be designated by the Minister of Finance. 2.5 THE ROLE OF THE BANKING SUPERVISORY AUTHORITY 2.5.1 Supervision of Financial Entities Subject to the exemptions granted under Section 62 of the Financial Institutions Act, 1993, (the Act), the Central Bank has the mandate to regulate and supervise those companies that carry on the business of banking and business of a financial nature. The Act provides the Central Bank and the Inspector of Banks with certain enforcement powers. Among these is the power to issue cease and desist orders to procure compliance by institutions licensed under the Act (licensees). The Central Bank is empowered to supervise institutions licensed under the Act, with the actual examination being carried out by the Bank Inspection Department of the Central Bank. The Inspector of Banks is appointed by the President (on the advice of the Governor) and is an officer of the Central Bank, whose duties include inter alia, the items outlined in Section 31 (1) a – d of the Act. The Act also grants the Central Banks, the Inspector and his assistants access to all books, records, accounts, vouchers, minutes of meetings, securities and any other documents of any licensee and the right to call upon any director, manager, auditor or employee of any such licensee for any information or explanation considered necessary for the due performance of their duties. Where the Inspector of Banks is of the view that an institution is insolvent, he is obligated to report his findings to the Board of Directors of the Central Bank who may decide, on the basis of such a 24 Trinidad and Tobago Report October 2000 report, an appropriate course of action. Such course of action may include a suspension of the licensee’s business for an initial period not exceeding 30 days. The Board may extend its order for suspension for a period not exceeding 60 days, thereby allowing adequate time for the company to be sold or restructured. The Financial Institutions (Prudential Criteria) Regulations, 1994, sets out certain prudential criteria which must be adhered to by licensees. Regulations with respect to prudential criteria may be made by the Minister of Finance after receiving recommendations from the Central Bank. These regulations are subject to the approval of Parliament. Regulations pertaining to prudential criteria may include but shall not be limited to the following: (a) capital adequacy and solvency requirements and capital ratios; (b) liquidity requirements and ratios; (c) treatment of loans and other credit facilities; (d) treatment of assets and investments; (e) treatment of interest; (f) related party transactions; (g) risks related to self dealing; (h) profiting from insider information; (i) risk related to foreign exchange transactions, sectoral and business risks, off balance sheet transactions; (j) reporting requirements for large or potentially large exposures and large deposits; (k) other reporting requirements; (l) information required in published financial statements; (m) new financial instruments; (n) relationship with parent, subsidiary and affiliate as it affects the capital position of the licensee. In particular, there are specific prudential criteria regulations pertaining to non-accrual of interest on delinquent loans. With respect to loan loss provisioning, prudential criteria regulations state that... “a licensee’s records and systems of control are not adequate if they do not enable the 25 Trinidad and Tobago Report October 2000 licensee to identify its problem credits promptly and to make adequate provisions for losses on credit facilities”. Standard Loan Classification and Provisioning criteria have been developed and instituted by the Central Bank as part of the supervisory process. These criteria are currently being reviewed with a view towards incorporation into the regulatory framework. However, many licensed institutions have incorporated the Central Bank’s criteria into their respective credit policy documents. To date, the prudential criteria pertaining to capital adequacy, and the treatment of loans, investments and interest have been established. While the Central Bank does not supervise certain financial institutions, it may, at the request of the Minister, require information from, inquire into or examine the affairs of any of the institutions that are listed in the Third Schedule of the Financial Institutions Act, 1993 as expressly exempted from the provisions of the Act. Exempt institutions listed in the Third Schedule include the Post Office Savings Bank, the Agricultural Development Bank, Building Societies, Credit Unions and the National Insurance Board. Other key players in the financial system that are not supervised by the Central Bank include insurance companies, pension funds, the Trinidad and Tobago Unit Trust Corporation and the Home Mortgage Bank. These institutions, as well as the others mentioned above, are governed by their respective pieces of legislation. In the 1999/2000 Budget statement, the government announced its long-term plan to put in place a single regulatory agency to supervise and regulate the entire financial system. The first phase of this plan will involve the integration of the supervision of the insurance, pensions and banking sectors. 2.5.2 Oversight of the Payment System Oversight of the payment system is not centralised as several departments within the Central Bank monitor various activities. As the area responsible for overall supervision of licensed financial institutions, the Bank Inspection Department ensures that these institutions have properly documented operating procedures which govern their treatment of the payment instruments issued by them as well as any transactions which they conduct. In its supervisory capacity it also assesses and reviews their operating procedures to ensure that problems are brought to the attention of the particular institution. On an on-going basis, the Bank ensures that these operating procedures are being followed and that internal auditors conduct an independent review of the systems. In addition, the Bank Operations and the Investment Management Departments of the Central Bank have responsibilities for specific operations of these institutions. 2.5.3 Anti-Money Laundering Measures Trinidad and Tobago is a member of the Caribbean Financial Action Task Force (CFATF), a regional body formed to coordinate and enhance the region’s anti-money laundering efforts. This body, comprising member countries from around the Caribbean Sea, is closely affiliated with the Financial Action Task Force ( FATF) and has adopted the FATF 40 recommendations against money laundering. In addition, the CFATF has issued 19 recommendations for implementation by its members. 26 Trinidad and Tobago Report October 2000 In May 1995 the Central Bank issued guidelines on money laundering to all financial institutions licensed under the Financial Institutions Act, 1993. These guidelines incorporated the FATF and CFATF recommendations for measures to prevent money laundering in deposit-taking institutions. These include procedures for verification of customer identity, record keeping, reporting of unusual or suspicious transactions, appointment of compliance officers and staff training. All suspicious and unusual transactions as defined by the guidelines are reported to the Financial Investigation Unit in the police service for further inquiry. While the guidelines are not enforceable legislative requirements, all licensees are tested for compliance during on-site examinations. In accordance with these guidelines, all commercial banks have agreed to adopt a common procedure requiring customers to fill out a declaration of the source of funds when making a cash deposit in excess of $40,000 or foreign currency equivalent. Additionally, every six months the external auditor of each commercial bank submits a report on compliance with the guidelines.14 2.6 THE ROLE OF THE SECURITIES AND EXCHANGE COMMISSION The SEC is established by the government but operates independently. The Securities Industry Act, 1995 provides for the appointment of no less than three and no more than five Commissioners to the Board of the SEC . The Securities Industry Act, 1995, Section 9 (2) states that the commissioners are to be selected from among persons with “wide experience and ability in legal, financial, business or administrative matters, one of whom shall be an attorney-at-law of at least 10 years’ standing”. The present Board consists of five Commissioners. The principal functions of the SEC are to: • advise the Minister of Finance on all matters relating to the securities industry; • maintain surveillance over the securities market and ensure open, fair and equitable dealings in securities; • register, authorise or regulate reporting issuers, self-regulatory organisations and market actors (including brokers, dealers, traders, investment advisers, etc.) to ensure that proper standards of conduct and professionalism are maintained in securities business; • protect the integrity of the securities market against any abuses arising from the practice of insider trading; • create and promote such conditions in the securities market as may seem necessary, advisable or appropriate to ensure the orderly growth and development of the capital market. In general, the SEC is charged with the responsibility of ensuring that market actors comply with the provisions of the Securities Industry Act, 1995 and the accompanying regulations, the Securities Industry By-laws, 1997. In particular, Section 6 of the Act vests the SEC with wide-ranging powers. These include the power to: 14 To date, no money laundering cases have been prosecuted. 27 Trinidad and Tobago Report October 2000 a) deal with such matters as may be referred to it by any person registered with the SEC under this Act; b) formulate principles for the guidance of the securities industry; c) monitor the solvency of registrants and take measures to protect the interest of customers; d) adopt measures to supervise and minimise any conflict of interests that may arise in the case of brokers or dealers; e) review, approve and regulate take-overs, amalgamations and all forms of business combinations in accordance with this Act or any other written law in all cases in which it considers it expedient or appropriate to do so; f) approve the contents of prospectuses, offering circulars or any form of solicitation, advertisement or announcement by which securities are offered for sale to the public; g) take action against persons registered under this Act for failing to comply therewith; h) undertake such other activities as are necessary or expedient for giving full effect to this Act; i) do all things which may be necessary or expedient or are incidental or conducive to the discharge of any of its functions and powers under this Act. Furthermore, all securities clearing agencies are required to register with the SEC . The SEC is responsible for determining the broad framework under which the clearing agency will operate. In addition, the SEC : • reviews the rules of a clearing agency prior to granting approval for registration; • may make an order requiring a change in the rules of the clearing agency; • oversees and regulates the activities of the clearing agency; • has rule-making powers and can prescribe by-laws to affect the operations of the clearing agency. 2.7 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES 2.7.1 The Ministry of Finance/Treasury The Treasury Division of the Ministry of Finance is responsible for issuing all payment instructions to the Central Bank on behalf of the government. These are mainly foreign currency payments to meet debt obligations and commitments to overseas missions. Instructions to the Central Bank are based on requests made to the Treasury by the government ministries. The Treasury Division may also encash small value cheques issued by government ministries. 28 Trinidad and Tobago Report October 2000 2.7.2 Bankers’ Association The Bankers’ Association of Trinidad and Tobago was incorporated on March 18th, 1999. It was registered under the Companies Act. Its membership consists of the CEO s of all the commercial banks. A president is appointed annually. Presently bi-monthly meetings are held to discuss matters of interest to the banks. The Bankers’ Association can form ad hoc working groups to study specific issues. At present, no permanent co-operative body for payment systems exists. 2.7.3 Deposit Insurance Corporation The introduction of deposit insurance was one of a number of major innovations and institutional reforms which took place in the financial sector in the 1980s. The onset of economic decline in 1983 due to the fall in international oil prices and the collapse of the real estate market left many financial institutions, and in particular the non-banks, holding severely impaired asset portfolios. Several experienced serious financial difficulties and there was one case of outright failure in 1983. The Deposit Insurance Corporation (DIC) was established in 1986 by a legislative amendment to the Central Bank Act and the Financial Institutions (Non-banking) Act. The DIC extends insurance protection up to a stipulated limit to holders of deposits in any of its member financial institutions in the event that the institution is closed by or with the approval of the Central Bank. The maximum insurable amount of any deposit is $50,000, which is also the maximum amount payable to any single depositor in any right or capacity. The DIC is funded on an on-going basis by annual premium contributions from its member institutions. These contributions are determined as a proportion of deposits of each institution. However, the enabling legislation also provides for compulsory initial contributions and, where necessary, for the levying of special contributions which are required to be matched by the Central Bank. 29 Trinidad and Tobago Report October 2000 3 PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES 3.1 CASH In Trinidad and Tobago, cash is an important medium of payment. At the end of December 1999, the amount of currency in circulation was $1,756 million, equivalent to 4.3 per cent of GDP.15 Of this amount the sum of $1,292.4 million was held in active circulation by the public. This represented about 10 per cent of M2 which also includes demand, savings and time deposits. The Central Bank of Trinidad and Tobago exclusively issues and redeems the legal tender (notes and coins) of the country. The established unit of currency in Trinidad and Tobago is the TT dollar which is divided into 100 cents. Currency notes and coins are issued in five (5) denominations of 1, 5, 10, 20 and 100 dollar notes and 1, 5, 10, 25, and 50 cent coins, respectively. From time to time commemorative coins are circulated. While both notes and coins are regarded as legal tender, the acceptance of coins for payment is compulsory only within certain limits as outlined in the Central Bank Act. The Central Bank is responsible for the issue, re-issue and redemption of the country’s notes and coins to the commercial banks. Guidelines outline the minimum quantities and values of currency, the times and dates for delivery and the types and method of packaging. Requisitions for currency are accepted only from the head offices or main branches of the commercial banks. The latter are responsible for the transportation of currency from and to the Central Bank and utilise the services of security firms who act as couriers. Currency transactions are settled by debiting or crediting the reserve accounts of the commercial banks at the Central Bank. 3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH 3.2.1 Cheques The other primary payment method for small-value transactions is cheques. The estimated average monthly value of cheques processed in the banking system during 1999 was $19.8 billion compared with $12.3 billion for 1998. In 1998 legislation with respect to cheques was amended making it a criminal offence to issue cheques that the drawer knows will not be honoured (see Section 2.1). All cheques are drawn on a bank and carry the name of the institution/individual which has been given cheque facilities by its bankers. 