Brief History of the Development and Nature of the Trinidad and Tobago Securities Market
Development of Institutional Structures
Brief History of the Development and Nature of the Trinidad and Tobago Securities Market
Development of Institutional Structures
Market Breadth and Depth
Since 1981, the securities market has shown signs of increasing sophistication with the development of financial instruments, such as collective investment schemes, commercial paper, debt derivatives and employee stock options. Another enhancement in market offerings was the development of cross-border trading in equities in the 1990s. Over the period 1997 to 2003, there were six cross listings that accounted for 4.69 billion shares, or 61 percent of the new shares on the TTSE. The cross-listing initiative reached its peak in 2010 when there were 12 listed on the TTSE. Since then, that figure has been whittled down to four. Despite this downturn, cross-listed companies still accounted for approximately 25 percent of the total Market Capitalisation of the TTSE as at May 2022.
Forde et al. (1997) also note that the timing of the arrival of the Exchange had the unfortunate providence of coinciding with the onset of the downturn in the economy after the first “Oil Boom.” The strength of the stock market in 1996 is reported to be as a result of the high liquidity being experienced in the financial system. This liquidity forces the depression of interest rates earned on bank deposits, thereby enhancing the stock market’s attractiveness. Jones-Hendrickson (1996) disagreed with the view of Blackman (1991), former Governor of the Central Bank of Barbados, that one of the fundamental hindrances to the deepening of the CARICOM equity markets is the low-income levels prevalent throughout many of the countries in the region (Jones-Hendrickson 1996, 6). He cites Blackman:
“To explain the slow development of the markets for equities in CARICOM, we must invoke the concept of critical mass. The larger the number of buyers and sellers in the market, the more actively they trade, the greater is the liquidity of the assets being traded and the more willing are investors to enter the market” (Blackman 1991, 199).
Jones-Hendrickson, however, believed that the cause of regional capital market underdevelopment is grounded in the Keynesian theory of long-term expectations. (Jones-Hendrickson 1996, 7).
Cozier and Watson (2018) identified lack of market liquidity and inadequate market size (as evidenced by low market turnover ratios and company listings) as serious hindrances that need to be addressed by the relevant authorities. These remain as hindrances to this date. Illiquidity in the markets only serves to discourage investors who may require more immediate access to their funds.
Development of Institutional Structures
Trinidad and Tobago began the process of constructing appropriate, independent local financial and securities market structures in the period 1964 to 1968. This era saw the passing of the Central Bank Act which established the Central Bank of Trinidad and Tobago (“CBTT”), the Commercial Banking Act, the Insurance Act, the Finance Institutions (Non-banking Act) and the Financial Institutions Act, just to name a few.
With a view to strengthening the local securities market, the CBTT instituted a Call Exchange in 1965. This self-regulated exchange operated as a clearinghouse for the trading of shares. A Capital Issues Committee was formed in 1970 to provide an oversight function for the securities market. This Committee had no legislative or enforcement powers.
Concurrent with these developments in the local securities market, the 1970s saw the emergence of stock brokerage firms, responding to the increasing activity in the market. In 1981, the Securities Industry Act (SIA (1981)) established the Trinidad and Tobago Stock Exchange (“TTSE”). Consequently, the Call Exchange and the Capital Issues Committees were abolished, with the TTSE effectively acting as a Self-Regulatory Organisation (“SRO”).
The TTSE was considered a vital addition to the securities market operations because it facilitated more efficient market transactions, and in the end, it contributed to the process of savings and investment. Another major development in this year was the proclamation of the Unit Trust Corporation Act of Trinidad and Tobago (1981) and the establishment of the Trinidad and Tobago Unit Trust Corporation (“UTC”) [see Forde et. al., 1997]. This heralded the introduction of collective investment schemes in the financial sector.
In Trinidad and Tobago up until the mid-1990’s the securities market was regulated by the Companies Ordinance Chapter 31 No. 1 (the Ordinance), which was based on the UK Companies Act, 1929, the Foreign Investment Act, 1990 ( the FIA), the Securities Industry Act, 1981 (the former SIA) and the self-regulated rules of the Trinidad and Tobago Stock Exchange (the Stock Exchange).
Companies typically raised capital by way of equity or debt financing such financing usually being raised “at home”. Consequently, the capital markets in Trinidad and Tobago remained undeveloped until member countries of CARICOM began a drive to facilitate and encourage cross-border investment in securities by harmonising and making more transparent their corporate and security related laws. Further, in the case of Trinidad and Tobago, the development of its multi-billion-dollar oil and natural gas industry made this country a magnet for foreign investors eager to invest in many downstream industries which continue to proliferate with each discovery of new oil and natural gas reserves. Local investors including financial institutions, foreign investors and the Government, desirous of seizing the investment opportunities offered by the development of these industries, advocated more legislative regulation and transparency of the securities market to the level of international best practice.
In 1995 new companies and securities industries acts, the Companies Act Chapter 81:01 (the Companies Act) which replaced the Ordinance and repealed it with certain exceptions, and the Securities Industries Act No. 32 of 1995 (the SIA), which repealed and replaced the former SIA, were passed which established the Trinidad and Tobago Securities and Exchange Commission. These acts together with the FIA provided the main legislative framework for the regulation of the securities market in Trinidad and Tobago.
Another arrangement in the institutional development of the securities market was the establishment of the Trinidad and Tobago Central Depository (“TTCD”), which began operations in January 2003. The TTCD was created to facilitate the smooth and efficient operation of book-entry systems. Another development was the establishment of the Caribbean Credit Rating Information Service Limited (“CariCRIS”), the first regional credit rating agency. The main objective of this entity is to provide information on the credit worthiness of countries, firms and debt securities across the Caribbean, which is significant to the pricing mechanisms of the securities markets.