Global Funds Ireland 2007

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IN ASSOCIATION WITH

GLOBAL FUNDS IRELAND

2007

VOLUME 2 No. 1 - 2007

NOT JUST LUCK

A DECADE AT THE PARTY - IRELAND’S GROWTH AS A FUND CENTRE

DISTRIBUTED WITH

INVESTOR S ERVICES JOURNAL

FUND ALTERNATIVES INTELLIGENCE

MAGAZINE

THE GLOBAL FUNDS SERVICES MAGAZINE

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EDITOR’S LETTER

GLOBAL FUNDS - IRELAND 2007 IN ASSOCIATION WITH

DISTRIBUTED WITH

INVESTOR S ERVICES JOURNAL

FUND ALTERNATIVES INTELLIGENCE

MAGAZINE

PPA MAGAZINE AWARDS PUBLISHER OF THE YEAR 2006 HIGHLY COMMENDED MEMBER - PERIODICAL PUBLISHERS ASSOCIATION

Times are a changing Welcome to Global Funds - Ireland, a sister magazine of Investor Services Journal and Fund Alternatives, we are pleased to have been asked by the IFIA and NICSA to produce the official conference supplement for their annual global funds conference. It cannot be denied that the rate of change in the funds community has accelerated over the last few years. In a bid to satisfy the end investor and in the face of greater margin pressures, traditional fund managers have adopted investment strategies that bring them closer to the portfolio of a hedge fund manager. An appetite for derivatives and more complex asset classes from these parties has thus in turn, forced fund administrators to adapt. Hand in hand with the adoption of these typically riskier products is the requirement for more frequent and detailed NAVs, best execution and risk analysis tools. Requests for timely and accurate information put pressure on administrators to upgrade their technology infrastructures. The funds administration community is therefore currently in a state of flux. The same can also be said of Ireland’s funds administration community. Dublin’s early days were so successful due to the reinvention of the jurisdiction as a nearshore low cost alternative to London. The city was able to match political imperative with global demand and offer a sufficiently attractive location and an inexpensive but qualified talent pool.

The jurisdiction is now facing competition from other domiciles such as the Middle East and Malta, which are attempting to position themselves as lower cost alternatives. This is compounded by the fact that real estate prices in Dublin have shot up and it is no longer seen as a cheaper place to relocate your business. Ireland’s response has been to market other cheaper cities in the country – such as Wexford, Cork and Limerick, to name but a few – as alternatives to Dublin. Dublin itself has been able to capitalise on the domain expertise that it has gained over the last decade in fund administration and the local talent pool and fend off the advances of these other jurisdictions. Although the city will never again be a low cost option, it is more than capable of becoming the ‘brain trust’ of the European market. There have also been developments in the local market such as a domestic push to deregulate Irish domiciled property funds and the introduction of a new authorisation process for qualified investor funds, which allows greater speed to market. These have allowed more freedom for investment in the country and this bodes well for the future. Despite the ongoing period of adjustment, it seems that the industry is more than capable of adapting. Don’t think twice, it’s all right. Virgine O’Shea

Group Editor: Virgine O’Shea ([email protected]) Editor Fund AIM: Giles Turner ([email protected]) Reporter: Andrew Warburton ([email protected]) Account Managers: Monique Theart ([email protected]) Ben Katzler ([email protected]), Mike Popay ([email protected]) Directory Sales: Daniel Ryder ([email protected]), Craig McCartney ([email protected]) Systems Manager: Jon Gunnarsson ([email protected]) Sales Administration: Leya Clayton ([email protected])

TOTAL CIRCULATION 15,000

Publisher: Justin Lawson ([email protected]) Managing Partner: Mark Latham ([email protected])

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Global Funds - Ireland 2007 1

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IFIA FOREWORD

GLOBAL FUNDS - IRELAND 2007

We are delighted to welcome you to Ireland for the IFIA/NICSA Annual Global Funds Conference 2007, which we are pleased to again be hosting with our colleagues at the National Investment Company Service Association. Following the success of last year’s conference, which saw the conference move for the first time outside of Dublin and the introduction of a golf competition, this year’s event will follow a similar format and is being held in one of Ireland’s prestigious country estates, Carton House, Maynooth, Co. Kildare with its acclaimed Montgomerie Course, host of two consecutive Irish Opens in 2005 and 2006. This year’s conference programme has been designed to provide insight into the current issues and challenges facing the international investment funds industry, including the continuous and rapid evolution of the industry, particularly the type of investment fund products being structured and distributed as well as the continued increase in regulation and the role of risk management. Keynote speeches will highlight the ‘Future outlook of the investment funds industry in the global market place’, the ‘Regulatory outlook for the European funds industry’ and ‘Asset management - an alternative approach?’ This year we are including a senior executives round table discussion which will provide different industry perspectives from CEOs, regulators and pension funds and will focus on current industry issues including the implications of the move towards defined contribution, 'decumulation' – what happens once investors stop accumulating wealth and start drawing down their positions, managing the rapidly changing investment instruments available, assessing if the appropriate risk controls are in place, cross border fund mergers in Europe, portable alpha and the impact of changes in front end commissions. Other sessions will address new products and product evolution including the

2 Global Funds - Ireland 2007

convergence of UCITS and hedge funds, enhanced yield cash products and other innovative investment product trends. There will also be a session on global distribution examining brand versus performance, fees versus commission, passportability, barriers to success and the like. Ireland is well recognised as a centre of excellence and a jurisdiction of choice for servicing alternative investment funds and no conference in Ireland would be complete without a session on alternatives and this year is no exception. The focus this year will be on hedge funds – anticipating the challenges before they arise and will address several themes including, fraud, managing downside risk, what happens when things go wrong etc – it promises to be a lively and informative session. Overall 2007 looks set to be another exceptional year for the international investment funds industry in Ireland, with its strong year-on-year growth continuing - the net asset value of funds serviced by the industry in Ireland now stands at over ¤1.3 trillion. With almost ¤770 billion in Irish registered funds and an estimated ¤600 billion in non-domiciled funds being serviced by the industry in Ireland this represents a growth rate of over 30 per cent during 2006. While this undoubtedly establishes the continued success story of Ireland, the Irish industry is as ever competitive and forward-looking and determined to retain its position as one of the leading jurisdictions in the global investment funds industry. The conference enables the Irish and international industry to come together for what promises to be a lively, interactive and memorable event – here’s to another great conference and another great year in the investment funds industry. We look forward to seeing you in Ireland on 5th -7th June!