15Currency in circulation was higher than normal at end 1999 due to Y2K contingencies. The average currency in circulation at end December is closer to $1.4 million. 30 Trinidad and Tobago Report October 2000 Commercial banks also issue foreign currency denominated drafts drawn on their foreign correspondent bank accounts. Customers can hold foreign currency accounts on which they draw cheques in foreign currency. At present, the value of US dollar denominated cheques drawn on domestic banks is estimated at 25 per cent of all US dollar cheques issued in Trinidad and Tobago. Foreign currency drafts are cleared via a pay-through correspondent bank, a process which can take as much as six weeks for some US dollar denominated cheques. In March 2000, commercial banks established a US dollar clearinghouse for US dollar denominated drafts drawn on foreign currency accounts in Trinidad and Tobago and made payable to local foreign currency account holders. This allows the settlement process on these cheques to be reduced to two days. Settlement is done daily on a net bilateral basis with the funds being transferred between correspondent bank accounts via instructions through SWIFT. 3.2.2 Direct Debits/Credits Direct debits are defined as pre-authorised debits on the payer’s account by the payee and usually involve payments such as insurance premiums, mortgage payments and utility bills. Direct credits – direct funds transfers - are increasingly being used for the payment of salaries and annuities. Some institutions prepare salary payments in electronic form (usually diskette) for commercial banks to update account holders’ balances. These diskettes are generally submitted along with one cheque payment. Where the institution itself holds an account at the commercial bank payment can be made by authorised debit to its account. 3.2.3 Payment Cards a) Credit and Debit Cards Credit cards are issued only by the commercial banks under the Visa and Mastercard labels. These cards provide prearranged revolving credit up to a specified limit. Payment of goods and services and withdrawals of cash are made against the line of credit. An annual fee is charged and a number of incentives are attached to the cards. These include the acquisition of airline miles and the earning of bonus points which can be redeemed at various merchants. Both cards offer a 45-day interest free repayment period. The use of credit cards in Trinidad and Tobago is becoming increasingly popular. At the end of 1998, the number of credit cards issued locally totalled 126,957 which represented an almost 100 per cent increase from the number issued five years previously (63,765). Credit card loans outstanding amounted to $558 million at the end of 1998, almost treble the balance ($195 million) at the end of 1995. Internationally-issued credit cards are also widely accepted. Debit Cards, under the brand name LINX, allow access to funds already in the account of customers. In Trinidad and Tobago, only commercial banks issue these cards which can be used in ATM s and electronic funds transfers at point of sale (EFTPOS) terminals. The EFTPOS system was introduced to Trinidad and Tobago in 1997 and is PIN-based. This method of payment has gained popularity and many merchants are now equipped with the required terminals. Approximately 6,604 EFTPOS terminals are installed at around 5,000 merchants. Available data show that the volume of transactions 31 Trinidad and Tobago Report October 2000 grew from 767,513 in 1997 to 3,157,207 in 1999. Banks charge both the merchant and the consumer a fixed fee per transaction. Both debit and credit card holders can obtain cash from the ATM s. b) ATM Cards Automated teller machines (ATM ) were introduced to Trinidad and Tobago in 1985/1986. As at the end of 1999, there were 251 operating at 24 hours service. These machines allow for cash withdrawals, deposits, balance inquiries, transfers between accounts, cheque book orders and utility bill payments. The debit card also functions as the ATM card and customers can access the machines with a Personal Identification Number (PIN). The card can also be used in machines owned by banks other than the cardholder’s bank and there is a fixed fee per transaction attached to this facility. One credit union issues its own debit card which can be used to withdraw cash from the institution’s ATM machines across branches. The volume of transactions using ATM cards increased from 12,147,985 in 1997 by 30 percent to 15,764,720 in 1998. The volume increased moderately in 1999 to 15,829,140. c) Cheque-guarantee Cards Cheque-guarantee cards are issued by commercial banks only and are used exclusively for cheque- guarantee purposes. Banks have decided to discontinue the service, effective end-2000 as a result of the incidence of fraudulent cheques. d) Retailer Cards and Pre-Paid Cards The only telephone provider in Trinidad and Tobago, Telecommunications Services of Trinidad and Tobago (TSTT), issues pre-paid phone cards, which can be used for local and international calls. The phone cards for domestic use allow calls to be made at public telephones, while the TSTT Companion Card allows the holder to make international calls on any phone by keying in a code. 3.2.4 Postal Instruments The Postal Administration’s role in the payment system is limited. The Post Office Savings Bank does not provide chequing facilities and it is the Post Office that issues money orders. The Post Office, TTPost, sells internal money orders and accepts cash or cheques in exchange.16 The fee attached to this service is $3.00 per thousand dollars. These money orders are purchased and mailed simultaneously to the recipients who can encash them at any post office. TTPost maintains a manual tracking system. TTPost issued 10,623 internal money orders in 1998 with a value of $2 million. TTPost also encashes United States money orders which are funded by the US Postal Administration through an advance forwarded to TTPost for this purpose. United Kingdom postal orders are also sold and encashed by TTPost; the counterpart in the UK sends a stock of its money 16 Customers purchase these money orders for a variety of reasons including payment of house rent and debt liquidation. 32 Trinidad and Tobago Report October 2000 orders for sale and the accounts are reconciled on a net basis between the sale and encashment of these postal orders. TTPost encashed 28,386 US money orders in 1998 with a value of $20.1 million and 19,059 British Postal Orders with a value of $3 million, while it sold 2,524 of the latter with a value of $60,081. 3.3 NON CASH GOVERNMENT PAYMENTS The government is the largest issuer of cheques in the system. An average of 6,000 cheques drawn by government ministries and departments are cleared by the Central Bank on a daily basis; this could peak to a daily rate of over 20,000 at the month-end. The Central Bank is banker to the government and manages several accounts on its behalf. A teller service is provided by the Bank for the receipt of deposits (revenue) from the various ministries and departments and for payments of cash to government paymasters who are required to make cash payments to members of the public e.g. some pensioners or government employees. The Central Bank also provides daily night-safe deposit facilities for government ministries and departments as well as other banking services such as chequing facilities. Almost all government ministries have a computerised cheque writing system. Those cheques are mainly issued for salaries, pension, social security payments, return taxes etc. The processing of payroll is done through a centralised system owned by the Ministry of Finance and payroll lists are prepared for each Ministry. For salary payments, each Ministry sends to each bank one cheque with a list of persons whose accounts are to be credited. Cheques are prepared for individuals who are not willing to sign for an automatic crediting of their accounts. The government accepts cheques from the public for payments of taxes and other services. Despite the Dishonoured Cheques Act,1998, there are still significant occurrences of cheques presented with insufficient funds. The current technical infrastructure at government ministries does not provide for payments by electronic means. Some government offices provide terminals to facilitate payment by members of the public through the LINX interbank ATM network. The government is currently engaged in a strategic review project to implement new systems which will facilitate the exchange of electronic information between the ministries, the commercial banks and the Central Bank. 33 Trinidad and Tobago Report October 2000 4 PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS 4.1 THE REGULATORY FRAMEWORK FOR CLEARINGHOUSES The Central Bank Operating Circular No. 3 on the collection and clearing of cheques outlines the regulatory framework for both the Clearinghouse Operation for cheques, drafts and other negotiable instruments and also the Special Clearings Items (SCIs) for cheques and other negotiable instruments of $500,000 or more. 4.2 LOW VALUE PAYMENT TRANSFER SYSTEMS The Central Bank conducts the low value cheque clearinghouse using a manual system. Cheques to be presented for collection (off-us cheques) are physically sent with a listing of the total value to the head offices of the commercial banks between 5.30 p.m. on the business day and 8.30 a.m. of the following day.17 Banks receive both the physical cheques and a report of the total value. Settlement is based on the values presented with the cheques and is agreed to at the Clearinghouse which starts at the Central Bank at 9:30 a.m. each business day. The total values confirmed during the clearing process are final and settled. Cheques are validated during the course of the day. There is a time limit of 6 days, starting from the day of presentment, for the processing of returned and dishonoured cheques. The representatives of all commercial banks and the Central Bank meet at the clearinghouse for the settlement of cheque payments. The values of the cheques (in/out) are reviewed and on completion each bank signs a settlement voucher authorising the Central Bank to credit or debit its reserve account for the net amount of all the cheques cleared between the institutions (commercial banks and Central Bank). The vouchers are used for batch posting to the accounting system with good value. A daily statement for each reserve account is provided to the commercial banks the next morning. 4.2.1 Cheque Clearing Process There is no ACH operating in Trinidad and Tobago and settlement is effected by manual means. However, the Central Bank and most commercial banks have cheque processing equipment which facilitates some measure of automation for the scanning, capturing and sorting of cheques for collection in the domestic system. At present all institutions issuing cheques are required to include the MICR code on the cheque. During the scanning process, the data from the MICR line as well as the image of the cheques are 17The normal commercial banking hours are Monday to Thursday: 8:00 a.m. – 2:00 p.m. and Friday 8:00 a.m. – 12 noon and 3:00 p.m. – 5:00 p.m. 34 Trinidad and Tobago Report October 2000 captured. This electronic file is generally used for the processing of the banks’ own (on-us) cheques. The information is uploaded to the current account system (after verification) and the accounts are automatically updated. The equipment can also be used to encode the amount field of the MICR line of all cheques being presented for collection; this a requirement by agreement among the banks. Three of the six commercial banks send electronic files to each other for further processing. The Central bank also sends electronic files to some commercial banks. The Central Bank also provides information on cheques cleared to some of its other account holders by diskette or cassette. This is to assist the customer in performing its cheque account reconciliation electronically. The scanned images of the cheques are used by the banks for archiving purposes. Some banks are discussing the possibility of exchanging scanned images electronically. 