Archive for May 20th, 2010

What effect will the EU’s “Alternative Investment Fund Manager Directive” have on the Caribbean’s financial services ?

Though it is not yet known what effect a draft law to tighten hedge-fund regulations might have in Cayman, the local financial services industry has raised objections to the proposal approved this week by European Union finance ministers.

The draft law, known as the Alternative Investment Fund Managers Directive, has also drawn objections from the UK and the US, according to Bloomberg news service.

Europe has agreed to “strict” new curbs on the trillion-dollar industry despite stiff resistance from fledgling British finance minister George Osborne, Agence France-Presse (AFP) reported.

The EU finance chiefs, tired of what they call “speculators’” attacks on their currency, agreed on a “mandate on negotiations with the European parliament” to standardise hedge-fund regulation across the 27-nation bloc, according to AFP.

In Cayman, Anthony Travers, chairman of Cayman Finance, said, “It is too soon to say whether there will be implications for the Cayman Fund industry, although one possibility is that the Cayman product will be enhanced as a result, albeit not to retail investors in the EU.”

Paul Harris, chairman of International Management Services Ltd in Cayman and president of the Cayman Islands Directors Association, concurred.

“My view is that it is still too early to formulate a view on what effect this will have on the Cayman Islands,” he said. “It could be that the greater restrictions in Europe will result in more business for Cayman. If adopted as they are currently drafted,” Mr Harris said, “the rules could force funds out of the EU, probably to the US, although some to Switzerland and a few to offshore financial centres such as the Cayman Islands.

“That will also be a problem for the EU since EU institutional investors such as life insurers and pension funds need hedge-fund investments to generate the sufficient funding they need. I doubt whether the lawmakers in the EU have fully considered this.”

Further, Mr Harris said, “with both the UK and the United States being against the directive, I believe we should reserve judgment as to what the outcome will be for Cayman until the final picture becomes clearer. In any event most of the funds in Europe are retail funds – a market that Cayman does not specialise in.”

The directive, which also affects huge private equity and real estate funds, would introduce harmonised EU-wide rules based on compliance with “strict requirements,” according to an EU press statement and reported by AFP.

German finance minister Wolfgang Schaeuble said that “we are closing a loophole in the regulations,” adding he thought that the bill would soon be placed before lawmakers.

Britain, home to 80 percent of Europe’s hedge-fund industry, has fought for months to ensure that funds based in Commonwealth outposts in the Caribbean, for example, but managed in the City of London, be able to sell to all of Europe’s half- billion population on the strength of British regulations alone, according to AFP.

That is the current situation, but in a slight nod to London’s concerns, ministers “took note of remaining concerns expressed by delegations, for instance with regard to third-country rules,” AFP reported.

No vote was required.

In a lengthy statement on behalf of the islands’ financial services industry, Cayman Finance took issue with former Prime Minister Gordon Brown, in particular, and his “mischaracterisation” last year of the Cayman Islands and its shared interests with the City of London.

“It is regrettable that former Prime Minister Gordon Brown could have made the valid point after the financial crisis that Cayman operated a world leading system of anti-money-laundering legislation and had full tax transparency with the United States,” Mr Travers wrote in the news release. “Instead he chose when addressing the US Congress to ask the rhetorical question — would the world not be a safer place if jurisdictions like the Cayman Islands were outlawed?

“In fact, given that no financial institutions failed in the Cayman Islands during the crisis, that Cayman had no Northern Rock, no HBOS, no Bear Sterns and no Lehman’s, the correct answer to the question should have been, ‘Actually, no, Mr Brown, rather the contrary.’

The problem with Mr Brown’s “transparent exercise in blame deflection,” according to Mr Travers, “was not simply the mischaracterisation of the Cayman Islands. The problem was that in aligning with the rhetoric of the anti hedge fund, European-inspired protectionist sentiments and failing to recognise the importance of the $480 billion dollars of direct investment from Cayman funds into the City of London, Mr Brown was wrong-footed when the true objective of the French and German attack manifested itself in the Directive.