Gary Palmer, Chief Executive, IFIA

21

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Launching in Ireland

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NICSA FOREWORD

GLOBAL FUNDS - IRELAND 2007

The investment funds industry is enjoying a period of extraordinary growth and success globally. The American funds industry is nearing the $11 trillions mark and accounts for only slightly over 50 per cent of the global pool of investment funds. Even more astounding is the rapid growth of investment into a variety of alternative investments – hedge funds are at nearly $2.5 trillion. ETFs, real estate funds and many varieties of index and enhanced index products are being organized in offshore and onshore jurisdictions at a pace we have not seen before. The needs of institutional and retail investors are being accommodated by an industry driven by innovation and service solutions that challenge the talented and dedicated staff of our organizations worldwide. Whether one is engaged in investments, distribution, shareholder services, administration and custody, or the legal and accounting professions servicing this industry, the challenges are extraordinary to keep ahead of the accelerating pace of our industry our industry is experiencing at this time. Our 10th conference organized together with the Global Funds Ireland Industry Association allows professionals to come together and share experiences to assure that we can sustain and build on the great success of the funds industry worldwide. Our challenge will be to recognize and mitigate the risks inherent in a period of accelerated growth and to monitor and control these risks in such a way that neither the regulators nor politicians feel compelled to impede our growth and success. Keeping faith with the tradition of our industry to keep the interests of shareholders, as our primary obligation and mission will help s achieve our goals. Barbara Weidlich President NICSA

4 Global Funds - Ireland 2007

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CONTENTS Ballybrit, Galway

GLOBAL FUNDS - IRELAND 2007 EDITOR’S LETTER IFIA FOREWORD NICSA FOREWORD VENUE INFORMATION

1 2 4 8

TIMES ARE A CHANGING BY GARY PALMER, CEO, IFIA BY BARBARA WEIDLICH, PRESIDENT, NICSA CARTON HOUSE

QIF

10

ON THE FAST TRACK

REGULATION

12 14

IS REGULATION BEHIND THE SUCCESS? NEW FUND LAWS IN IRELAND

OFFSHORE FUND ADMIN

16

DUBLIN VERSUS LUXEMBOURG

DISCUSSION

18

ON KEEPING AHEAD OF THE PACK

CELTIC EDGE

20

GOOD REGULATION FOR A GOOD IRELAND

OFFSHORE LAW

24

WILL IT BECOME A FLOOD?

FUND DISTRIBUTION

27

LEADING THE SALES CHARGE

INVESTMENT LEADERSHIP

28

HOW TO STAY AT THE TOP

UCITS

30

A WORLD OF ALTERNATIVES

AUTHORISATION

32

A FUND IN A DAY!

INTERNATIONAL REGULATION

34

GLOBAL VIEWS ON REGULATION

ASSET VALUATIOJS

38

BUSINESS OR ART?

INVESTMENT MANAGEMENT

40

THE SECURITIES LENDING MARKET GETS CREATIVE

AUTOMATION

42

WILL EUROPE COME OF AGE?

6 Global Funds - Ireland 2007

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Are You Equipped to Succeed?

Investment managers today are dealing with a fast-evolving industry, shifting opportunities, and heightened competition. In this climate, having the right infrastructure is more critical than ever. SEI can help. Our wide-ranging industry expertise and capabilities enable us to create an end-to-end operating solution that is customised to fit your alternative products, your existing systems and the Accounting / Administration / Alternative Investments Services / Brokerage Services / Compliance Support / Distribution & Marketing Services / Institutional Client Services / Investment Processing / Investor Servicing / Mutual Fund Services / SMA Services / Transfer Agency

client experience you want to deliver. To find out how SEI’s alternative investment outsourcing services can give you a competitive advantage, call us today in Europe: 353-1-638-2435,

Services provided by SEI Investments Distribution Co. (SIDCo); SEI Investments Management Corporation (SIMC); SEI Private Trust Company, a limited purpose thrift; SEI Investments Global Fund Services; SEI Global Services, Inc.; and SEI Investments Global Fund Services Limited, which are wholly owned subsidiaries of SEI Investments Company. © 2007 SEI Investments Developments, Inc.

or in the US: 1-610-676-1270 or visit us online at www.seic.com/ims.

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IFIA / NICSA CONFERENCE VENUE INFOMATION

Carton House

Maynooth, Co Kildare, Ireland 30 minutes drive from Dublin city centre T: +353 (0)1 5052000 F: +353 (0)1 6517703 W: www.cartonhouse.com James Tynan 165 rooms: 18 stylish, historic bedrooms, 147 luxurious, contemporary bedrooms Two championship world class golf courses: The Montgomerie & The O’Meara. The Spa at Carton House Fully equipped gym and leisure Suite Outdoor pursuits – archery, 4x4 off roading, rock climbing, fishing, walks on 20kms of pathways Business Facilities: 14 fully equipped conference and event facilities. The Carton Suite can cater for 600 delegates standing/400 seated