4.3 LARGE VALUE PAYMENTS TRANSFER SYSTEMS Large value cheque payments are termed Special Clearings and refer to any cheque in an amount valued $500,000 and over called in for clearance. Any commercial bank receiving a large value cheque drawn by a Central Bank account holder seeks clearance by telephone from the Central Bank. Once clearance is given the Central Bank credits the commercial bank’s Reserve account. On the other hand, when the Central bank receives large value cheques drawn on commercial banks, it calls the commercial banks to obtain clearance before settling through debit to their reserve accounts. Similarly, commercial banks receiving large value cheques drawn on each other obtain clearance from the relevant banks and arrange settlement via inter-bank transfer. The cut-off time for obtaining clearance is 1:30 p.m. on Mondays to Thursdays and at 12:30 p.m. on Fridays. Each commercial bank involved in the special clearing process of that day will exchange a special clearing fax message with each other or with the Central Bank within one half hour of the deadlines. The following information is provided on the fax for each cheque cleared by phone: the presenting branch, the drawee bank, the drawer, the payee, the amount, the cheque number and the account number. The physical items are presented and exchanged in the low value cheque clearinghouse on the following morning. • Inter-bank transfers Inter-bank transfers can arise from bank-to-bank transactions including loans and foreign currency operations, or from the deposit by customers of large value cheques drawn on another bank. Large value inter-bank transfers are settled through the reserve accounts held at the Central Bank. Instructions to debit the reserve account and credit the reserve account of another are in the form of a debit instrument drawn on the reserve account and credit slips. Details of these transactions are not required by the Central Bank. The cut-off time for inter-bank transfers is 3:00 p.m. Not all inter-bank transfers have a large value nature. In fact, the commercial banks issue inter-bank payment vouchers to each other to effect other small value inter-bank settlements. These are cleared and settled during the low value cheque clearing process. 35 Trinidad and Tobago Report October 2000 4.4 OTHER SYSTEMS AND TYPES OF SETTLEMENT 4.4.1 ATM and Debit Card Clearing and Settlement Most commercial banks have on-line connection between their branches and ATM -machines throughout the country. The downtime rate because of communication problems is less than 0.15 percent. Infolink Services Limited ( ISL) is responsible for daily settlement of ATM transactions switched between members i.e. the four commercial banks in the network. Each bank must provide ISL with settlement vouchers drawn on a designated settlement account. For the purposes of settlement, the day ends at 7:00 p.m. Transactions after this time are recorded under the next settlement day, seven days per week. Transactions processed after 7:00 p.m. on the last business day of the week or on a non- business day are reported separately with actual settlement taking place on the next business day. The ISL Switch Hub initiates processing of all transactions completed before the 7:00 p.m. deadline at approximately 8.30 a.m. of the following day and prepares a settlement summary report. Each member is required to prepare its own settlement report. Each business morning ISL prepares settlement vouchers based on its settlement report of the previous day as follows: Credit Position: ISL prepares a settlement voucher drawn on its settlement account in favour of the member who is in a credit position in the amount of the net credit. The voucher along with a copy of the settlement summary report is sent to the member by 10:30 a.m. on each business day. On receipt of a settlement voucher in its favour, the member deposits the value to its internal settlement account. Debit Position: ISL prepares a settlement voucher drawn on the member’s account in favour of ISL in the amount of the net debit. Similarly the voucher is accompanied by a copy of the settlement summary report and sent to the member by 10:30 a.m. on each business day. ISL deposits to its account the values shown on these vouchers prepared for those members in a net debit position on the working day that they are prepared. Each member reconciles the totals reported on the Settlement Summary Report against its own total and reports any differences to ISL by 3:00 p.m. of the same working day. The total number of debit/POS cards issued by commercial banks as at end 1998 was 750,000. Infolink handles all the switched ATM transactions – those performed by cardholders at an ATM - machine other than that of their own bank. Currently, this is estimated to be around 20 percent of all ATM transactions. The average number of transactions processed by the ISL system each month is 1,071,262 with an average value of $185.00. Infolink also handles the point of sale ( POS) switching. All the EFTPOS machines can be used with debit or credit cards. The average monthly number of EFTPOS transactions handled by the LINX network between 1996 – 1999 was 127,373 with an average value of $182.00 per transaction. 36 Trinidad and Tobago Report October 2000 4.4.2 Credit Card Settlement At present credit cards are issued by four of the six commercial banks. Widespread use of credit cards developed in the 1990’s when banks began to issue credit cards under licences obtained from Visa and Mastercard. It is estimated that there are about 5,000 merchants (with about 6,000 terminals) who accept this means of payment. Settlement for all credit card transactions is processed at a central location. Following the removal of exchange controls in 1993, there was an acceleration in the use of international credit cards. 4.5 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED 4.5.1 ACH-Project In 1996, a committee comprising members from the commercial banks and the Central Bank was formed to accomplish the exchange of debit clearings items electronically in the first instance. It was subsequently decided that instead of pursuing the cheque clearings option only, the project should encompass the implementation of a complete Automated Clearinghouse (ACH) with both credit and debit items. The committee is presently completing the business requirements for this exercise. 4.5.2 Automated Credit Bureau (ACB) ISL is also working with the major banks in Trinidad & Tobago on the establishment of an ACB. The ACB will facilitate faster credit decisions based on more complete and reliable credit history data. A feasibility study is due to be completed before end-2000. 4.5.3 US Dollar-denominated Cheque Clearinghouse Discussions towards the establishment of a US dollar cheque clearinghouse for foreign cheques drawn on local banks were concluded in February 2000. On March 16, 2000 the Clearinghouse for US dollar denominated cheques was convened for the first time (Section 3.2.1.) The clearinghouse will be restricted to those items drawn on local US dollar denominated accounts held on behalf of payees residing in Trinidad and Tobago. US dollar cheques issued abroad to residents of T&T will continue to be cleared via a ‘pay-through’ bank in the United States. Most commercial banks use a common ‘pay-through’ bank. Since liberalisation (Section 1.a) and the removal of foreign exchange controls there has been an increase in the number of US dollar accounts held at local commercial banks and the exchange of US dollar cheques between them has grown considerably. The establishment of the clearinghouse will reduce the time taken to process these items from one month to approximately two days. 4.5.4 Inter-bank Foreign Exchange Trading A limited number of foreign exchange transactions currently take place on the inter-bank market. Recently, steps were taken to deepen this market. Market participants, who are authorised dealers 37 Trinidad and Tobago Report October 2000 in foreign exchange, are required to make a market among themselves by providing continuous quotations for buying and selling US dollars. Dealers are obliged to trade with each other when a firm quotation is provided. Exchange rates are market determined and it is expected that spreads would be forced by competition to converge in a narrow range. A key feature of the market is the creation of an electronic screen accessible to all dealers and the Central Bank through which quotations would be displayed and via which trades would be confirmed and reported to the Central Bank. The Central Bank continuously monitors market transactions and rate movements and may intervene in the market in line with its policy objectives. 4.5.5 Settlement of Security Payment for the Trinidad & Tobago Central Securities Depository The financial settlement for securities transactions by the TTCD will take place at the Central Bank on the reserve accounts of commercial banks. The Central Bank will also provide safe custody facilities for Jumbo Certificates (Section 6.1.2). 4.6 CROSS BORDER PAYMENT SETTLEMENT SYSTEMS International payments are made electronically via wire transfers or by cheque. Instructions are sent to foreign correspondent banks via the SWIFT messaging system or other electronic transmission through an external correspondent bank. Some commercial banks settle payments on-line. Cross border payments are also made by means of credit cards, international money orders and travellers’ cheques. 4.6.1 Intra-regional Payments The Central Banks in the CARICOM region have bilateral arrangements to facilitate the settlement of payments between each other. Intra-regional payments are made on the basis of instructions received via telex or SWIFT messages and net settlement takes place on a monthly basis in US dollars. Each net debtor makes payment to the relevant creditor’s correspondent bank account within two (2) working days after being billed. The commercial banks in the territories of the CARICOM region have correspondent banking relationships through which they effect payments for supplies and services on behalf of themselves and their customers. Payments can be made via cheque or SWIFT instructions. 38 Trinidad and Tobago Report October 2000 5 SECURITIES: INSTRUMENTS, MARKET STRUCTURE AND TRADING INSTRUMENTS 5.1 FORMS OF SECURITIES In Trinidad and Tobago a dematerialised system is operated for collective investment schemes and treasury bills and notes. Other debt instruments and equities are certificated. The Companies Act, 1995 recognises the share or debenture certificate as the document that confers legal ownership. The Companies Act also states that an issuer of securities must maintain a shareholder registry. The issuer or its transfer agent may act as Registrar and is responsible for updating the shareholder registry and the production and delivery of certificates to security holders. 5.2 TYPES OF SECURITIES The following categories of securities are traded: shares and other securities representing equity rights (equity), long-term debt, short-term debt (fixed income) and derivatives. 5.2.1 Shares and Securities Representing Equity Rights 5.2.1.1 Equities Initial public offers ( IPOs) are not very common in Trinidad and Tobago. Rights issues, bonus issues and offers for sale tend to be the main types of equity issues. According to the Companies Act, 1995 there are no restrictions to the issuance of any kind of shares. Shares are classified as Ordinary or Preferred Shares. Ordinary shares represent ownership in a company and give the shareholder a vote in the selection of management and a proportionate but unspecified claim on profits which can be distributed as dividends declared by the company´s directors and paid out of earnings. They also involve the right to information about the company in which an investment is made; a pre-emptive right which is the due right of shareholders to maintain their proportionate share of ownership in a company; and the right to share in the assets in the case of dissolution. Preferred shares confer certain rights and privileges not enjoyed by ordinary shareholders. The major privilege is that these shareholders are entitled to dividends at a predetermined rate, which must be paid out of earnings before any dividends are paid to ordinary shareholders. Usually such preference as to dividends is cumulative, which means that if a company is unable to pay preferred dividends when due, they accumulate and must be paid sometime in the future before any profits can be distributed to ordinary shareholders. Preferred shares can also be non-cumulative, in which case the above mentioned privilege is not conferred. Another right of preferred 39 Trinidad and Tobago Report October 2000 shareholders is the right to a stipulated portion of the assets in preference to common shareholders in the case of liquidation of the company´s business. However, they do not confer either any pre- emptive rights or the right to vote in the election of the Directors to the Board and these shareholders do not have a voice in the management of the company. Companies are increasingly including Employee Stock Options Packages (ESOP) in compensation packages. A Committee has been appointed by the Government to draft legislation to govern this instrument. 5.2.2 Long-term Debt 5.2.2.1 Bonds These refer to debt certificates issued by the government or a company for periods over five years and usually in denominations of $1,000, although $500 and $100 certificates are not uncommon. In Trinidad and Tobago, the Government is the major issuer of bonds although there has been an increase in the number of corporate bonds issued in the domestic market. Government bonds usually have a maturity ranging from 10 to 30 years while the term to maturity of corporate bonds rarely extends beyond 15 years. Government and corporate bonds are usually denominated in the local currency but within recent years there has been some US dollar denominated issues. In general, bond issues are placed with institutional investors rather than retail investors. 5.2.3 Money Market Instruments The main instruments offered in the money market are Certificates of Deposits (CDs), Treasury bills and notes, Commercial Paper, Bankers’ Acceptances and Repurchase Agreements. 5.2.3.1 Treasury bills and notes The Central Bank issues Treasury bills and notes on behalf of the Government. The statutory limit on the issuance of Treasury bills is set at $2 billion, while the limit on Treasury notes is $1 billion. The Bank oversees auctions for the allocation of Treasury bills and both competitive and non- competitive tenders for bills are permitted, with mainly large investors participating in the competitive bidding process. Small investors (i.e. bids for less than $100,000) usually submit non-competitive tenders and are given allotments at the average price determined in the auction. At present Treasury notes are issued only for Open Market Operations. They are auctioned and bids are allotted on a yield basis. Notes are issued in multiples of $10,000 to primary dealers. Treasury notes are traded on the secondary market on a limited scale. 