Thu, 22/10/2009 - 12:22
The Cayman Islands’ dominant role in the offshore investment fund and structured finance industry sectors was the catalyst for the establishment of the Cayman Islands Stock Exchange (CSX) and is the foundation of its continuing success. The jurisdiction’s dominance is evidenced by the approximately 10,000 investment funds domiciled in the Cayman Islands and the more than 150 fund administrators licensed there. Similarly, the Cayman Islands continues to be the jurisdiction of choice for sophisticated structured finance vehicles.
Over the last 40 years the Cayman Islands has matured into one of the world’s largest international financial centres, providing institutionally-focused, specialized services to a global client base. The Cayman Islands’ competitive strength in global financial services lies in its ability to provide an effective and cost-efficient tax neutral platform for international capital flows in an environment of economic and political stability. The Cayman Islands’ main industry sectors, in addition to the Cayman Islands Stock Exchange, include banking, investment funds, captive insurance, companies and partnerships, trusts, structured finance and vessel and aircraft registration. The jurisdiction provides a full range of services within each of these sectors.
The jurisdiction offers a “one-stop-shop” for clients, supported by an excellent professional infrastructure. The ready availability of experienced professionals dedicated to providing first-class service certainly has been a significant factor in the Cayman Islands becoming the preferred offshore domicile for both investment funds and structured finance vehicles. All major accounting firms have substantial practices in the Cayman Islands; most of the top 50 banks globally have branches or subsidiaries in the Cayman Islands; and there are numerous law firms providing a wide range of expert legal services.
The Islands’ financial services industry operates in a regulatory environment that is recognized internationally to meet and surpass international standards, encompassing modern and evolving legislation, rigorous law enforcement and international cooperation. The jurisdiction is included on the G20’s “white list”, its principal financial services regulator, the Cayman Islands Monetary Authority, is a full member of IOSCO and the CSX is an affiliate member, evidencing that the jurisdiction, its principal regulator and the CSX each meet internationally accepted standards of securities regulation. In this regard, it is worth noting that the financial industry in the Cayman Islands weathered the current financial meltdown with no failures in its banking industry and regulatory standards in place governing investment funds and their service providers, including fund administrators, custodians and auditors, make it extremely unlikely that a Madoff-sized investment fund fraud could occur in the Cayman Islands.
Last but not least, a progressive, client-centred approach has been a key to the Cayman Islands’ success. A strategic partnership between the Government and the private sector produces a business environment responsive to the needs of the financial industry. The establishment of the CSX is but one example of this strategic partnership in action. The CSX is proud to incorporate the jurisdictional attributes of excellence, experience, international regulatory standards and a strong client focus.
Since 1997, the Cayman Islands Stock Exchange has provided a specialized listing and trading facility for the specialist products of the Cayman Islands financial industry, in particular investment funds, specialist debt securities and eurobonds. The CSX also provides a secondary listing facility and an offshore trading venue for securities listed and traded on another recognized exchange and offers domestic companies the ability to list and trade locally.
The current value of funds, debt and equity listed on the CSX exceeds US$160 billion. The CSX has had over 3,000 listings to date, of which approximately 2,000 have been investment funds. These listings include companies established both in the Cayman Islands and internationally, most recently including listings from investment fund companies based in the Middle East, Southeast Asia, Brazil and South Africa. The CSX has listed investment funds of every form including mutual funds, hedge funds, funds of funds, open and closed ended funds, umbrella funds, master/feeder structures, segregated portfolio/protected cell companies, limited partnerships and unit trusts. The CSX also has listed approximately 1000 structured debt products of every form, including various types of asset-backed, collateralised and credit-linked securities, eurobonds and, more recently, sukuks and catastrophe bonds.
Specialized Listing Services
The CSX specializes in the listing of investment funds and structured debt products targeted at the institutional and high net worth investor. The CSX’s listing rules are sophisticated and designed to contemplate innovative structures, combining reasonable and appropriate disclosure requirements with the flexibility necessary for the specialized instruments that list on the Exchange. The listing rules have been drafted and procedures implemented to ensure that the Exchange meets all international regulatory standards while ensuring that listing and continuing obligation requirements are appropriate for the sophistication of the investor pool. The objective is for listing on the CSX to be a straightforward and speedy process.
The CSX also remains very attentive to the needs of its specialized marketplace, adapting its listing requirements to address new fund and debt structures and products. On the debt side, over the past three years the CSX quickly has become the favoured listing facility for catastrophe bonds, partly due to the ease with which its listing rules were adapted to the listing features of that product. More recently, the CSX listed its first property funds, having in the process adapted its listing requirements to address pragmatically the unique features of such funds. Requirements were changed to include, for example, independent third party valuations of the fund’s assets while the frequency of NAV reporting was reduced to a minimum of every 6 months to reflect the nature of the underlying assets. The CSX actively seeks to avoid the imposition of any regulatory requirement that unnecessarily increases costs for either the issuer or the investor. This approach in turn has the direct effect of assisting to maximize investment returns.
The Benefits of Transparency and Third Party Oversight
The current financial environment, as well as government and regulatory community reaction to it, is exposing to an ever greater extent the value to both investment fund and structured debt issuers of building in increased transparency and third party oversight to their current and future offerings. Not only are regulators demanding this, investors are increasingly requiring it as a condition of making an investment. Transparency and third party oversight are some of the principal benefits a listing on the Cayman Islands Stock Exchange both offers and emphasizes.