8 Global Funds - Ireland 2007

Carton House was built in 1739 by Robert Fitzgerald, the 19th Earl of Kildare, as the magnificent country estate for the Fitzgerald family. Just half an hour outside Dublin, the beautifully elegant Palladian house is set in over a thousand acres of stunning parkland, and has attracted a long list of glamorous guests from Queen Victoria to Grace Kelly. Carton House provides guests with an experience like no other. Minimalist interiors, spacious modern rooms, contemporary art and sparkling chandeliers contrast magnificently with the untouched classic exterior and original antique pieces. Boasting 165 bedrooms, 18 incredibly beautiful suites housed in the original building provide rooms that are fit for Royalty coupled with 147 stylish bedrooms in the contemporary new wing. A luxurious spa and a leisure and fitness suite have taken residence in the old stables and two championship golf courses utilise the surrounding grounds. The new hotel boasts 147 luxurious bedrooms that are contemporary, simple and chic. All rooms have a king-sized bed with colourful cushions, bath and power shower, thick white towelling robes, flat-screen TV, WiFi, a sofa and desk, air-conditioning and minibar. The 18 historical suites in the original house are larger and more decadent with emphasis on design features unique to the original room. The Kitchen Bar has been created to provide guests with homely dishes from soups to pasta to be eaten around the aga cooker framed with original antique tiles, while contrasting modern leather seating provide the laid back vibe. The Linden Tree restaurant offers a menu of contemporary Irish cuisine from 6.30pm to 10pm, featuring a variety of wholesome favourites, from mouth-watering sirloin steak with

buttery mashed potato to a warming bowl of creamy risotto, accompanied by a fine bottle from the extensive wine list finished off with irresistible puddings, like the decadent dark chocolate patisserie roll. The relaxed and contemporary restaurant also serves a hearty breakfast, with views onto the parkland providing inspiration for the day’s activities. Carton House has its own library, a snooker room, a traditional drawing room, and a glamorous dining room with a spectacular ornate gold ceiling. The Carton Suite can accommodate up to 600 standing or 400 seated and can be adapted to suit any occasion, from a glamorous ball to a corporate event. The delicate, contemporary chandeliers, designed by Sharon Marsden, provide a fitting centrepiece for the room; their fibre optic chains of light contrast with the swirling calligraphy (taken from one of Lady Emily’s original love letters) inscribed on the mirror, perfectly exemplifying Carton House’s unique blend of the traditional and modern. In addition to the Carton Suite, there are a further 14 fully equipped conference and event rooms available to hire. The Spa at Carton House, which is housed in the old stables, features a swimming pool, hot tub, gym and seven treatment rooms – including a special treatment room for couples, with its own private infinity pool. A steam room, relaxation area, hydrotherapy pool and a manicure/pedicure room complements the extensive and unique selection of treatments available. Carton House brings together the past and the present seamlessly. Contemporary touches add to the charm of the estate, while respecting the centuries of heritage, perfectly bridging the gap between the traditional and modern.

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QUALIFYING INVESTOR FUNDS

Now that the new Qualifying Investor Fund (QIF) fast track approval process is up and running, the in dustry is looking to include more diverse structures within its wrapper. Alison Ebbage reports

Fast times Enniskillen, Fermanagh 10 Global Funds - Ireland 2007

The QIF is currently on offer to individuals with 1.25 or more in net assets excluding principle residence and household goods or institutions with more than 25 under discretionary management. The introduction of next day approval back in February was seen as essential as time to market is such a crucial element with alternative fund structures. Prior to the introduction of fast track approval, all parties involved in the launch of a new fund would need to be approved by the Irish regulator and the relevant fund application, documents would be filed by a lawyer for examination by the regulatory authorities. On average the time between filing the application and receiving authorisation was six to eight weeks. Under the new arrangements, once the fund promoter, administrator and lawyer have been pre-authorised by the regulator they are entitled to apply for next day regulatory approval for a QIF. Feargal O’Reilly, director at KPMG in Dublin, comments: “This move should be seen as evolutionary rather than a new era in its own right. It’s not only attractive to institutions but also to funds of funds managers who are often not permitted to invest in non-regulated funds. Both are huge growth areas.” Although it is primarily associated with hedge funds, the QIF structure can also be used for other alternative asset classes. Some of the growth in funds investing in property, private equity venture capital or corporate trust business could certainly go Ireland’s way. Tony O’Brian, head of business development at the Bank of New York, thinks that one of the QIF’s main attractions will be to act as a wrapper for corporate trust business. “More and more investors want access to structured debt via a special purpose

vehicular (SPV) and the bank has been working hard to offer the QIF wrapper around this and provide all the custody and administration on top,” he says. He adds that as a result of the Bank of New York buying JPMorgan’s corporate trust business last year, it is now one of the only providers able to bring together both the corporate trust and the administrative side of things and respond to this huge client demand. Property investment is another huge growth area and as with corporate trusts, SPVs are often used and then wrapped in the QIF structure. But the relative newness of asset classes like property means that certain regulatory questions will need to be resolved. Transparency is the main issue as there are many ways to access property and tax efficiency also needs to be taken into consideration. The industry as a whole seems supportive of attracting all alternative assets; Gary Palmer, chief executive of the Global Funds - Ireland Industry Association (IFIA), admits that although property funds do have specific issues in relation to the title of the assets and with regard to tax that the underlying issue is technical. “Although efficiencies can be made by making a number of SPVs that can be structured within a single property fund, some engagement is now needed on this to clarify the number of layers that are actually needed. It’s a technical issue over the separation of NAV and how property is defined and how gross asset value is also defined. Venture capital trusts and private equity have similar layering issues,” he says. Clearly then, in such a complicated market, Ireland has done well to have a structure capable of catering to all alternative investments. And newer alterative asset types such as currencies or infrastructure type products in emerging markets are also starting to become popular. Here the attraction lies in creating a legal framework so that the complexity of the administration comes from the underlying asset and not the legal structure. Appeal to institutional investors But what sort of investor is the fast track QIF intended to attract? Put simply, it is institutional investor such as pensions funds, insurers and banks, all of who are looking to gain from the enhanced returns offered by the underlying assets of a QIF, but are happier to be within a regulated environment. Donnacha O’Connor, partner in finan-