5.2.3.2 Repurchase orders/Repurchases (Repos) In 1998 the Central Bank began repurchase transactions with primary dealers as a means of smoothing liquidity in the market. This market utilises Treasury bills and notes. There is a standard contract for repos between the central bank and the primary dealers. 40 Trinidad and Tobago Report October 2000 5.2.3.3 Certificates of Deposits (CDs) The primary issuers of CDs are commercial banks. However, CDs are also issued by finance companies, mortgage companies, trust companies, building societies and credit unions. 5.2.3.4 Bankers’ Acceptances This market emerged in Trinidad and Tobago in the early 1990s. In 1995, the Central Bank introduced regulations to ensure that licensed financial institutions adopt policies and procedures to cover, as a minimum, the management of the liquidity and the funding risks attached to this activity, internal controls, proper documentation, collateral sufficiency, credit quality and collectibility. 5.2.3.5 Commercial Paper Commercial Paper is rarely used in the money market. There is an average of only one or two issues each year. 5.2.4 Derivatives This market is at an embryonic stage of development, with activity limited to one or two contracts involving equity options. While the use of options is expanding, these instruments are not being traded at this time. 5.3 SECURITIES IDENTIFICATION CODE The Trinidad and Tobago Stock Exchange Limited has not yet implemented the International Securities Identification Number (ISIN) for securities transactions. However, the brokers utilise an internal identification system. 5.4 CLASSIFICATION OF SECURITIES ACCORDING TO TYPE OF TRANSFER 5.4.1 Bearer Securities The Companies Act, 1995 Section 33(2) states that “no company may issue bearer shares or bearer share certificates.” However, prior to the passing of this Act bearer securities were issued. 5.4.2 Registered Securities Most bonds are issued in registered form. The Companies Act, 1995 requires that issuing companies maintain a register of shareholders. 5.4.3 Nominee and Beneficiary The Securities Industry Act, 1995 makes a clear distinction between the beneficial owner and registered owner of a security and establishes that the clearing agency can be recognised as 41 Trinidad and Tobago Report October 2000 the registered owner (i.e. the nominee) provided that the beneficial owner has given written authorisation. The clearing agency/nominee who is regarded as the registered owner of the securities has the right to trade in securities on behalf of the beneficial owner. 5.5 TRANSFER OF OWNERSHIP The Companies Act, 1995 Section 195 (1) states that the shares or debentures of a company may be transferred by a written instrument of transfer signed by the transferor and naming the transferee. This document must also be accompanied by the physical delivery of the certificate. Both these documents are forwarded to the company (in the case of equity) or the trustee (in the case of debt instruments) for registration. The transfer of legal ownership of a security, however, is not effected until the transferee’s name is registered in the shareholders’ registry by the issuer. Section 195(4) of the Companies Act, 1995 states that: ‘a company, and in the case of debentures, the trustee… is not bound or entitled to treat the transferee of shares or debentures as the owner of them until the transfer has been registered or until the Court orders the registration of the transfer to him…’ Since it takes about four to six weeks to enter the purchaser’s name in the register and to produce a certificate verifying legal ownership of the security, there is an obvious time lag between the sale/ purchase of a security and the transfer of legal ownership. It is to be noted that until the transferee is entered in the shareholder registry, the transferor is still regarded as the legal owner of the security although the buyer becomes the beneficial owner at the time a trade is executed. The Securities Industry Act, 1995 contains provision for the transfer of securities through a clearing facility. Section 105 of the Act states that ‘the clearing agency, upon receipt of written instruction and a security certificate from a participant, is required to deliver the certificate to the issuer and request the transfer of the securities evidenced by the certificate to the clearing agency. The issuer on receiving notification from the clearing agency has a duty to register the transfer, immediately enter the transfer in its securities register and deliver to the clearing agency a security certificate representing the securities and showing the clearing agency as registered owner. 5.6 PLEDGE OF SECURITIES AS COLLATERAL The Securities Industry Act, 1995, Section 108, determines that on receipt of written instructions from a participant, a clearing agency shall, in accordance with the instructions, effect a transfer by way of pledge of a security from the participant to a pledgee. The pledge shall be done by making an entry in the records to block the account in favor of the pledgee for the amount of the debt or other obligation or the number of securities pledged. The clearing agency is not liable for any loss resulting from compliance with the instructions of a pledgee unless it knows before the transfer that the pledgee is not entitled to the securities. A participant 42 Trinidad and Tobago Report October 2000 has no right to pledge a security held for him by a clearing agency except through the facilities of the clearing agency. The rules of the proposed Trinidad and Tobago Central Securities Depository (TTCD) will outline procedures for the pledging of securities. 5.7 TREATMENT OF LOST, STOLEN, OR DESTROYED SECURITIES The Securities Industry Act, 1995 Section 97, states that the SEC may prescribe that a registrant shall inform about a missing, lost, counterfeit or stolen security and shall also submit to the SEC an inquiry for this information in relation to a security which is in the registrant´s custody or control; or for which he is responsible; or in respect of which he is effecting, clearing or settling a trade. The by-laws further states that this information will include the name of the security holder, amount or value of the security, name of the issuer, any identification number or marks and any other information that the SEC may request. This information must be made available on request to a registrant, financial institution or other prescribed person. Non-compliance of this duty of information does not affect a person´s status as a bona fide purchaser of the securities involved. 5.8 LEGAL MATTERS CONCERNING CUSTODY The Securities Industry Act, 1995 recognises the right of a person or legal entity to hold property for another in custody or trust relationship. The law also recognizes the fungibility of securities. Apart from the clearing agency, no other entity or person has the right to hold securities for another in custody or trust relationship.18 Additionally the Companies Act, 1995 recognises that a trustee relationship can exist (see Section 148). However, Section 186 (1) states that notice of a trust, whether expressed, implied or constructive, shall not be entered in any register maintained by the company. 5.8.1 Fungibility The law makes provisions for the transfer of securities through a book entry system. Such a system is premised on the idea that the securities are interchangeable i.e. they are fungible. The Companies Act, 1995, Section 30 (5) states “that issued shares in a company of a particular class rank equally for all purposes, none of those shares need thereafter have a distinguishing designation so long as it ranks equally for all purposes with all shares for the time being issued”. This provision facilitates fungibility since such class of shares need not have identifying numbers. 18As stated in the Securities Act, a clearing agency means a person that: (a) maintains records of trades of securities for the purpose of settling claims for money and securities; (b) maintains records of transfers and pledges of securities for the purpose of permitting securities to be transferred by record entry; (c) holds security certificates deposited with it for the purpose of permitting securities to be transferred by record entry or (d) performs any combination of two or more functions referred to in (a) to (c), but does not include a securities company or financial institution acting exclusively in the ordinary course of its customary business unless the SEC prescribes otherwise. 43 Trinidad and Tobago Report October 2000 5.8.2 Elimination of Physical Delivery Section 104 of the Securities Industry Act, 1995, provides for immobilisation and dematerialisation of securities. Immobilisation takes place when an issuer delivers a security certificate, under written authorisation of the beneficial owner, directly to a clearing agency as registered owner of the security. Dematerialisation takes place when the issuer, instead of delivering a security certificate, provides information to a registered clearing agency as registered owner to record the transaction with the consent of the beneficial owner. With the implementation of the TTCD gradual immobilisation and dematerialisation of securities are expected to occur. MARKET STRUCTURE AND TRADING SYSTEMS 5.9 Primary Market The issuance of securities in the primary market is regulated by the SEC . Domestic investors are now able to participate in issues originating in other jurisdictions. For the year ended September 1999, total value of debt securities registered by the SEC was $5.3 billion19. This represented a marked increase from the $1.6 billion recorded for the 12-month period October 1997 - September 1998. Table 7 presents debt securities registered in 1999. Table 7: Debt Securities Registered in 1999 Debt Securities Registered Number of issues Corporate: Secured Bonds 4 Commercial Paper 1 Fixed Rate Bonds 3 Mortgage Notes 1 Government: Government Fixed and Floating Rate Bonds 7 Quasi-Government Fixed and Floating Rate Bonds (a) 6 Total Issues Registered 22 Source: Trinidad and Tobago Securities and Exchange Commission. These are mainly issues from statutory authorities which are guaranteed by the (a) Government of Trinidad and Tobago. 19 It is to be noted that the number and value of issues registered by the SEC in a particular period may differ from those issued during that period to the extent that there are delays in bringing these securities to the market. 44 Trinidad and Tobago Report October 2000 There is a growing market for bonds. Government bond issues dominate the bond market, although there has been a steady increase in the number of corporate issues coming to the market. A number of issues have been floated in the Trinidad and Tobago market by sovereign governments and private entities. Table 8 indicates the value of government bonds issued between 1995 - 1999. Table 8: Government Bonds(a) (1995–1999) (TT$ million) Years Total Value Issued 1995 903.5 1996 22.7 1997 1,894.2 1998 1,377.2 1999 904.6 Source: Central Bank of Trinidad and Tobago. Includes issues of the wider public sector; no (a) government issues were made in 1996 The divestiture of state enterprises in the late 1980s and 1990s served to promote wider public participation in the stock market. However, the primary equity market is relatively inactive since borrowers have a tendency to use debt financing rather than equity financing. The equity market is further affected by the fact that firms prefer to raise capital from existing shareholders since majority owners of public companies are particularly concerned with preventing the dilution of shareholdings and loss of control. There are few transactions in the derivative market. There has been a dramatic increase in the number of mutual funds marketed in Trinidad and Tobago. In 1998, the TT dollar mutual fund industry grew 48.1 percent, up from $2.3 billion in 1997 to $3.4 billion. 5.10 SECONDARY MARKET The secondary market is well established. While most of the transactions are executed on the floor of the Stock Exchange, transactions also take place off the floor. The legislation does provide for off- the-floor trading. A stamp duty is imposed on transactions which do not cross the floor of the Exchange. Information is not available on trades occurring in the over the counter market. • Equity Trading As at December 31,1999, stocks with a market capitalisation of $27.5 billion were listed on the Exchange. These represent the securities of 28 companies including four foreign companies, which are listed on the First Tier of the Exchange. In addition, provision is made for a Second Tier market to accommodate firms unable to meet the more stringent listing requirements of the Exchange. However, only one company has availed itself of this facility. 45 Trinidad and Tobago Report October 2000 An upward trend in stock market activity has been observed over the past few years. Table 9 shows the number of listed companies and issues, trading days, transactions, shares traded, market value of shares traded, average daily number of sales traded, average daily value of shares traded, market capitalisation and year end composite index from 1995 to1999. Table 9: Information on Market Turnover (1995–1999) Average Comp- Average daily osite No. of No. No. Market value daily no. value of Market Index End of Listed Cos trading of trans- No. of of shares of shares shares capitalisation year period (c) & lss (s) days actions shares traded traded $ traded traded $ TT$ end 1995 27 (c) 31 (s) 150 6,186 131,651,789 812,395,236 877,679 5,415,968 6,750,685,340 150.22 (49) 1996 27 (c) 30 (s) 152 5,667 121,347,803 645,996,109 798,341 4,249,974 8,852,164,723 167.41 (07) 1997 25 (c) 28 (s) 150 7,679 100,745,975 846,076,864 671,640 5,640,512 19,636,860,258 352.27 (08) 1998 26 (c) 29 (s) 151 7,369 123,369,880 1,249,620,699 817,019 8,275,634 24,984,066,595 436.30 (09) 1999 28 (c) 31 (s) 149 3,182 92,082,717 735,265,157 493,396 3,986,648 27,513,523,050 417.47 (21) Source: Trinidad and Tobago Stock Exchange Limited. Notes: 1. These figures do not include those of the Second Tier Market. • Bond Trading A number of bonds are listed on the Exchange. However, these instruments are thinly traded as bondholders prefer to hold these instruments to maturity. Table 10 shows the face value of transactions executed in the secondary market between 1995 and 1999. There are no exchanges for options and futures. Table 10: Secondary Market Transactions – Government Bonds Face Number of Year (TT$MN) transactions 1995 15.3 34 1996 19.2 28 1997 22.3 15 1998 0.3 4 1999 11.9 13 Source: Central Bank of Trinidad and Tobago. 