Cayman prepares for AIFMD passport

| 04/08/2015 | 0 Comments

CNS Business(CNS Business): Cayman Islands financial and government leaders said they remain committed to working with the European Securities and Markets Authority as the island,  along with other major jurisdiction, face uncertainty over whether they will be granted the EU’s Alternative Investment Fund Managers Directive (AIFMD) passport, allowing the sale of funds in European countries. ESMA issued its initial set of recommended countries for EU’s AIFMD passport late last week.

The decision by ESMA to not grant a European-Wide marketing “passport” to US hedge fund managers means almost all of the world’s largest hedge fund managers must continue to apply to national regulators in each EU member state for permission to sell their funds in those countries.

Earlier this month, the Cayman Islands Government set up new regimes that would allow managers to opt-in to reporting consistent with the European AIFMD requirements and to put the islands in a better position to secure an extension of the AIFMD passport.

“We expect this will satisfy ESMA requirements and strongly position us for a positive assessment,” stated Minister of Financial Services Wayne Panton.

In a further step towards achieving European passport-ability for Cayman Funds, the Cayman Islands’ Government published two draft bills on Friday 10 July which make certain enhancements to the existing Cayman Funds regime in order to provide a mechanism for compliance with the provisions. The two bills made certain amendments to the Mutual Funds Law (MFL) and Securities Investment Business Law (SIBL). The bills are designed to put in place two separate opt-in regimes for prudential regulation of both EU-connected funds and EU connected managers which are consistent with the AIFMD. Panton noted that Cayman’s Legislative Assembly will consider amendments to the two financial services laws in early August.

So far, of the more than 40 jurisdictions that ESMA is expected to assess in relation to the passport extension, the independent EU authority has assessed six. Those jurisdictions include Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US.

“We are happy to see this formal recommendation process started, where ESMA is committed to taking an objective and transparent approach to reviewing and recognising jurisdictions around the world who play such an important role in the global investment funds market and we look forward to ESMA reviewing and assessing Cayman’s carefully developed AIFMD regimes” said Cayman Finance CEO Jude Scott.

“The Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation. No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria,” ESMA’s announcement stated.

ESMA also said it “aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport”.

Prior to activating the relevant provision in the AIFMD extending the passport to these jurisdictions, ESMA noted that the European Commission, Parliament and Council may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries, before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have.

Panton noted that ESMA’s advice that the European Commission, Parliament and Council wait for a sufficient number of recommendations before introducing the passport is “eminently fair and appropriate”.

Cayman’s investment funds currently are marketed in the EU under national private placement regimes (NPPRs). The NPPR and passport regimes will coexist until at least 2018, by which time ESMA will have decided, and acted upon, whether or not the passport regime should entirely displace NPPRs.

The minister acknowledged that through AIFMD, Cayman intends to strengthen and expand its EU presence.

“We are a global leader in investment funds, and we intend to build on our market dominance with our new AIFMD regime as the platform upon which Cayman will pursue further growth in our share of the EU’s investment funds sector,” he explained.

The AIFMD Regimes will give Cayman Islands based funds and managers the option of electing for an additional layer of regulation to apply where certain types of marketing in the EU, or managing of EU funds or depositary activity are contemplated. Although much of Cayman’s investment funds business stems from the US, Cayman’s new AIFMD regime is designed to provide a future pathway between Cayman Islands-domiciled investment funds and managers and the EU, with the intention of maintaining Cayman’s leadership, and further growing its share, of the global mutual funds sector.

The Mutual Funds (Amendment) Bill makes provision for the regulation of Cayman investment funds that elect to be regulated by CIMA for AIFMD passport purposes. In the bill, a Cayman investment fund that makes such an election is referred to as a ‘regulated EU connected fund’, a category available to both open-ended funds as well as closed-ended funds.

The Securities Investment Business (Amendment) Bill makes provision for the regulation of Cayman fund management entities that engage in certain EU connected activities, as specified in the bill; and elect to be regulated by CIMA for AIFMD passport purposes. In this bill, a Cayman fund management entity that makes such an election is referred to as an ‘EU Connected Manager’, a category available to both current licensees under the Securities Investment Business Law and entities that are currently not required to be licensed under such law.

The reports stated that ESMA has decided to take a “country by country” approach to such recommendations to the EC. Whether to grant any actual extension of the passport to any country will be determined separately by the EC, which has three months from 22 July to reach a decision on the countries recommended on ghat date.

In the meantime, Cayman Islands investment funds may continue to be marketed in the EU under national private placement regimes (NPPRS). That requires, amongst other things, that Cayman’s regulator, the Cayman Islands Monetary Authority, has memoranda of understanding with individual EU Member States. Pursuant to the AIFMD, these arrangements can continue until at least 2018. ESMA will then have to decided whether or not the passport regime should entirely displace NPPRs.

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Category: Finance, Financial Services

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