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QUALIFYING INVESTOR FUNDS

QIF overview Qualifying investor funds (QIF) have no parameters set by the financial regulator on investment objectives, investment policies, diversification limits or leverage and borrowing. The funds have a minimum subscription requirement of ¤250,000 and do not allow for grouping of individual investors. All investments in sub funds are also taken into account. The qualifying investor criteria are for an individual to have a minimum net worth of ¤1.25 million or an institution to own or invest at least ¤25 million on a discretionary basis. The new process means that there will be no review of documentation before authorisation by the financial regulator, provided that the promotor and investment managers are already approved. The fund documentation will be prepared and negotiated with the service provider and the fund’s board will approve the documentation before submitting it to the regulacial services at Dillon Eustace, comments: “People have been talking about the need to have a QIF for the last two years at least. This has been largely driven by the entry into hedge funds of institutional players who tend to demand a more regulated environment.” He thinks that high net worth individuals do not really care as much about such issues, but that the bulk of new demand is coming from European institutions wanting to sell within Europe or from US institutions wanting to target Europe, a suitable investment vehicle was clearly needed. O’Brian agrees: “The desire for a regulated domicile comes mainly from European institutions but Ireland is also very attractive to non European institutions wanting to use the EU passporting capabilities.” But Ian Headon, vice president in product management at Northern Trust, contests this. He comments: “Industry surveys indicate that Dublin, Luxembourg, Guernsey and Jersey all have about 5% of the total market and in terms of assets under management the business is thriving but in terms of relative market share then the numbers appear flat.” He says that this goes against the perception that institutions are instinctively more comfortable with a regulated environment and adds: “You could speculate that institutional managers are sophisticated enough to make investment decisions based on a wide range of factors, including manager quality, headline and operational risk, as well as any perceived additional investor protection arising from so called ‘regulated jurisdictions’.” But whether Headon is right or not, no jurisdiction hoping to increase its share of domicile can afford to ignore the surge in

tor who will approve it the next day. But promoters beware; any application that is subsequently found to be missing information or containing inaccuracies will mean that the promotor will not be allowed to use this fast track process again. The immediate effect will be that there is no need to list valuation providers in the articles or the trust deed. It will no longer be mandatory to state that the difference between the sale and repurchase price of units means that the investment should be viewed as medium to long term. In addition there is no need to provide a worked example of performance fee. Future changes are yet to be discussed, but include the need for an independent custodian for hedge funds, a limit of investment in unregulated funds, risk spreading for investment companies, amending the investment criteria, giving a separate prospectus for share classes and the need for semiannual accounts.

the institutional market. Indeed Luxembourg has also moved to attract more domiciled business and in addition Jersey, Guernsey and the Isle of Man all have similar structures in place. And what is often termed as ‘healthy competition’ between the various European jurisdictions looks set to continue. O’Connor is upbeat: “The introduction of the QIF has been smooth and there looks to be good levels of takeup from existing and new promoters. I think that the Irish regime is now similar enough to a non-reg-

two companies that made the deal attractive in the first place, will now combine to bring a deeper and broader presence to the Irish marketplace.” Indeed, the pace of growth in the Irish marketplace confirms that there is definitely the demand to have a real variety of services providers there. Over $1.3 trillion of assets are currently being serviced and the industry represents 9,000 jobs. The growth continues apace partly as a result of an influx of new investment managers, driven not only by the QIF but also by the huge

“The introduction of the QIF has been smooth.” Donnacha O’Conner ulated regime in terms of speed to market and flexibility but with the added comfort of the regulator.” He even talks of one client that is actively considering shifting domicile from the Cayman Islands. Consolidation Consolidation was a major theme last year and it looks to have continued, with two of the largest players, Bank of New York and State Street, both having made major acquisitions this year in the form of Mellon and Investors Bank Trust, respectively. In addition, the latest announcement, that Citi is to acquire Bisys, has left some wondering whether it is only a matter of time before two of the big players combine forces to create a global behemoth. Gavin Nangle, head of business development at State Street in Ireland, comments: “All three deals will have a local impact as Ireland is a significant global player. Certainly, State Street is now in the process of how best to merge the two companies. We expect that the synergies between the

growth in UCITS III compliant funds. But with consolidation widening the gap between large and small services providers, how is the role of smaller niche players set to develop? Is it likely that with larger players forever seeking to widen their offerings via acquisitions or mergers, smaller players are now counting time until they are inevitably acquired? O’Brien thinks not: ”There is room in the market for niche players and smaller set ups with smaller newer promoters who will always need to flexibility and niche offering of players such as Custom House, Quintillion or Capita Financial Services.” However, Nangle thinks that some smaller players will certainly need to monitor their position in the market. “The gap between big and small is widening but for now, new boutique fund manager entrants into the market means that there is demand for smaller fund administrators who can perhaps provide a bit more of a customised or bespoke offering,” he says.

Global Funds - Ireland 2007 11

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REGULATION

Top gear

Donegal, Ulster

To what extent has Ireland’s success as a funds location been driven by the regulatory environment? David Dillon investigates The benefit of hindsight is a remarkable thing. In an Irish context, it would appear that the regulatory environment in Ireland has been the most important pillar in the country’s successful development as a funds location. Initially, it was delays in Luxembourg due to capacity problems as funds were being re-registered under the UCITS directive, which gave Ireland the opportunity to attract early UCITS business. In those days it was speed of authorisation, combined with a flexible approach, which established the beachhead. Flexible was a relative term. The regulator never allowed its approach to affect its prudential standards, but it did avoid rigid formulaic procedures and adopted a principle based regulatory approach. While the early days were categorised by a rivalry between Luxembourg and Dublin, today, the two jurisdictions have a common interest: to prevent the more conservative elements in Europe from limiting investment possibilities. For example, the jurisdictions promote the interests of the investment funds industry by avoiding narrow interpretation of community legislation. A feature of the current mutual funds industry is the impact of regulatory harmonisation through institutions such as the Committee of European Securities Regulators

12 Global Funds - Ireland 2007

(CESR) and IOSCO, its international equivalent. Ireland and Luxembourg are very active in the debate within these organisations to ensure the further development of the industry. For the most part, they have been successful in winning the argument to take full advantage of the various directives. We can also thank the European Commission for a positive response to the opportunities presented by the new UCITS legislation. The opportunities presented by the Financial Services Centre in Dublin and the European Union Financial Services Action Plan (FSAP) have been exploited remarkably well in Ireland. This is due in no small measure to the effectiveness of the public sector in implementing the relevant directives on a timely basis. Ireland has a reputation for being an early adopter and implementer of the directives supporting the common market, and in the area of financial services, our record has been exemplary. We have been among the first to adopt nearly all of the relevant directives and implementing them within the required deadlines. UCITS III, the Reinsurance Directive and MiFID are good examples of this. In addition to a commitment to the early establishment of the best regulatory framework, its can-do reputation was a