46 Trinidad and Tobago Report October 2000 5.11 STOCK EXCHANGE TRADING Trading takes place on the Stock Exchange’s floor on Tuesdays, Wednesdays and Fridays commencing at 9.30 a.m. and continuing until all securities listed have been called and dealt with as members may require. Generally the trading session does not extend beyond 12 noon. Securities are traded in alphabetical order, at the conclusion of which a call-over procedure is employed before trading ceases. The Exchange operates on a cash basis and settlement takes place within five business days of the original transaction date (T + 5). Only shares admitted to listing can be bought or sold on the Exchange. Before a broker can enter a buy or sell order, the customer must open an account. All stocks transactions are done on a cash basis. In practice, cheques are used. The payment must be made on settlement date (T + 5). In the case of a sell order, share certificates must be deposited with the broker beforehand. Trades on the Stock Exchange are regarded as inviolable and may be only annulled by the Exchange as a result of misrepresentation or material mistake in the bargain. Dealings are allowed in securities admitted to the Official List and securities which have been granted a primary listing on an overseas Stock Exchange. Bargains are made ex-dividend, ex-rights and ex-capitalisation. After the broker purchases or sells a share, he is required to send his client a contract note which is a legal document, specifying the numbers of shares traded, the unit price, total cost and the commission payable to the broker. In the case of a purchase, the contract note is the proof of ownership until the share certificate is delivered. Legal ownership is not transferred until the purchase is registered. There is no exchange trading in forward trades or repurchase agreements. The securities law provides for securities lending between brokers. However, this is not a common practice in Trinidad and Tobago. 5.12 O VER THE COUNTER MARKET (OTC) Although the actual volume of trade occurring off the Exchange is not known it is believed that this is less than the volume of trades which cross the floor of the Exchange. While there is no data on the reasons why investors may choose to trade off-floor, it seems reasonable to conclude that the rationale for conducting off-floor trades lies in the fact that: 1. The parties to the trade are desirous of maintaining privacy about the transaction. 2. Transaction costs are lower on off-floor trades which attract stamp duties that are substantially lower than the commission payable on exchange transactions. (see Table 11 on next page). 47 Trinidad and Tobago Report October 2000 Table 11: Stamp Duty for Exchange Transactions Value of Sale Stamp Duty ($) Less than $25 0.10 $25-50 0.25 $51-125 0.75 $126-250 1.00 $251-500 2.50 For every additional $500 or part therefore 2.50 Source: Trinidad and Tobago Securities and Exchange Commission. 48 Trinidad and Tobago Report October 2000 6 CLEARANCE AND SETTLEMENT CIRCUITS FOR CORPORATE SECURITIES 6.1 ORGANISATIONS AND INSTITUTIONS The Trinidad and Tobago Stock Exchange Limited (the Exchange) provides trading, clearance and settlement services for corporate securities. The Companies Act, 1995 recognises the share or debenture certificate as the document that confers legal ownership. The Company law also states that an issuer of securities must maintain a shareholder registry. The issuer or its transfer agent may act as Registrar and is responsible for updating the shareholder registry and the production and delivery of certificates to security holders. The transfer of legal ownership takes approximately four to six weeks. All trades occurring on the floor of the Exchange must be conducted through brokers who are members of the Exchange. The investor places a buy (sell) order with a broker who subsequently executes the trade. The Exchange operates a manual record-keeping system that lists the details of all transactions executed on the floor of the Exchange. Participants in the securities market include brokerage firms, commercial banks, mutual funds, merchant banks and a unit investment trust. These agencies may conduct securities-related business under the following class of business: broker, reporting issuer, securities company, dealer, trader, investment adviser or underwriter. There are 16 securities companies registered with the Trinidad and Tobago Securities and Exchange Commission (the Commission). Six of the securities companies are brokerage firms. Commercial banks and their merchant banks are also registered as securities companies. There are four promoters of locally incorporated mutual funds – three of these being commercial banks. The Unit Trust Corporation ( UTC ) is the only unit investment trust and the largest investment company. The majority of those institutions have automated the record keeping and processing of securities transactions. The brokers are currently in the process of acquiring the necessary record keeping and processing applications that will allow them to interface their back-office with the application of the TTCD, which will soon start operations. Although the commercial banks (and consequently, their subsidiaries) and the UTC have the necessary technology in place to provide electronic transmission for clearing and settlement purposes, the clearance and settlement between the different parties in this market place is still a manual one. The Trinidad & Tobago Stock Exchange established TTCD to enable investors buying and selling securities on the Exchange to settle such transactions through a computerised book-entry system, which aids the change of ownership of securities without the need for the exchange of physical securities. The TTCD is under implementation. 49 Trinidad and Tobago Report October 2000 6.1.1 Clearing and Settlement Institutions There is no centralised clearance and settlement system for securities in Trinidad and Tobago. In the absence of such a system, several agencies provide these services for the various market segments. These agencies are at varying stages of computerisation and there is no formal system in place for electronically sharing information. As noted above, the Stock Exchange effects the clearance of securities traded on the floor of the Exchange. Mutual fund providers engage in clearance and settlement activities. The mutual fund companies have computerised record-keeping systems and all transactions are maintained in book- entry form. Mutual funds issue certificates only when a new account is opened or upon request. Statements are given to all shareholders at regular intervals. 6.1.2 Trinidad and Tobago Central Securities Depository Under the new system, issuers will be required to deposit their securities with the TTCD before they are able to trade. These securities will be registered in the name of the TTCD and Jumbo certificates representing the number of shares deposited will be held for safekeeping at the Central Bank. The value of the Jumbo certificates will increase as brokers register their clients’ shareholdings. All securities will be dematerialised although certificates can still be provided on request. The TTCD is considering maintaining sub-accounts under each broker’s account for each of the broker’s customers. The sub-accounts would list the name of the investor and the number of shares owned. Transactions will be processed electronically on a real time basis. The electronic book-entry system will automatically debit the individual account of the purchaser (depositor) and credit the account of the seller. The TTCD will distribute a number of reports, in duplicate, to the brokers, the commercial banks and the Central Bank. The participants in the TTCD will be: a. The clients and the brokers. The clients will deposit their share certificates with their brokers who will register their shareholdings with the TTCD. The share certificates will be submitted to the registrars for cancellation. Brokers will have on-line connection to the system through dial-up lines and password protection to enter their trades. Only brokers will be allowed to enter data into the TTCD software. b. The Registrars and the Stock Exchange. The brokers will send the securities to the Registrars for verification and cancellation. The Stock Exchange will provide the TTCD with the details of the securities traded. The TTCD will verify and keep records of all transactions entered by the brokers. c. The commercial banks and Central Bank. The cash settlement obligations will be netted and each participant will either be in a Net to Pay or a Net to Receive position. The clearing 50 Trinidad and Tobago Report October 2000 of funds between brokers and the commercial banks will take place between T+2 and T+4. d. On settlement day (T+5) each buying participant’s (broker’s) bank will confirm the availability of cleared funds (net to pay) in their client(s) account and authorise the Central Bank to credit the reserve account of the associated selling participant’s bank. 6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES The Company Law requires all issuing companies to maintain a register of shareholders. In respect of corporate equity, the issuer must maintain: • a list of substantial shareholders; • a basic list of all shareholders of all classes; • a list of persons holding options. In Trinidad and Tobago, several institutions perform the functions of Registrar for public companies. As Registrar each institution maintains detailed information on each issue, including the following: • the name and address of each participant in the issue; • a record of all transactions on the account; • the dividend/payment instructions; • the investors’ shareholdings. Issuers of debt instruments are also obligated to prepare and maintain a register of debt holders. The requirements for the bond register are similar to those for shareholders. The Central Bank maintains a computerised register for Treasury bills, notes and selected government bonds. It also provides safe custody facilities for its customers. Investors generally make individual arrangements for the safe custody of their certificates. 6.3 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES IN THE STOCK EXCHANGE (CURRENT SYSTEM ) According to the Rules of the Exchange the sale of a security becomes a binding contract at the time of the trade (i.e., when matches are secured on the Exchange Floor). Rule 200 states that ‘bargains on the Stock Exchange shall be regarded as inviolable…’ and may be annulled only by the Exchange. Trades are automatically matched since they are effected on a locked-in-basis. Therefore, there is no incidence of failed matched trades. 51 Trinidad and Tobago Report October 2000 After a trade is executed on the floor of the Exchange a Market Contract Note is prepared in triplicate by the selling broker. All copies of the Market Contract Note are signed by both the selling broker and the buying broker. The buying broker, the selling broker and the Stock Exchange each retains a copy of the Market Contract Note. The purchase and sale so made is deemed to be a valid contract fully binding on the contract parites. According to Rule 112, trade confirmation of the transaction with the client must be initiated within 24 hours of the trade. The selling broker is required to prepare and submit a Client Contract Note to his client within 24 hours of the trade providing details of the transaction. The Client Contract Note shall: a) advise of the sale or purchase of the listed security; b) state the price at and the consideration for wich the sale or purchase was effected and the commission charged in connection therewith and any other proper charges; c) identify the member involved in the sale or purchase; and d) contain any such further particulars as may from time to time be required by the Exchange’ Between T and T+5 the parties will exchange the funds and securities. The buying broker may make payment by cash or cheque. Cheques must be presented for payment through a commercial bank. The selling broker must ensure good delivery of all documents including certificates. The Exchange uses a gross settlement system and settles all trades by T+5. Settlement occurs when the parties to the trade exchange the funds and securities and the Exchange is notified in writing by the transferor of the change in beneficial ownership. Although the transferor receives payment for the securities and the Exchange is duly notified of the change in beneficial ownership, legal ownership is not transferred until the Registrar enters the transferee’s name in the shareholder’s registry. Electronic records may be submitted in respect of financial statements, accounting records and other financial information. However, the Securities Industry Act, 1995 is unclear on the issue of whether electronic documents and signatures are adequate to bind parties to a sales contract. Therefore the Exchange rules require that parties to a securities transaction complete and submit prescribed written forms with the appropriate signatures. 6.4 SECURITIES CLEARANCE AND SETTLEMENT PROCESSES IN THE STOCK EXCHANGE: FUTURE ARRANGEMENTS (TTCD) The TTCD will require Exchange members to execute and sign a written contract. The TTCD plans to settle securities and funds by using delivery versus payment (DVP). Securities will be settled at the TTCD on a trade-for-trade book-entry basis. Funds will be netted and settled at the Central Bank. Initially the TTCD will settle securities and funds on T+5; however, after an initial phase, the settlement period will be reduced to T+3. 