“And that objective was the City of London,” he said, underscoring those words.

Further, the news release says, “Cayman attracts hedge funds because it has relevant and attractive laws, a high standard of professional service, an effective Court system with ultimate appeal to the Privy Council and full IOSCO (International Organisations of Securities Commissions) transparency. Having sensible judges and a UK common law as basis to our legal system and regulator-to-regulator disclosure matters is substantive.”

Cayman Premier Mackeeva Bush also issued a statement this week regarding the EU proposal. He said that the rules “would require those funds inside the EU to comply with restrictions on bonuses, leverage and investment strategies, among other things.

Further, he said, the (Directive) places conditions on investments in funds from non-EU jurisdictions … “The marketing of funds from non-EU countries would be allowed if certain criteria are met. As it currently stands, these criteria include equivalence in relation to regulatory oversight, anti-money laundering and countering terrorist financing, and compliance standards. They also involve having regulatory and tax information exchange agreements between relevant non-EU and EU authorities, as well as market access for EU based funds.

“We believe that Cayman, on an objective assessment, meets these criteria,” the Premier said in his statement. “However, we are still seeking clarification on the specifics (some of which the EU is still working out) and on the process that they will put in place to assess whether the criteria are met.”

As a result of the EU finance ministers’ action this week, negotiations with the European parliament could begin on 31 May on a new legislative text expected to make it much tougher for non-EU funds, used to easy British access, to reach the full single market, AFP reported.

A European diplomat said that the so-called “passport” issue had yet to be fully worked through, underlining that “the door is still open on this one, it means the UK’s concerns are in play.”

That followed one-on-one talks between Osborne and Spain’s Elena Salgado, chairing the talks, France’s Christine Lagarde and Germany’s Wolfgang Schaeuble, the source said.

European parliament lawmakers also voted late on Monday to echo Britain’s concerns in its negotiating position, although Osborne has no guarantee that his core demand will be included in the final bill.

United States Treasury Secretary Timothy Geithner had warned in March that the legislation would amount to a protectionist onslaught, helping Osborne’s predecessor to win a pre-election reprieve on the issue.

Managers argue that the need to obtain regulatory approval in each of the other 26 EU countries will cost millions of pounds in fees and could lead to an industry exodus to Switzerland and the Middle East.

European partners had warned Osborne beforehand that he would have to accept the majority will on an industry in which top earners can pockets billions each year.

“That’s how it is in Europe,” Schaeuble had said. “We are a union, and there are decisions that go against individual countries, but that can happen to any one country.

“A clear majority want this law to go through and consider it necessary,” Schaeuble underlined.

Hedge funds lost some of their lustre during the economic downturn, but still handled between $1.2 trillion and $1.3 trillion worldwide in 2009.

Final EU approval of any measures requires an accord between the European Parliament and EU national governments, Bloomberg reported, in a process that could take another year or more.

– Roddy Thomson (AFP), Bloomberg and Net News staff

‘EU Hedge Fund Directive fuelled by politics of envy’
Prepared statement from Anthony Travers, chairman of Cayman Finance

“Now that there is a new Government in the UK perhaps it is a good time to remind Conservative ministers, despite the possible constraints of the realpolitik, of the common interest between the Cayman Islands and The City of London,” Cayman Finance chairman Anthony Travers, OBE, said today.

“The body which I chair, Cayman Finance, has been actively monitoring the European Union Alternative Investment Fund Directive for the past 12 months. Last year after we met with influential UK Conservative politicians it was agreed that the Directive is in neither of our interests.

“It is regrettable that former Prime Minister Gordon Brown could have made the valid point after the financial crisis that Cayman operated a world leading system of anti money laundering legislation and had full tax transparency with the United States.

“Instead he chose when addressing the US Congress to ask the rhetorical question – would the world not be a safer place if jurisdictions like the Cayman Islands were outlawed?