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REGULATION

major attraction for international groups. A good example of this approach and continuing innovation is the introduction of the Qualifying Investor Fund. The authorisation procedure that now applies to QIFs is a fast track one, which enables a QIF to be authorised 24 hours after the papers have been properly lodged with the regulator. Throughout 2004 and 2005, regulations were adopted that created a common contractual fund to facilitate the pooling of pension funds in a tax efficient way. Furthermore, legislation was passed providing for cross investment in corporate umbrella funds and the creation of protected cells for umbrella funds. A thorny discussion within Europe over the last few years has been the implementation of management structures for management companies of UCITS. The debate between the industry and the regulator was constructive and a reasonable compromise was arrived at which preserved the ability of management companies to delegate many of the specialist functions. It was interesting to see how the Irish regulator was able to convince regulators in other European jurisdictions that this was a robust model. In years gone by such a suggestion would have been greeted with a lot of suspicion. It is an indication of how far the reputation of the Irish regulator has come that the country often leads the discussion within CESR and initiatives such as the regulation of prime brokerage are studied and sometimes copied by other jurisdictions. This augurs well for the continued growth and development of Ireland as an investment fund centre. The trick is to ensure that the harmonised industry within Europe does not smother the possibility to lead the industry in the development of new products. Recent developments affecting the industry in Ireland include changes to the authorisation of QIFs. QIFs are nonUCITS products that can be structured as investment companies, unit trusts or common contractual funds. The new authorisation procedure provides that, subject to meeting agreed parameters, a QIF is now capable of being authorised by the financial regulator on a filing only basis. Therefore, once a complete application for authorisation is received before 3pm on a particular day, a letter of authorisation for the QIF will issue from the financial regulator on the following day. Annual management fees were generally calculated as a percentage of the net asset value of a fund. The regulator has now confirmed that it will permit a retail fund to charge an annual management fee based on the initial issue price of the units of the fund, subject to three main requirements. These requirements are that the fund is a structured product providing for a specific return based on the performance of a particular index or underlying basket of assets, which provides a predefined return to investors. The fee to be charged will be adjusted to take account of dealing activity in the fund and the prospectus discloses the arrangements. The Investment Funds, Companies and Miscellaneous Provisions Act 2005 introduced the possibility of one subfund within a corporate umbrella structure investing in another sub-fund. Prior to the legislation this was not possible due to company law. Funds that are authorised as professional investor funds will be permitted to take investments below the minimum subscription requirements from investors who are trustees of pen-

sion funds. This is under the proviso that these investors commit to invest the minimum subscription amount within a period of 12 months. The financial regulator has confirmed that it will no longer impose any restriction in relation to investment by retail funds in securities (both debt and equity) traded on the Russian securities markets. In order to enhance the understanding of fund managers and practitioners on the requirements for the registration or authori-

“Early days were categorised by a rivalry between Luxembourg and Dublin, today the two jurisdictions have a common interest.”

David Dillon

sation of a UCITS for sale in Hong Kong, the Hong Kong Securities and Futures Commission has prepared a guide to the level of information that must be provided to SFC. This information concerns the risk management and control process of a UCITS, which uses or will use the expanded investment powers, especially those using financial derivative instruments for investment purposes. The guide has been prepared based on the European Commission’s recommendation 2004/383/EC on the use of FDIs by UCITS. The financial regulator has agreed to certain changes to the regulatory regime applicable to property funds. The new guidance note provides that professional investment funds and QIFs may establish multi-layered SPV structures subject to certain conditions. The assets of a property fund can also be registered in the name of the scheme or in the name of its wholly owned SPV, although this is also subject to certain conditions. Following intensive engagement between the financial regulator in Ireland and the Dutch securities regulator, confirmation has been received that the Minister for Finance in the Netherlands has designated Ireland as a state of equal supervisory standards under the Netherlands Act on Supervision of Collective Investment Schemes. The designation took effect on the 31 October 2006. A consequence of this designation is that Irish non-UCITS do not need a separate license to enter the Dutch market. However, they do need to apply to the regulator in Holland and comply with relevant information and advertising requirements. In relation to OTC derivatives, funds are permitted to invest in such instruments provided that the fund is satisfied that the counterparty will value the transaction and will close it out at the request of the fund at fair value. The proposed amendment to the guidance note will allow a fund to exercise discretion in relation to value of the OTC derivatives for the purpose of the net asset value calculation, provided that valuations provided from another source are reconciled with the counterparty valuation. A consultation process is currently taking place to consider further extensions to the valuation methodology.

Global Funds - Ireland 2007 13

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REGULATION

New investment fund law in Ireland

Tara O’Reilly, Partner, Asset Management and Investment Funds at William Fry reports 14 Global Funds - Ireland 2007

One of the key components in the success of Ireland as a global financial services jurisdiction is its regulatory environment, which has long been recognised as one of appropriate regulation while remaining responsive to change in industry needs. Promoters face a constantly changing demand for product and need a jurisdiction that can keep apace with that market development. Ireland, to remain competitive, needs to provide a suitable environment for such development. The Irish Government has recognised this in its initiatives as set out in its strategy document “Building on Success” for the International Financial Services Industry in Ireland. The Irish Financial Services Regulatory Authority (the “Financial Regulator”) is supportive of this and in its “Strategic Plan for 2007 to 2009”, published in November 2006, the Financial Regulator commits to adopting a proportionate approach to regulation by striking a balance between the advantages of regulation and the constraints it imposes on financial services providers. A critical factor in this is speed to market and in recognition of this, Ireland has adopted a new