52 Trinidad and Tobago Report October 2000 On the morning of T+1, the TTCD will notify each participant of its obligations to deliver securities and of its cash settlement obligations. The cash settlement obligations will be netted and therefore each participant will be in a Net to Pay or Net to Receive position. The TTCD also will send copies of each participant’s money settlement obligation to the participant’s bank and to the Central Bank. Each Participant, each Participant’s bank and the Central Bank must acknowledge receipt of the report by time stamping and signing the report and returning one copy of the reports to the TTCD. Procedure relating to the Participants’ bank: Net to Pay: By 11 a.m. on settlement day (T+5) each participant’s bank will notify the Central Bank as to whether the Participant’s account at the bank contained the requisite amount of cleared funds to meet its settlement obligation as shown in the Net to Pay Report. In the event the Participant has sufficient funds in his account to meet the settlement obligations, the Participant’s bank will authorise the Central Bank to debit its Reserve Account. In the event that a Participant has insufficient funds in his account and the bank is unable to settle the transaction, the bank must notify the Central Bank and the TTCD of the situation not later than 11 a.m. on settlement day. Net to Receive: By noon on settlement day (T+5) the Central Bank will deposit the (Net to Receive) funds in the reserve account of the selling Participant’s bank. Procedure relating to the Central Bank: By 11.15 a.m. on settlement day (T+5), the Central Bank will confirm to the TTCD that all Net to Pay and Net to Receive obligations as contained in the Net Settlement Obligations Report of Participants have been satisfied. If, on the other hand, the Central Bank is notified by the Participant’s bank by 11 a.m. that there are insufficient funds in the Participant’s account to settle a transaction, then the Central Bank would so notify the TTCD. Subsequent to receipt of the failure to pay notification by the Central Bank and the Participant’s bank, the TTCD will inform the Central Bank of the remedial action proposed to ensure settlement by noon. By noon the Central Bank will notify the TTCD that the settlement obligations have been met. 6.5 SECURITIES CLEARANCE AND SETTLEMENT BY MUTUAL FUNDS In the mutual fund industry, a sale is executed and deemed binding only when there is a transfer of financial resources to the Fund’s account. In addition, the relevant forms must be completed and 53 Trinidad and Tobago Report October 2000 submitted by the purchaser. These transactions are usually conducted over the counter; however, in some instances these transactions may be initiated by telephone. A deal struck on the telephone must subsequently be confirmed in writing. Since the clearance and settlement system for mutual funds is automated, trades in these securities are usually settled by T+1. Occasionally, for the redemption of very large amounts or in the case of some mutual funds denominated in foreign currencies, the settlement period could vary from T+1 to T+10. 6.6 BUYING-IN AND SELLING-OUT PROCEDURES Rule 219 of the Stock Exchange Rules addresses the matter of buying–in and selling-out. When a member company, having sold securities, fails to deliver such securities to the buyer, the buyer shall issue before midday on any business day, a demand note requiring that the seller deliver the securities by 12:30 p.m. on the fifth business day after the note is received. Failing delivery by the seller by the time specified in the demand note, the buyer shall, before 4:00 p.m. on the specified date, or on any subsequent business day, give a buying-in notice to the Stock Exchange to buy the securities at the seller’s risk. A copy of this notice is delivered to the seller. The member company selling under the buying-in shall deliver the securities to the Stock Exchange before noon on the following business day, and the seller for whom they were bought shall pay for them on delivery. When a buyer fails to pay for securities when delivered, the seller may before 4:00 p.m. on the due date, or any subsequent business day, give a selling-out notice in writing to the Stock Exchange to sell the securities at the buyer’s risk. A copy of this notice is delivered to the buyer. The member company for whom the securities are sold-out shall deliver the securities to the Stock Exchange before noon on the following business day, and the buyer shall pay for them on delivery. Any difference arising from buying-in or selling-out under this procedure shall be settled by the Exchange, which will charge such difference plus commission at the full rate applicable to the member company at risk. 6.7 MECHANISMS ESTABLISHED BY THE NEW SYSTEM TO REINFORCE SECURITY IN SETTLEMENT PROCEDURES The TTCD will hold securities in book-entry as nominee holder. The issuers’ registrars will list the TTCD as the registered holder of all securities held by the TTCD. Securities registered in the name of the TTCD will be held at the Central Bank. The TTCD plans to hold jumbo certificates for each issue. The TTCD plans to allow a participant to view its accounts but requires a participant to submit written instructions to make any changes or movements to a participant’s account. 6.8 SECURITIES LENDING The law makes no provision for securities lending between brokers. However, under specified conditions the Stock Exchange Rules allow an individual broker to borrow from his broker’s account. 54 Trinidad and Tobago Report October 2000 6.9 DERIVATIVES CLEARANCE AND SETTLEMENT There is no Exchange trading in financial derivatives. 6.10 INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS Cross-border transactions are facilitated through broker-to-broker arrangements involving a broker from Trinidad and Tobago and a broker in the other country involved in the transaction. For example, a person from another country who wishes to buy or sell a security in a company listed on the Exchange in Trinidad and Tobago would first contact a broker in their country. The broker in that country would contact a broker operating in Trinidad and Tobago who executes the transactions on the floor of the Exchange. Similarly, a person from another country would deliver funds to settle the transaction through his broker who subsequently forwards the funds to the broker in Trinidad and Tobago. There is no difference in the process for the clearance and settlement of domestic trades and cross border transactions. However, the timetable to complete cross-border transactions can be longer. In Trinidad and Tobago, foreign investors wishing to hold 30 percent or more of a domestic company must apply for a licence. The present system does not allow for electronic trading. However, automated trading will follow after central securities depositories are established in the region. There is a current initiative to link stock exchanges in five territories – the Bahamas, the Dominican Republic, Barbados, Jamaica and Trinidad and Tobago. 55 Trinidad and Tobago Report October 2000 7 CLEARANCE AND SETTLEMENT CIRCUITS FOR GOVERNMENT SECURITIES 7.1 MARKET ARRANGEMENTS The Central Bank is the fiscal and paying agent for Treasury bills and notes. Treasury notes were first introduced in 2000. Treasury bills and notes are sold in the primary market largely through a competitive bidding process; there is no restriction on the number of bids that can be submitted (Section 5.2.3.1). The Central Bank has recently implemented a primary dealer approach for the trading of Treasury securities. The Central Bank also provides custody services for government as well as other selected entities. The secondary market for Treasury bills and notes revolves around the primary dealers (mainly commercial banks). Table 12 indicates the value of Treasury bills purchased and sold by the Central Bank in the secondary market during the period 1995 – 1999. Table 12: Purchases and Sales of Treasury Bills (1995 – 1999) (TT$ million) (a) Item 1995 1996 1997 1998 1999 Purchases 7,487.0 5,427.1 3,246.3 1,447.2 175.5 Sales 8,913.3 6,963.8 2,931.6 2,674.7 245.9 Source: Central Bank of Trinidad and Tobago. (a) With the introduction of OMO in 1996, the role of the Central Bank in the secondary market has declined. The government is a significant issuer of long-term paper (Section 5.2.2.1). Most investors hold these bonds to maturity, therefore they are not generally traded in the secondary market. The insurance firms and pension funds are the major holders of these securities since they are required to invest at least 80 percent of the assets in their statutory funds in domestic securities. 7.2 SETTLEMENT PROCEDURES Settlement of Treasury bills and notes transactions in the primary market is executed for good value over a reserve account and a securities account that each bank maintains with the Central Bank. The securities accounts and the banks’ reserve accounts are not integrated and posting to these accounts is not simultaneous. Current work in progress on automating these interfaces will facilitate real time processing. 7.2.1 Potential Risks in Current Settlement Arrangements The Central Bank can face the potential risk that a bank may not have sufficient funds in its accounts for the securities purchase. However, this risk appears to be very low because of the high reserve 56 Trinidad and Tobago Report October 2000 requirement ratio and its close monitoring by the Central Bank. If the bank failed overnight, the Central Bank could always reverse the credit to the bank’s securities account. More importantly, there is potential for broader systemic risk in the event that a buyer of government bills failed overnight and was short on its reserve account and therefore was unable to satisfy its obligation to the seller of government securities. These risks are given effect mainly because the Central Bank accounting system is not updated until the following day. 57 Trinidad and Tobago Report October 2000 8 THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS 8.1 THE RISK CONTROL POLICY 8.1.1 Low-value System Risks Since cash and cheques are the predominant forms of payment, the risks associated with these instruments assume primary importance. The security risks associated with cash include theft and counterfeiting. The risks associated with cheques include operational and security risks. Though the use of MICR line encoding has reduced operational risk, adherence to coding standards becomes critical. Furthermore, depending on whether cheques are guaranteed or not, there is some level of credit and liquidity risk (to the bearer or the drawee) attached. Recent legislation pertaining to dishonoured cheques should serve to address this problem. Additional risks can arise because of the float time between cheque presentation and settlement - up to six days is allowed for returned items. Settlement lags can also create credit and liquidity risks if any institution fails to meet its payment obligations during the day. However, intraday monitoring of balances does not occur with the deferred net settlement system that is in place. Moreover, potential risks in the system are represented by the possibility left to banks to clear large value cheques in the clearinghouse outside the “special clearings” mechanism. Although this event seems uncommon, it poses theoretical doubts on the nature of the system (strictly low value or potentially large-value) with implications on the risk control policies to be adopted. Operational risk and security risk are associated with debit and credit cards. To some extent, the issuing banks are also exposed to credit risk if credit card holders cannot repay. The imposition of credit limits puts a ceiling on this type of liquidity/credit risk. The security risk posed by the use of these cards is curtailed by ensuring the proper scrutiny of signatures by retailers and the presentation of valid forms of identification along with such cards. 8.1.2 Large-value System Risks The only large value payment system in Trinidad and Tobago is represented by the Special Clearings system described above (Chapter 4). In the Special Clearings system, credit and liquidity risks are in principle limited because of: i) the confirmation obtained on a transaction by transaction basis by the drawee bank to the drawer bank on the availability of funds; ii) the settlement on the reserve account is “virtually” made on the same day; iii) the high availability of funds on the banks’ reserve accounts through the maintenance of the reserve requirement. However, the current systems present potential risks, which could emerge since the Central Bank accounting system is not real-time. Both the Central Bank and banks cannot have access to intraday monitoring of the reserve accounts precluding same day assessment of the liquidity levels in the 58 Trinidad and Tobago Report October 2000 system (actual balances are confirmed through telephone communication and reports are prepared and dispatched each morning). Because of these de facto settlement lags in this netting system, there is some element of credit and liquidity risk if any of the institutions fail to meet their payment obligations at the end of the day. 8.2 SETTLEMENT Settlement for inter-bank transactions including those with the Central Bank are generally made through the reserve accounts held at the Central Bank. The settlement process is manual and involves the use of vouchers, credit slips, cheques and other paper based forms. The types of transaction that are settled by crediting/debiting the reserve accounts of the commercial banks are: 1. low value payments (cheque clearing); 2. large value payments; 3. settlement of currency transactions (issue, re-issue and redemption of notes and coins to the commercial bank); 4. securities transactions; 5. foreign exchange purchases and sales. 8.2.1 Settlement of Securities Transactions All banks settle their Treasury bill /notes activity through their reserve accounts. Transactions are confirmed and settled on agreed value dates. The accounting entries for Treasury-related activities are batch processed the following morning with good value. 8.3 MONETARY POLICY AND PAYMENT SYSTEMS The payment system performs a critical function in the financial sector and the overall economy. Given this important role, the involvement of the Central Bank is focussed on the containment and reduction of risk, which if not managed could precipitate a collapse of the country’s financial system. The role of a Central Bank in a country’s payment system is also linked to that authority’s responsibility for monetary and financial stability (Section 2.5). The Central Bank has recently shifted to more indirect measures of conducting monetary policy. This requires that the Central Bank receives more timely information on liquidity levels in the system. The operation of a non-automated deferred net settlement system impacts on the immediacy of such information. 