Transparency – Investment Funds
For its listed investment funds, the Exchange has for many years facilitated transparency through its automated electronic NAV self-reporting system. An online link to the Exchange’s reporting system enables every listed fund easily to meet its NAV reporting obligations by electronically self-reporting updates of the fund’s net asset values when calculated, whether on a daily, weekly, monthly or quarterly basis, as well as any change in the number of shares outstanding. The updated information is immediately and automatically published on the Exchange’s website, which also includes all previously published updates, to provide an easily accessible, publicly available historical record of the fund’s performance. The Exchange’s website also includes all news releases issued by the fund as well as background information about the fund such as its major service providers. To permit a broader distribution of the data, the CSX has agreements in place with Bloomberg and with Telekurs to publish some or all of this data through their facilities.
Transparency – Structured Debt
The CSX recently implemented an automated electronic self-reporting system, similar to that already in place for investment funds, for its structured debt listings. Structured debt issuers listed on the CSX now can publish, directly and electronically on the Exchange’s website on a daily basis, or less frequently as desired, the value of the collateral underlying their issued securities. The online reporting system permits the issuer to report not only a combined collateral value but also individual values for each component of the collateral, enabling the issuer to provide full transparency to its investors. The Exchange’s recent introduction of its structured debt reporting facility directly addresses concerns about lack of transparency in the specialist debt market that have been raised by both regulators and investors in relation to the subprime financial crisis and its aftermath. In that regard, the recently introduced facility can provide a significant competitive advantage to the Exchange’s listed structured products issuers when soliciting investment capital.
Third Party Oversight
In addition to enhanced transparency, a CSX listing includes, as a value added service, independent oversight by the Exchange of the listed security. The CSX‘s listing staff vets the initial listing documents and reviews for the suitability of, as applicable, the issuer’s directors, investment manager, administrator, custodian, prime broker, arranger and auditors. The CSX’s compliance staff enforces the required periodic filing of NAVs; conducts daily market surveillance, electronically monitoring and reviewing NAV update filings for unusual changes in NAVs, subscriptions and redemptions; monitors for the timely filing of audited financial statements and reviews the statements for undisclosed information and risks; generally conducts reviews for compliance with continuing disclosure obligations and monitors for new developments that could impact the listed security.
A significant benefit of the Exchange’s oversight is reduced risk for the investor, other than that related to the investment strategy itself. The limited costs that apply to listing on the CSX are more than offset by the evident marketing advantages to a lower risk offering. Certainly in the current environment, a listing on the CSX places both investment funds and structured debt products in a favourable position to meet the heightened expectations of both investors and regulators.
Other Advantages of Listing on the Cayman Islands Stock Exchange
Other advantages to be gained from listing on the Exchange include:
• Synergies from listing on an exchange in the leading domicile in the world for investment funds and structured debt products, providing access to the full range and top calibre of service providers in a jurisdiction that has fashioned its legislative, regulatory and administrative approach to enable the utmost efficiency in specialist product operations.
• UK HMRC “recognised stock exchange” status that (a) qualifies CSX listed securities for investment by UK personal pension plans, personal equity plans (PEPs) and individual savings accounts (ISAs) and (b) exempts interest paid on CSX listed securities from the application of UK withholding tax.
• Access to institutional investors who may face legal or regulatory constraints on investing in unlisted securities or prefer for internal capital allocation purposes to invest in listed securities.
• Sophisticated listing rules that are easy to understand and commercially driven. They are tailored to (1) accommodate the latest structures and products and (2) to meet the needs of issuers who market their offerings to institutional and high net worth investors, emphasizing the disclosure of all relevant information without imposing unnecessarily onerous conditions. For example, no investment restrictions or minimum capitalization requirements apply to investment funds, a local sponsor is not required for structured debt listings, there is no requirement for locally resident directors and the provisions of EU directives, including the EU Prospectus Directive, do not apply.
• Fast and efficient listing services from an experienced and highly qualified team that understands the complexities of the specialist products listed on the Exchange and is committed to meeting each issuer’s listing deadline. The listing application process is completely electronic, enabling staff to meet requested document turnaround times. There is no enhanced fee for speedy handling of new listings.
• A commitment to ensure that the cost of listing is not an impediment to list. The CSX provides a high quality listing environment and a high level of service at a low cost. The full schedule of fees is published on the CSX website at www.csx.com.ky.
While the overall outlook for financial markets remains troubled in the short term, the Exchange is confident that its traditional qualities, a dynamic approach to listing and the ability to provide timely, flexible and cost effective solutions in fast changing markets, will prove advantageous notwithstanding the current challenges being faced in financial markets internationally. A CSX listing continues to be an inexpensive, efficient and effective way to add credibility, marketing value and a higher profile to an investment fund or structured debt offering. If you wish to discuss listing on the CSX, you can contact the CSX Listing Department directly at [email protected]. All CSX listing rules and other regulations are accessible for review on the CSX website.
By Gerry Halischuk, Head of Markets & Compliance, Cayman Islands Stock Exchange
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