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REGULATION

24 hour authorisation process for products aimed at sophisticated investors allowing an approved Promoter to bring a regulated product to market in the same timeframe as an unregulated off-shore product. Qualifying Investor Funds (“QIFs”) are non-UCITS collective investment schemes which may generally be invested in only by investors who meet a minimum high net worth test ((a) individuals

leverage, which apply to retail funds, are disapplied in respect of QIFs. QIFs may be established as open or closed ended investment companies, unit trusts, common collective funds or investment limited partnerships. Subject to the promoter, directors and relevant service providers (primarily the Investment Manager, Administrator and Custodian) to a QIF having the appropriate authorisation/approval of the Financial Regulator, the QIF fund product itself will be capable of being authorised by the Financial Regulator on a filing-only basis. Applications must be filed no later than 3.00 pm on the day before the proposed date of authorisation/approval and letters of authorisation/ approval will be issued by close of business on the day of authorisation/approval. This revised process will also apply to the addition of new sub-funds and to revised Prospectus/Supplements for existing QIFs etc. The rationale behind the change to a filing-only system for a QIF fund is that because the investment and leverage restrictions which would apply to retail funds are disapplied in the case of QIFs then, subject to the directors and service providers to the QIF having all necessary approvals and the Prospectus documentation containing all appropriate disclosures, “qualifying investors” should be sufficiently sophisticated to appreciate the type of product in which they are investing without pre-review of the Prospectus documentation by the Financial Regulator. All of the normal requirements of the Financial Regulator in relation to a QIF, including the contents of the Prospectus and the material contracts still need to be adhered to. A detailed Application Form

In the competitive global market, other jurisdictions are seeking to offer similar speed to market with a minimum net worth, excluding main residence and household goods of 1,250,000; or (b) institutions which own or invest on a discretionary basis at least 25 million or the beneficial owners of which are qualifying investors in their own right) and also make a minimum initial investment of at least 250,000. The conditions and restrictions relating to investment objectives and policies and

must be completed by a director of the fund and certain confirmations provided by the custodian/trustee and legal advisers. The element, which has been eliminated from the previous process, is the detailed review by the Financial Regulator of the Application Form, the Prospectus, Supplements and the Custodial/Trust documentation. Where share classes are being listed on the Irish Stock Exchange,

the Prospectus documentation will of course have to have been approved in advance by the Irish Stock Exchange before the formal application for authorisation can be made to the Financial Regulator. If fund promoters are seeking special derogations from the Financial Regulator’s normal rules in relation to QIFs, obviously, these will have to be applied for in advance and will have to be factored into the applicant’s timetable for authorisation of the fund product. QIFs are and will continue to be fully regulated collective investment schemes with all the attendant advantages, including that they will generally be exempted from Irish taxes. The advantages of this process are being seen already, both in terms of new product and existing product. Promoters finding new opportunities can satisfy them within a matter of weeks and amendments to existing product can be made, subject to notice requirements, within a matter of days. This speed in regulatory process now gives the agility promoters of these sophisticated products need to keep pace with their client demands. In the competitive global market, other jurisdictions are seeking to offer similar speed to market. In the regulated product space, Luxembourg has introduced its specialised investment fund or SIF. While offering certain advantages, such as no requirement for promoter approval, this product has uncertainty for promoters as a post authorisation review takes place and may lead to the requirement to amend documents after a launch with any relevant shareholder involvement that might entail. Following on from this development, the Financial Regulator has also agreed developments in the prime brokerage, property and private equity arena, typically structured as QIF’s, to enhance their potential and attractiveness. The changes here relate principally to how the assets of these funds are custodied, how property is defined and valued, the use of subsidiaries or special purpose vehicles and the requirement that managers be regulated and they reflect the changes in the market in these areas. These are further examples of the dynamic between the Irish industry and the Financial Regulator to keep Ireland responsive to market innovation and competitive as a jurisdiction for global promoters.

Global Funds - Ireland 2007 15

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INTERNATIONAL OFFSHORE FUND ADMINISTRATION

Betting the House Dublin

There is no doubt that Dublin is giving Luxembourg a run for its money in the international offshore fund administration game, argues Peter Heaps of RBC Dexia Investor Services Dublin has not only enjoyed record inflows but it has also carved out a niche in servicing hedge fund and other alternative assets. The future could not look brighter as RBC Dexia celebrates its tenth anniversary operating in the country. It was a very different picture 20 years ago, when the country was beleaguered with high unemployment and bleak economic prospects. However, private and public institutions joined forces to develop Dublin’s International Financial Services Centre. This fortuitously coincided with the introduction of Undertakings for Collective Investment in Transferable Securities (UCITS) legislation, which made funds 'passportable' across Europe. According to the Dublin Funds Industry Association, Ireland currently services 6,000 domiciled UCITS funds and non-domiciled funds, with total assets under administration of more than 1,000 billion. The UCITS type investment funds account for about 80% of the funds administered in Dublin, while the remainder consist

16 Global Funds - Ireland 2007

of hedge funds and other specialist funds. The country also boasts being the largest offshore financial centre for servicing money market and exchange traded funds. The secret of Ireland’s success can be attributed to a favourable tax regime, along with a flexible and cooperative regulatory framework. Industry participants all agree that the Irish Financial Services Regulator Authority (IFSRA) has consistently demonstrated a pragmatic, pro-business approach to the regulation of investment funds. It has a reputation for working with business, rather than against it, using streamlined processes. For example, Ireland was one of the first countries to allow the pooling of multinational pension assets currently held in retirement plans across a number of jurisdictions. Ireland also stole a march in the alternative asset class space from other European centres, by being one of the first of the European Union countries to regulate hedge funds. Luxembourg was reluctant to take the plunge because of the high profile collapse of Long Term Capital Management in 1998. However, once the hedge fund industry started to recover on the back of strong returns and investors’ desire for higher performing alternative asset classes, it was Dublin and not Luxembourg that stepped into breach. As a result, Ireland is now in the enviable position of being the largest European hedge fund administration centre, accounting for a third of the $1,400 billion of global hedge funds. Promoters of funds that are domiciled in popular offshore hedge fund centres such as the Cayman Islands, and to a lesser extent, the British Virgin Islands and Bermuda, have turned to the Irish Stock Exchange to list their funds and to Dublin’s service providers for their back office administration requirements. In addition, IFSRA has recently been applauded by the fund management industry for promising same day approval for applications for new qualifying investor funds (QIF), a vehicle targeted at sophisticated non-retail high net worth investors in areas like hedge funds and other alternative investment products. The government also wins points for its tax policies. In January 2006, a corporation tax rate of 12.5% was introduced, which is well below the tax rate of many of Ireland’s European competitors. Other changes include the abolition of the 1% capital duty on company capitalisation, elimination of withholding tax on regulated Eurobonds, removal of tax on investments in securitisation vehicles within money market funds and the introduction of special share classes to facilitate hedging of foreign exchange risk. Equally as important, the country has carefully nurtured a highly skilled workforce who can navigate their way around the complexities of the fund administration world across a broad range of asset classes. Ireland not only offers unrivalled depth of expertise in investment fund administration but also the supporting roles of legal, compliance, financial reporting and other industry specialist functions. Looking ahead, Dublin is well aware of the dangers of complacency, particularly in light of Luxembourg’s desire to usurp Ireland’s pole position in the alternative asset class space. The Parliament in the Grand Duchy has recently approved a new law on Specialised Investment Funds (SIF) to replace the 1991 law on institutional investor schemes. The regulation widens the investor base to include institutional and 'qualified' private investors as well as intermediaries such as private banks. It also brings greater flexibility for investment, while maintaining the risk-spreading principles of existing regulations, for example by removing quantitative investment restrictions. This will certainly keep Dublin on its toes, but industry players believe it is up to the challenge and will continue to develop new offerings, as well as enhancements to existing products in response to the needs of the global marketplace.