59 Trinidad and Tobago Report October 2000 8.4 THE ROLE OF THE CENTRAL BANK IN CROSS-BORDER PAYMENTS The majority of cross-border transactions are effected by the commercial banks through their foreign banking correspondents. The Central Bank makes cross-border payments on behalf of itself and its customers which include the government and international agencies. These payments are generally effected through SWIFT or by cheque. 60 Trinidad and Tobago Report October 2000 9 SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEM 9.1 SECURITIES AND EXCHANGE COMMISSION SUPERVISORY AND STATUTORY RESPONSIBILITIES The Securities and Exchange Commission has the responsibility of maintaining surveillance over the securities market and ensures orderly, fair and equitable dealings in securities. It can delegate the powers conferred in the Securities Industry Act, except the powers to make by-laws and hear appeals, to any self-regulatory organisation. The SEC is required to inform the Inspector of Banks of any disciplinary action against a financial institution. In addition, the SEC consults and cooperates with the Central Bank and other agencies that exercise regulatory authority under a written law over a financial institution, insurance company or other body. In particular, in terms of clearance and settlement facilities, the SEC has the authority to review and approve the rules. The clearing agency is also required to submit all proposed amendments to the SEC for approval. The SEC has the power to require changes in the rules of any self-regulatory organisation that are necessary to bring the rules into conformity with the requirements of the Securities Industry Act. The Central Bank is not required to register with the SEC . Its activities are governed by the provisions of the Central Bank Act, Chapter 79:02 and its Amendments. 9.1.1 Responsibility over SROs (Stock Exchange, TTCD) According to the Securities Industry Act, Section 36, no person shall carry on business as a securities exchange or clearing agency or carry on activities as an association of securities companies unless registered as a self-regulatory organisation (SRO) under the law. All SROs must register with the SEC before starting their activities. The application for registration must state the purpose for engaging in the securities business, provide the name of the corporate body (with corporate seal) which can sue and be sued, include the date of incorporation in Trinidad and Tobago or in any other state (but registered in Trinidad and Tobago) and indicate the existence of a body of rules for the governance of its members. In the case of an applicant for registration as a clearing agency, the rules to be submitted for the SEC ´s consideration must contain provisions designed to develop and operate a prompt and accurate clearance and settlement system; to safeguard money and securities in its custody or under its control or for which it is responsible; and to provide that a securities company, a financial institution, another clearing agency or a person or class of persons designated by the SEC may become a participant in the clearing agency. Amendments of SROs´ rules must also be submitted for the SEC´s consideration and approval. The SEC can make an order requiring changes in the rules of the SROs to ensure fair administration or to make the rules conform to the requirements of the Securities Industry Act. 61 Trinidad and Tobago Report October 2000 SROs shall, with the SEC ´s approval, appoint an auditor to audit their financial statements. They must also keep records according to the SEC ´s prescriptions and provide any prescribed report to the SEC or to the public. In addition, the SEC can inspect the records and examine the financial affairs of the SROs or of any of their members. The SEC can also request the preparation of any kind of information or report. According to the law, self-regulatory organisations (SROs) must maintain a contingency fund to compensate customers for losses resulting from insolvency, bankruptcy or default of a member of the organisation or of a registrant who contributes to the fund, up to a maximum of $20,000 per claimant in any one calendar year. The SROs may increase that maximum from time to time. The rules on the creation, administration and operations of SROs contingency funds must be previously filed with the SEC for its approval. The SEC exercises a strict control of these funds by means of inspections, authorisation to the SROs to appoint an auditor to audit their financial affairs and examination at the end of each financial year of a report on the operations and financial conditions of the fund prepared by its administrator. Every registrant of an SRO participates in and contributes to the contingency fund. 9.1.2 Responsibility Over Participants in the Securities Clearing and Settlement Processes A participant is defined in the Securities Industry Act, 1995 as a person who receives services from a clearing agency other than exclusively (a) through another person who is a participant; or (b) as a pledgee, judgement creditor, or beneficial owner for whom a blocked account has been established. The existing legislation does not explicitly address the relationship between participants in a clearing agency and the securities regulator. However, all persons engaging in securities business are required to register with the SEC in accordance with the stipulated requirements. The SEC maintains oversight over the operations of the clearing agency. 9.2 SROS (STOCK EXCHANGE, TTCD) SUPERVISORY AND STATUTORY RESPONSIBILITY SROs have supervisory and statutory responsibilities over their members and participants. In particular, a SRO may refuse membership or impose conditions on membership or prohibit or limit access to services furnished by it or its members in the specific cases established in Section 43 of the Securities Industry Act (lack of financial responsibility, not meeting the criteria required, not carrying the type of business specified, lack of training or contravention of the law). SROs must file with the SEC a copy of any decisions on refusal of membership or the imposition of conditions on membership. The SEC will affirm or set aside the decision or remand the matter to the SRO for further proceedings. Any person who is aggrieved by an act or dealing by a SRO or by any other registered market actor may lodge a complaint in respect thereof to the SEC who will resolve the complaint. SROs also have disciplinary powers over their members. Unless the SEC directs otherwise, all disciplinary decisions must be published. 62 Trinidad and Tobago Report October 2000 9.3 SAFEGUARD AND SECURITY SYSTEM All agencies engaged in the securities business are subject to internal and external audits. In addition these agencies are supervised either by the Central Bank or the SEC . The Securities Industry Act, Section 39(3), requires that the rules of these agencies contain provisions designed to develop and operate a prompt and accurate clearance and settlement system and to safeguard money and securities in their custody or under their control or for which they are responsible. All agencies providing facilities for clearance and settlement of securities have adopted measures to protect and safeguard their systems. These include routine daily backups of their transactions, off- site storage and appropriate security access levels. In addition, many agencies have developed disaster recovery programs. 63 Trinidad and Tobago Report October 2000 64 Trinidad and Tobago Report October 2000 APPENDIX: STATISTICAL TABLES The first series of tables (A) are statistics on payments and securities clearance and settlement in Trinidad and Tobago and were completed following a standard model prepared in the context of the Western Hemisphere Payments and Securities Clearance and Settlement Initiative. They slightly differ from the model due to data availability constraints. The second series (B) are more general statistics related to the financial sector. SERIES: A Payments and Securities Clearance and Settlement Statistics A1 Basic Statistical Data .................................................................................................67 A2 Settlement Media Used by Non-banks ......................................................................67 A3 Settlement Media Used by Credit/Deposit Taking Institutions ...................................68 A4 Institutional Framework ............................................................................................68 A5 Banknotes and Coins ................................................................................................69 A6 Cash Dispensers, ATM s, and EFTPOS Terminals .........................................................69 A7 Number of Payment Cards in Circulation .................................................................70 A8 Indicators of Use of Various Cashless Payment Instruments (Volume of transactions) ...........................................................................................70 A9 Indicators of Use of Various Cashless Payment Instruments (Value of transactions) ...............................................................................................71 A10 Payment Instructions Handled by Selected Interbank Transfer Systems (Volume) ......71 A11 Payment Instructions Handled by Selected Interbank Transfer Systems (Value) .........71 A12 Equity Securities and Accounts Registered in Securities Settlement Systems .............72 A13 Transfer Instructions Handled by Securities Settlement Systems (Volume) .................72 A14 Transfer Instructions Handled by Securities Settlement Systems (Value) ....................72 A15 Participation in SWIFT by Domestic Institutions ........................................................73 A16 SWIFT Traffic Data .....................................................................................................74 SERIES: B General Statistics B1 Number of Financial Entities ....................................................................................75 B2 Number of Branches .................................................................................................75 B3 Number of Financial Sector Employees ....................................................................75 65 Trinidad and Tobago Report October 2000 B4 Financial System: Assets ........................................................................................... 76 B5 Financial System: Deposits ....................................................................................... 76 B6 Financial System: Loans ............................................................................................ 76 B7 Financial System: Equity ........................................................................................... 77 B8 Volume and Value of Stock Exchange Operations .................................................... 77 66 Trinidad and Tobago Report October 2000 Table A1: Basic Statistical Data 1995 1996 1997 1998 1999 May-00 (a) Population 1,260 1,264 1,271 1,283 1,286 N.A. (b) GDP 31,697 34,448 36,552 38,197 41,045 N.A. (c) GDP per capita 25 27 29 30 32 N.A. (d) Exchange rate TT$/US$ 5.89 5.99 6.25 6.28 6.27 6.27 Source: Central Bank of Trinidad and Tobago. (a) In thousands. (b) In millions of TT dollars. (c) In thousands of TT dollars. (d) The mid-point of the period average of the buying and selling rates of the TT/US dollar. Table A2: Settlement Media Used by Non-banks (Millions of TT Dollars)(a) 1995 1996 1997 1998 1999 May-00 (d) Notes and coins 833 910 1,063 1,020 1,292 1,109 (e) (b) Transferrable deposits 7,655 8,373 9,629 10,512 11,126 11,595 Household sector 5,895 6,262 6,808 7,220 7,804 N.A. Business sector 930 1,152 1,845 1,820 2,035 N.A. (f) Narrow money supply M1-A 3,307 3,316 3,894 4,072 4,282 3,956 transferrable in foreign Deposits (c) currency 2,194 2,968 3,352 3,885 4,158 4,500 (g) Broad money aggregate 15,645 16,106 18,096 21,142 23,202 22,707 Source: Central Bank of Trinidad and Tobago. (a) Data represents end of period. (b) As at April 2000. (c) Defined as foreign currency deposits of the commercial banks. (d) Currency in active circulation. (e) Demand and savings deposits. (f) Defined as currency in active circulation and demand deposits(adj). (g) Defined as M1-A plus domestic and foreign currency deposits of the commercial banks and the non-bank financial institutions. 67 Trinidad and Tobago Report October 2000 Table A3: Settlement Media Used by Credit/Deposit Taking Institutions (In millions of new TT$) Year ended 1995 1996 1997 1998 1999 May-00 (a) Required reserves at the Central Bank: (b) In domestic currency 1,956 2,062 2,454 2,548 2,537 2,552 Of which usable for settlement In domestic currency 1,956 2,062 2,454 2,548 2,537 2,552 Excess reserves at the Central Bank: In domestic currency 58 60 58 222 21 28 (c) (d) Transferrable deposits at other institutions 305 369 280 392 925 665 Source: Central Bank of Trinidad and Tobago. (a) There is no reserve requirement on foreign currency deposits. (b) Refers to the reserve requirements of the commercial banks. (c) Refers to Balances from Other Commercial Banks. (d) As at April 2000. Table A4: Institutional Framework (1999) Value of Number of Number of Number of accounts institutions branches accounts (TT$Mn) Central Bank 1 0 181 5,681.0 Commercial Banks 6 111 -Deposits 1,404,565 16,202.4 -Loans 437,317 11,454.9 (a) Savings Banks 1 64 -Deposits 143,425 11.2 -Loans 0 0 (b) Building and Loans Assocs 3 0 -Deposits 564 11.2 -Loans 543 39.4 Other Types of Institutions (c) 15 12 -Deposits 35,533 4,429.2 -Loans 23,189 3,394.9 Treasury 1 0 - Deposits 341 1,568.4 - Loans 647 211.4 Total 26 187 2,045,136 35,543.2 Sources: Central Bank of Trinidad and Tobago. (a) Savings Bank includes the Post Office Savings Bank. (b) Building and Loans Associations include Thrift Institutions i.e. Building Societies: General Building and Loan Association, Trinidad Building and Loan Association, and Caribbean Builiding and Loan Association. (c) Other Types of Institutions include Finance Cos. and Merchant Banks, and Trust and Mortgage Finance Cos. Treasury Division, Ministry of Finance. 