Investment Insights - Part 5

Several important economic and financial developments have taken place in the Eastern Caribbean Currency Union in recent times. The Eastern Caribbean Central Bank in partnership with this newspaper, The Anguillian, is presenting this series of financial columns in an effort to ensure that all ECCU citizens can reap the benefits offered by these initiatives, as well as enhance their individual investment skills.

DEMATERIALIZATION

What it is, and the benefits.
In a previous column we noted that the Eastern Caribbean Securities Market (ECSM) is the first fully electronic regional securities market in the Western Hemisphere. In an effort to ensure that the market is efficient and modern, and that trading meets international standards, the Eastern Caribbean Securities Exchange (ECSE) and its subsidiaries have invested heavily in technology.

In keeping with the state-of-the-art nature of the market, there are no physical security certificates. All securities in the ECSM are held in a dematerialized form, which means that the securities are in electronic or uncertificated form, and the records of the holders of securities are maintained electronically at the Eastern Caribbean Central Securities Registry (ECCSR).

This feature of the market is advantageous, given the design of the ECSM. It is a regional market, in which investors from eight countries are able to buy shares in all eight jurisdictions. It would therefore be logistically difficult to move physical certificates from one country to the other on a timely basis.

There are also other well-known problems associated with certificates, which have become all the more apparent since the launch of the market. Included among these are:

Costs arising from the issuance, safekeeping, transfer, delivery and record keeping processes required, which are ultimately borne by the investor;
Missed investment opportunities and the inability of investors to mitigate losses, when the markets are falling, because certificates cannot be delivered to a broker on time for sale (e.g. access restricted to bank hours);
The risks of theft, loss or mutilation of certificates during movements through and from the registrars, and the costs and time to replace them.
Inconveniences that can result when investors need to get the physical certificates to their broker’s office in good transferable form. For example, completing the transfer panel on the reverse of the certificate and getting the signature guaranteed by a recognized authority (normally provided by the broker).

The benefits of dematerialization (and electronic ownership) are considerable. These include:

The elimination of the nuisance, high cost and delays associated with the moving, safekeeping and security of physical securities in the regional market;
The removal of the expense and delays associated with replacing lost or stolen certificates;
The ability of investors to move or sell their securities within a short timeframe;
Verification of ownership can take place at any time;
Evidence of ownership cannot be lost or misplaced as the official record is kept electronically by the ECCSR; and
All market participants can benefit from fewer failed trades, lower borrowing costs and lower insurance premiums.

Since trading and post trading activities are fully electronic, investors in the region are able to trade securities and settle positions, in an equitable, secure and reliable manner. Settlement takes place at time T+1, where T is the date of the trade. This means that securities positions are changed and cash exchanged between buyers and sellers within one day after the trade date.

Shareholders receive periodic notification from the ECCSR detailing the number of their securities. However all shareholders can also request a statement (similar to a bank statement) from the ECCSR, or can contact a broker-dealer in their jurisdiction to ascertain details of their ownership of shares.

Notification from the ECCSR will be provided to shareholders on a bi-annual basis. A unique Account # and Investor ID # provided to the shareholder by the ECCSR will serve as the basis for private transfers and execution of transactions through licensed broker-dealers. Private transfers can also be processed directly through the ECCSR.

Existing shareholders of public companies listed on the ECSE can retain their physical certificates for their own record purposes; however, notification received from the ECCSR (upon listing) will now serve as the new proof of confirmation of ownership. The share certificate will no longer evidence ownership.