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DISCUSSION

Keeping ahead of the game Hillary Griffey of Maples and Calder answers some hard questions about the future of Dublin In 2006, the number of funds administered in Ireland rose to $1,206 billion. How will Ireland as a jurisdiction hope to retain this business and grow on it in the future? These figures are indicative of the success and attractiveness of the jurisdiction as a fund domicile and any jurisdiction that has enjoyed this level of growth is likely to be challenged to retain and enhance this level of growth. All stakeholders in the industry are conscious of the need to maintain this success story and this has resulted in efforts on multiple levels to further enhance Ireland’s attractiveness. This is demonstrated by the continuing work to enhance the legal, regulatory and fiscal environment. The industry is also working to add to the depth and breadth of experience available by the promotion of career opportunities in the funds industry and through a new "green card" scheme for experienced investment funds professionals. These developments will ensure that quality of service can be maintained by industry participants and that specialist expertise can be both grown organically and attracted into the jurisdiction as required. There is also currently underway a process of review of the minimum activities requirements for investment funds, which is likely to permit the outsourcing of some functions under controlled conditions.

18 Global Funds - Ireland 2007

With the development of emerging fund domiciles around the world, such as Dubai, Malta and Gibraltar, what do you feel will be the main challenges for the more established European domiciles? Different centres are developing different areas of expertise for a number of reasons, including investor demand in the particular region, or the current economic cycle in a region favours a particular type of structure or strategy. One example of this would be the large increase in property and private equity funds domiciled in Dubai in the last 12 to 18 months. This will continue be a feature of how the sector develops globally. More locally the single biggest challenge for Ireland to continue to maintain its lead will be the requirement to continue to re-evaluate and enhance its offering at all levels in the sector. Both Luxembourg and Dublin have amended their respective fund legislations in order to allow funds to be set up more quickly. How will this impact on the global funds industry? It should be stressed that Ireland’s fast track QIF product is a fully regulated product and the new process has addressed the speed to market issues previously experienced by promoters when comparing Ireland to the offshore jurisdictions. There is some debate as to whether the Luxembourg product is a regulated product and therefore comparable. The Irish QIF process, in addition to attracting new promoters, will also firmly wed those promoters who have existing Irish product to the jurisdiction and it is likely to result in established long only players domiciling their alternative investment products in Ireland.

Dublin and Ireland are often criticised for high turnover of staff in the fund services industry. How is the industry responding to this and trying to keep staff on board? This is a feature of any successful and mature industry and is not unique to Ireland. The most effective mechanism to combat this is to continue to develop long term career paths and flexible work practices to retain employees to encourage them to move up the value chain of expertise. This is a challenge but it has been recognised by the industry and measures such as encouraging entry level education into the funds industry, increasing education provision in areas of acute shortages and developing a world class research infrastructure are all well underway and will enable this development. During 2006 and in the early part of 2007, Europe has been a hot spot for consolidation. Has any evidence of consolidation in the Irish funds industry started to emerge? There has been a consolidation between some of the larger players in the last couple of years particularly from the long only shops purchasing hedge fund administrators. For example, JPMorgan’s purchase of Tranaut, Bank of New York's purchase of Allied Irish Bank's interest in their joint venture AIB/BNY, and also the recently announced purchases of Bisys and Mellon by Citi and BNY. This development has opened up the market further across the spectrum and seen the emergence of some new independent specialist players in the fund administration space in Ireland. Hillary Griffey

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COMPETITIVE REGULATION

The Irish Financial Regulator serves the Irish funds industry well by ensuring good regulation gives Ireland a competitive edge Barry McGrath, investment funds partner, and Niamh Ryan, senior associate in the Investment Funds Group, A&L Goodbody report

Celtic EDGE The international financial services industry has been extremely beneficial for Ireland. The fact that Ireland is a regulated jurisdiction has not hampered its growth or success. In fact one of Ireland's strongest selling points is our Financial Regulator (the Regulator). Since the small beginnings of the Irish Funds

of Ireland. This has provided fund promoters with a wide range of choice in selecting the most flexible and cost-effective investment vehicle through which to market their products. It is also an important factor in the Irish fund industry’s ability to facilitate changing industry trends as speedily as possible. However, the Funds industry does not stand still, as we know. As well as growth in numbers of participants and assets under management (as of March 2007, there were 4204 collective investment schemes registered in Ireland representing almost EUR 77 billion assets under management), promoters and asset managers are consistently creating new and more innovative products. It is crucial therefore that the Regulator mirrors this evolution and growth. Tuning into this need, the Regulator issued its Strategic Plan 2007- 2009 which stated the Regulator's purpose, vision, values and high level goals. In particular, it set out the Regulator's key actions for 2007. Regulatory Environment The Regulator operates a principlesbased approach to regulation, and requires those operating in the industry to be fit and proper individuals who apply sound corporate governance principles and act honestly and ethically at all times. This “principles-based” approach is also one that is followed in the UK and it is no coincidence that the chairman of the Federal Reserve in the US recently called on US financial watchdogs to consider this approach to regulation as the model for how financial markets could be better regulated. To date in 2007, the Regulator has issued for the implementation of these principles, has progressed the establishment of specialist units and the streamlining of the authorisation process, and has taken steps to eliminate inefficient