“In fact given that no financial institutions failed in the Cayman Islands during the crisis, that Cayman had no Northern Rock, no HBOS, no Bear Sterns and no Lehman’s the correct answer to the question should have been – ‘Actually, no, Mr. Brown, rather the contrary’.

“But the problem with his transparent exercise in blame deflection was not simply the mischaracterisation of the Cayman Islands. The problem was that in aligning with the rhetoric of the anti hedge fund, European-inspired protectionist sentiments and failing to recognise the importance of the $480 billion dollars of direct investment from Cayman funds into the City of London, Mr. Brown was wrongfooted when the true objective of the French and German attack manifested itself in the Directive.

“And that objective was the City of London. “Cayman attracts hedge funds because it has relevant and attractive laws, a high standard of professional service, an effective Court system with ultimate appeal to the Privy Council and full IOSCO transparency. Having sensible judges and a UK common law as basis to our legal system and regulator to regulator disclosure matters is substantive.

“Cayman has been and remains highly attractive as a tax transparent but tax neutral jurisdiction in which relevant structuring can be undertaken to pool funds invested from the international capital markets. Latest statistics from the Monetary Authority show the numbers of registered funds at around 9500, a drop of less than 4% since the peak of the market in 2007, although rate of growth which is now increasing has, and understandably in a deleveraged world, tempered from the pre-crisis levels.

“A good deal of self-promotion from European based centres has somewhat clouded the issues with regard to the Directive but it is by no means certain that the hedge fund industry will wish to attempt to operate the traditional fund structure from within the EU under the new constraints proposed (in whatever form results from the European Parliamentary reconciliation process).

“Nor is it the case that the Cayman hedge fund product has ever had a cross border UCITS passport to market retail within the EU. The Cayman product is, and has always been, designed for institutional not retail consumption and Cayman regulation fits that construct. More critically, in its most extreme form, if that is what is enacted, the Directive will restrict EU based fund managers in terms of transparency disclosure, short selling and possibly remuneration, with the result that an EU based fund manager could not compete in terms of investment return with a non EU based fund manager.

“So we may well be left with a more distinct fork now in the road. But what is certain is that in a global financial marketplace no institution that wants the investment return of a Cayman hedge fund needs to invest in it from an EU-based bank account. Further, it is by no means a foregone conclusion that protectionist legislation in Europe will be a negative for the Cayman hedge fund industry, because one consequence may be that EU hedge fund managers seeking to maintain a competitive return will choose to leave the EU.

“In that event, no doubt Switzerland would become a favoured jurisdiction for an EU-based fund manager to relocate within the proximity of Europe. But the relationship between the Cayman hedge fund and a Swiss (or Dubai or Singapore or Hong Kong) based fund manager would remain unimpaired, as would the investment return of that hedge fund untrammelled by the EU investment restrictions.

“No one should be in any doubt that the EU agenda here is motivated by French and German resentment of the success of the City of London, but in seeking to exclude non EU funds and non EU fund managers, the EU may also be picking a fight with the United States, a point which Mr Geithner, the Treasury Secretary, has made clear since US fund managers may also be excluded.

“As it stands given that there are still some 1,600 proposed amendments to be reconciled within the European Union legislative process, Cayman Finance has not yet been able to formulate a specific response. Indeed, Mr Matthew Jones of the London Alternative Investment Management Association commented at the Cayman Finance inaugural Summit on 6 May 2010 that it was too soon to do so, given the ongoing fluidity in the European proposals.

“Protectionist legislation this extreme, motivated by a political and not a true regulatory agenda, seems inconsistent with the global political accords suggested by recent statements of certain G20 politicians and very often has a quite unintended consequence. But rumours of the demise of the Cayman Islands may prove to be greatly exaggerated.

“In all of this it should be remembered that Europe is the third most relevant jurisdiction for onward investment by Cayman fund products and at the height of the market in 2007 ranked with only 13% of assets under management. It may well be that Cayman will develop an alternative regulatory regime that will provide a hedge fund lite product that operates within fortress Europe, but outside of the EU in the global marketplace, the traditional Cayman product will retain its tried and tested virtues.”