68 Trinidad and Tobago Report October 2000 Table A5: Banknotes and Coins (Total value end of year in TT $millions) 1994 1995 1996 1997 1998 1999 Jun-2000 (a) Total currency in circulation 949 1,065 1,165 1,323 1,335 1,756 1,342 Of which: $100 684 777 858 984 993 1,360 1,003 $20 141 156 166 185 180 221 175 $10 31 32 35 37 38 43 37 $5 22 23 25 27 29 31 27 $1 23 26 27 30 32 34 31 Coins Issued 48 51 55 60 64 68 69 Notes and Coins Held by Credit Institutions (banks) 205 232 255 260 289 417 237 Notes and Coins in Circulation Outside Banks 745 833 910 1,063 1,020 1,292 1,158 Source: Central Bank of Trinidad and Tobago. (a) Currency in circulation excludes currency held by CBTT tellers. Table A6: Cash Dispensers, ATMs and EFTPOS Terminals Jan-Jul 1996 1997 1998 1999 2000 Cash Dispensers and ATM No. of Networks 1 1 1 1 1 No. of Machines N.A. N.A. 234 251 254 Volume of Transactions 7,678,745 12,147,985 15,764,720 15,829,140 9,370,800 EFTPOS No. of Networks 1 1 1 1 1 No. of Machines N.A. 2,933 4,677 6,052 6,604 Volume of Transactions 26,323 767,513 2,162,866 3,157,207 1,467,910 Source: Infolinks Services Ltd. 69 Trinidad and Tobago Report October 2000 Table A7: Number of Payment Cards in Circulation 1997 1998 1999 (c) (b) (a) (a) Cards with a cash function 160,290 481,463 511,901 (d) (b) (a) (a) Cards with a debit/credit function 160,290 481,463 511,901 (e) (b) (a) (a) of which: debit cards 140,134 405,227 426,242 (a)(f) (a) (a) (a) credit cards 66,556 76,836 86,459 (g) (b) (b) (b) Cards with a cheque guarantee function 9,844 10,200 9,494 (a) Data from one commercial bank representing approximately 33 per cent of total banking assets. (b) Data from one commercial bank representing approximately 19 per cent of total banking assets (c) All cards enabling the holder to withdraw cash from an ATM. (d) All cards which have a debit function, credit function or both functions. (e) Card which enables the holder to have his purchases directly charged to his account at a bank. (f) Includes both credit and charge cards. (g) Transactions with this card are guaranteed by the issuing bank up to a specific amount. Table A8: Indicators of Use of Various Cashless Payment Instruments Volume at year end (estimated) Monthly Monthly Monthly 1997 average 1998 average 1999 average Cheques in local currency: Cheques Received Number (millions) 10.1 0.8 10.3 0.9 11.0 0.9 Amount ($m) 144,193 12,016.1 147,205 12,267.1 237,905 19,825.4 Average Size (unit value) 14,277 1,189.7 14,292 1,191.0 21,628 1,802.3 Return Cheques (Central Bank only) Number (in thousands) 14.9 1.2 13.4 1.1 12.3 1.0 Amount ($000) 75,440.0 6,286.7 95,045 7,920.4 93,695 7,807.9 Average Size (unit value) 5,063 421.9 7,093 591.1 7,617 634.8 Cheques in foreign currency: Cheques Received Number (in thousands) 174 14.5 248 20.7 280 23.3 Amount N.A. N.A. N.A. Average Size N.A. N.A. N.A. Source: Central Bank of Trinidad and Tobago. 70 Trinidad and Tobago Report October 2000 Table A9: Indicators of Use of Various Cashless Payment Instruments (Value at year end, $M) Monthly Monthly Monthly (a) 1998 average 1999 average 2000 average Domestic Currency Cheques (b) Interbank transfers 52,081 4,340 45,284 3,774 29,004 2,417 Foreign Currency N.A. N.A. N.A. Cheques Interbank transfers Total 52,081 4,340 45,284 3,774 29,004 2,417 Source: Central Bank of Trinidad and Tobago. (a) June 2000. (b) Excludes settlement of CBTT Special Clearings. Table A10: Payment Instructions Handled by Selected Interbank Transfer Systems (Volume of transactions)(a) Monthly Monthly Monthly (b) 1998 average 1999 average 2000 average Large Value cheques (Central Bank on-us) 2,802 234 3,058 255 1,726 144 Large Value cheques (Central Bank off-us) 2,477 206 2,038 170 1,202 100 Total 5,279 440 5,096 425 2,928 244 Source: Central Bank of Trinidad and Tobago. (a) Shows cheques cleared by and on the Central Bank only. (b) June 2000. Table A-11: Payment Instructions Handled by Selected Interbank Transfer Systems (Value of transactions $m)(a) Monthly Monthly Monthly (b) 1998 average 1999 average 2000 average Large Value cheques (Central Bank on-us) 9,358 780 9,671 806 6,525 544 Large Value cheques (Central Bank off-us) 9,886 824 10,622 885 5,876 490 Total 19,244 1,604 20,292 1,691 12,401 1,033 Source: Central Bank of Trinidad and Tobago. (a) Shows cheques cleared by and on the Central Bank only. (b) June 2000. 71 Trinidad and Tobago Report October 2000 Table A12: Equity Securities and Accounts Registered in Securities Settlement Systems 1995 1996 1997 1998 1999 No. of Securities Issuers 31 30 28 29 31 (a) No. of Equity Accounts N.A. N.A. N.A. N.A. 102,000 Source: Trinidad and Tobago Securities and Exchange Commission. (a) As at June 1999. Table A13: Transfer Instructions Handled by Securities Settlement Systems (Volume) (a) 1995 1996 1997 1998 1999 Equities 6,188 5,667 7,679 7,369 3,182 (b) Government Securities N.A. N.A. 57 56 91 (c) Bonds 34 28 15 4 13 (d) Equity-based Fund 114,443 95,146 163,406 235,225 200,003 Source: Trinidad and Tobago Stock Exchange Limited; Trinidad and Tobago Unit Trust Corporation Central Bank of Trinidad and Tobago. (a) There is no centralised system for securities payments and settlement. (b) This refers to short-term securities and volume is defined as number of issues per annum. From September 1996, the Central Bank commenced open market operations. (c) This represents secondary market activity in government bonds. (d) This represents net volume of transactions of equity-based mutual funds in Trinidad and Tobago. Table A14: Transfer Instructions Handled by Securities Settlement Systems (Value, TT$millions) 1995 1996 1997 1998 1999 Equities 812.4 646 846.1 1,249.60 735.3 (a) Government Securities N.A. N.A. 3,585 4,017 5,040 (b) Bonds 15.3 19.2 23 0.3 12 (c) Equity-based Fund 156.6 52.3 306.5 283.6 -241.6 Source: Trinidad and Tobago Stock Exchange Limited; Trinidad and Tobago Unit Trust Corporation Central Bank of Trinidad and Tobago. (a) This is defined as the size of issues per annum. (b) This represents secondary market activity in government bonds. (c) This represents the net transaction value of equity-based mutual funds in Trinidad and Tobago. 72 Trinidad and Tobago Report October 2000 Table A15: Participation in SWIFT by Domestic Institutions 1994 1995 1996 1997 1998 1999 TT SWIFT users of which 2 2 2 2 2 5 members 2 2 2 2 2 3 sub-members 0 0 0 0 0 0 participants 0 0 0 0 0 2 Total SWIFT worldwide 4,625 5,251 5,632 6,176 6,557 6,797 members 2,551 2,845 3,014 3,070 3,052 2230* sub-members 2,097 2,314 2,500 2,621 2,781 2,825 participants 218 315 404 681 938 1936* Source: Central Bank of Trinidad and Tobago. (a) Major changes in numbers of members and participants are due to the introduction of a new category of participants, “Non Shareholding Banks”. As a result, a number of smaller banks have chosen to switch to this new category of participants. 73 Trinidad and Tobago Report October 2000 Table A16: SWIFT Traffic Data Traffic YTD 31.12.94 31.12.95 31.12.96 31.12.97 31.12.98 31.12.99 Total messages sent Growth 89% 15% 16% 21% 40% Number 33,351 62,935 72,123 83,413 100,990 141,452 of which Cat 0 1,766 2,017 1,557 1,338 1,863 3,573 Cat 1 14,614 29,890 37,752 44,645 57,854 94,774 Cat 2 8,035 13,410 14,131 14,824 15,450 16,999 Cat 3 1,023 1,982 1,923 2,575 2,841 3,052 Cat 4 802 1,111 1,860 2,368 2,702 2,173 Cat 5 11 5 9 4 0 0 Cat 6 0 0 0 0 0 0 Cat 7 3,630 6,370 6,354 6,714 6,223 6,381 Cat 8 1 0 0 0 0 0 Cat 9 3,469 8,150 8,537 10,945 14,057 14,500 Total messages received Growth 85% 16% -1% 21% 40% Number 41,638 76,990 88,987 87,702 105,732 147,995 of which Cat 0 242 246 263 11 121 7 Cat 1 15,173 26,029 29,547 35,208 46,379 68,623 Cat 2 1,393 1,800 2,067 2,293 2,360 4,536 Cat 3 1,096 2,262 2,376 1,530 1,605 2,598 Cat 4 641 1,203 1,505 1,589 2,081 2,802 Cat 5 59 82 71 83 55 432 Cat 6 0 0 0 0 0 0 Cat 7 733 1,571 2,253 2,940 3,198 3,770 Cat 8 0 0 3 1 1 0 Cat 9 22,301 43,797 50,902 44,047 49,932 65,227 Domestic traffic (sent and received) N.A. N.A. 156 302 395 434 Global SWIFT traffic 518,097,873 603,575,374 687,785,294 812,117,556 937,039,995 1,058,836,425 Growth 16% 14% 18% 15% 13% Source: Central Bank of Trinidad and Tobago. 74 Trinidad and Tobago Report October 2000 Table B1: Number of Financial Entities (End of year) 1997 1998 1999 Central Bank 1 1 1 Commercial Banks 6 6 6 Finance Houses and Merchant Banks 10 11 10 Trust and Mortgage Finance Companies 6 5 5 Thrift Institutions of which: Building and Loans 3 3 3 Savings Banks (Post Office Savings Bank) 1 1 1 Development Banks 2 2 2 Source: Central Bank of Trinidad and Tobago. Table B2: Number of Branches (End of year) 1997 1998 1999 Central Bank 0 0 0 Commercial Banks 123 110 111 Finance Houses and Merchant Banks 3 3 3 Trust and Mortgage Finance Companies 13 11 9 Thrift Institutions of which: Building and Loans 0 0 0 Savings Banks (Post Office Savings Bank) 64 64 64 Development Banks 4 4 4 Source: Central Bank of Trinidad and Tobago. Table B3: Number of Financial Sector Employees (End of year) 1997 1998 1999 Central Bank 349 385 398 Commercial Banks 8,259 7,019 6,646 Finance Houses and Merchant Banks 170 188 208 Trust and Mortgage Finance Companies 381 334 361 Thrift Institutions of which: Building and Loans 30 30 29 Savings Banks (Post Office Savings Bank) N.A. N.A. N.A. Development Banks 110 124 118 Source: Central Bank of Trinidad and Tobago. 75 Trinidad and Tobago Report October 2000 Table B4: Financial System: Assets (Millions of TT$) December Assets 1997 1998 1999 Apr-00 Total financial system 44,757 45,118 51,414 39,295 Commercial Banks 27,194 26,474 28,930 29,811 Central Bank 8,507 8,556 9,716 9,484 (a) Finance Companies & Merchant Banks 2,388 4,014 4,936 4,859 (a) Trust and Mortgage Finance Companies 5,578 4,890 6,632 6,953 Thrift Institutions 81 81 81 N.A. Development Banks 1,009 1,103 1,119 N.A. Source: Central Bank of Trinidad and Tobago. (a) As at March 2000. Table B5: Financial System: Deposits (Millions of TT$) December Deposits 1997 1998 1999 Apr-00 Total financial system 21,003 24,638 26,650 22,745 Commercial Banks 14,164 16,202 16,463 17,353 (a) Central Bank 3,374 3,966 4,034 5,392 (b) Finance Companies & Merchant Banks 980 1,955 2,772 2,619 (b) Trust and Mortgage Finance Companies 2,463 2,493 3,359 3,246 Thrift Institutions 22 22 22 N.A. (c) Development Banks — — — — Source: Central Bank of Trinidad and Tobago. (a) Includes deposits of the licensed financial institutions, public sector and insurance companies. (b) As at March 2000. (c) Development Banks in Trinidad and Tobago do not hold deposits. Table B6: Financial System: Loans (Millions of TT$) December Loans 1997 1998 1999 Apr-00 Total financial system 15,262 17,220 19,141 13,972 Commercial Banks 10,011 11,455 12,326 12,580 Central Bank 1,119 1,440 1,612 1,392 (a) Finance Companies & Merchant Banks 986 963 1,293 1,341 (a) Trust and Mortgage Finance Companies 2,261 2,432 2,945 3,001 Thrift Institutions 40 40 39 N.A. Development Banks 845 890 926 N.A. Source: Central Bank of Trinidad and Tobago. (a) As at March 2000. 76 Trinidad and Tobago Report October 2000 Table B7: Financial System: Equity (Millions of TT$) December Equity 1997 1998 1999 Apr-00 Total financial system 2,128 2,396 2,462 1,612 Commercial Banks 1,341 1,475 1,488 1,488 (a) Central Bank 74 99 124 124 (b) Finance Companies & Merchant Banks 226 305 309 312 (b) Trust and Mortgage Finance Companies 98 108 108 140 Thrift Institutions 33 31 29 N.A. (a) Development Banks 356 378 404 N.A. Source: Central Bank of Trinidad and Tobago. (a) Defined as share capital and reserves. (b) As at March 2000. Table B8: Volume and Value of Stock Exchange Operations 1993 1994 1995 1996 1997 1998 1999 Shares (Volume, Mill) 78.0 67.6 131.7 121.3 100.7 123.4 92.1 Shares ($Mill) 301.2 300.9 812.4 646.0 846.1 1,249.6 735.3 Bonds ($ Mill) N.A. 20.8 15.3 19.21 22.3 0.3 11.9 Source: Central Bank of Trinidad and Tobago. 77 Trinidad and Tobago Report October 2000 List of Abbreviations ACB: Automated Credit Bureau ACH: Automated Clearinghouse ADR: American Depository Receipt ATM: Automated Teller Machine CBTT: Central Bank of Trinidad and Tobago CD: Certificate of Deposit CEMLA: Centro de Estudios Monetarios Latinoamericanos CFATF: Caribbean Financial Action Task Force COSRA: Council of Securities Regulators of the Americas DIC: Deposit Insurance Corporation DTC: Depository Trust Corporation ESOP: Employee Stock Ownership Plan FATF: Financial Action Task Force FIA: Futures Industry Association IAC: International Advisory Council IMF: International Monetary Fund IPO: Initial Public Offer IOSCO: International Organization of Securities Regulators ISIN: International Securities Identification Number ISL: Infolink Services Limited OTC: Over The Counter POS: Point Of Sale RTGS: Real Time Gross Settlement SCI: Special Clearings Item SEC: Securities and Exchange Commission SRO: Self-Regulatory Organisation TSTT: Telecommunication Services of TT TTCD: Trinidad and Tobago Central Depository UTC: Unit Trust Corporation VCC: Venture Capital Company VCIP: Venture Capital Incentive Program WB: World Bank 78 Trinidad and Tobago Report October 2000 Glossary The Committee on Payments and Settlement Systems (CPSS) of the Bank for International Settlement (BIS) is finalizing a combined glossary for payments and securities clearance and settlement terms, which should be published in the following months. In order to avoid unnecessary proliferation of terminology, the Western Hemisphere Payments and Securities Clearance and Settlement Initiative decided not to present an independent list of terms. As soon as the BIS document becomes available, some of its terms will be added, where appropriate, to the subsequent reports. The following are some of the terms used in this report, which are peculiar to the Trinidad and Tobago context. CARICOM: Caribbean Community and Common Market, established by The Treaty of Chaguaramas, Trinidad, on July 4, 1973. Currently, 14 countries are members: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. The British Virgin Islands, the Turks and Caicos Islands, and Anguilla were granted Associate Membership in the 1990s. The Caribbean Community has three areas of activity: economic integration; cooperation in non-economic areas and the operation of certain common services; and coordination of foreign policies of independent member states. LINX: Interbank ATM network managed by Infolink Services Limited. It covers the ATM operations of the 4 largest banks in the country. Special Clearings : Large value cheque payments cleared and settled at the Central Bank of Trinidad and Tobago. 79 ISBN 968-9154-71-X