The Funds industry does not stand still, as we know. As of March 2007, there were 4,204 collective investment schemes registered in Ireland representing almost EUR 77 billion assets under management industry, the Regulator has taken a balanced and pragmatic approach to its regulatory duties, enabling a full range of products to be developed and offered out

regulatory reporting. Over the course of 2007, the Regulator is developing service protocols which will establish targets and define respective expectations for the various types of interaction between the



20 Annual Global Funds 2007

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COMPETITIVE REGULATION

industry and the Regulator. It also continues to clarify its role in relation to innovation and product development in the industry and its role in relation to the regulation of wholesale and retail financial service providers as well as seeking efficiencies in the general authorisation process. The Regulator is also in the process of reviewing current outsourcing activities taking account of international best practice in this area. In response to requests from the industry, the Regulator is also review of its minimum activities requirements in respect of the administration of collective investment schemes. With effect from February of this year, the Regulator introduced a new procedure

Legislative and Fiscal Environment A major consolidation and modernisation of legislation for company law and financial services regulation is in progress, based on extensive stakeholder consultation and with specific aims and objectives. The structured involvement of the stakeholders is considered central to the successful development of the proposed legislative system, so existing adhoc consultative arrangements will be formalised and developed through the establishment of a Financial Legislation Advisory Forum, which again has specific objectives. This Financial Legislation Advisory Forum has been established under the auspices of the Department of Finance to ensure structured engagement

Ireland set out, quite some time ago, to identify key areas where a position of competitive strength, differentiation and critical mass could be further developed for the authorisation of qualifying investor funds which essentially provides for authorisation within a day of filing of the documentation without any prior review by the Regulator. This development is a significant step forward for Ireland and has been welcomed by the industry as a pragmatic response to an increasingly competitive market. On an ongoing basis, the Regulator is working on improvements /amendments to the funds application forms and is providing further industry workshops. The developments and initiatives outlined above are indicative of the Regulator’s willingness to engage with participants in the Irish market and the key to the Regulator’s success, consistently adding value to an ever changing and developing market. This approach allows it to react to developments in the marketplace without compromising its purpose as stated in its Strategic Plan “to help consumers make informed decisions in a safe and fair market and foster sound dynamic financial institutions in Ireland.” Accordingly it seems that despite an ever increasing mountain of legislation both domestically and at a European level, Ireland still remains as attractive as ever for new and existing participants in the financial services industry.

22 Annual Global Funds 2007

with industry on the development of the legislative framework so that regulation is well targeted and enforced and without unintended side effects or disproportionate compliance costs. Ireland set out, quite some time ago, to identify key areas where a position of competitive strength, differentiation and critical mass could be further developed. Our prime minister, the Taoiseach, issued a paper titled “Building on Success” on 15 September 2006 which set out specific action points for implementation with a view to developing international financial services in Ireland from a number of perspectives, namely the regulatory environment; the legislative and fiscal environment; expertise in marketing the Irish financial services industry; skills, education and training; product development, innovation and R&D; and the essential conditions for the industry. The Irish government formulated six principles in its 2004 White Paper Regulating Better, which it utilises to ensure good regulation: necessity, effectiveness, proportionality, transparency, accountability and consistency. The Regulator is a participant in the Better Regulation Group which is charged with overseeing the implementation of the White Paper. In addition, the financial sector is represented on the Business Regulation Forum (established by the Minister for Enterprise, Trade and

Employment in 2005) which enables industry to highlight regulations that are problematic to business. The Irish Government is also exploring the issue of broadening the remit of the Company Law Financial Services Unit so as to increase focus in responding to the needs of the international financial services industry. The level of commitment at government level to developing the regulatory environment in Ireland is evident and reflects the fact that good regulation enhances the industry and is important to its continued success. European Legislation At a European level, the Regulator and the Irish Funds industry are significant contributors to the growth and maturity of the European Funds Industry liaising with the European Commission and in particular the Committee of European Securities Regulators in developing new policies and structures to meet business demand, business imperatives, market demand and to grow the Funds industry in Europe. In addition, for some time, the Irish Funds industry has been coping with the practical implementation for affected Funds of the Prospectus Directive requirements, the Market Abuse Directive requirements, the Takeover Directive requirements and now the Markets in Financial Instruments Directive requirements as well as the various UCITS initiatives. These regulatory developments and their impact on the industry will continue to evolve in the near future. It is both exciting and gratifying to witness the depth of analysis, engagement and commitment in the Regulator’s Strategic Plan and to see just how much progress has been made to date on the many initiatives in the Taoiseach’s “Building on Success” paper. The effectiveness of the Regulator and of the approach to regulation in Ireland has been a significant factor in the growth of the industry and will continue to be, particularly in light of the legislative developments at a domestic and European level. We can expect further innovation and evolution from the Regulator in a dynamic environment which is forward looking, responsive to challenge and ready to avail of the opportunities presented by the continuous changes in the international financial services industry.

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OFFSHORE LAW

The past few years have seen huge growth in funds and capital markets products, and the offshore financial centres (OFCs) have thrived on the work generated by this boom. The Cayman Islands in particular have established themselves as a pre-eminent centre for this type of work, drawing significant capital offshore and becoming the world's fifthlargest banking centre. However, European financial centres such as Dublin and Luxembourg are increasingly offering tax advantageous products to the fast-growing funds and capital markets industries, prompting speculation that the traditional domain of the offshore world might be moving onshore the so-called "onshore drift".

Onshore Drift Will it become a flood tide?

Bunglass, Donegal

Charles Jennings and Jeremy Bomford of the offshore law firm, Maples and Calder, analyse the growth of European onshore financial centres offering an offshore style product and look at the implications for the offshore markets 24 Annual Global Funds 2007

Statistically speaking The number of new European hedge fund launches reached record levels in the first half of 2006, according to a survey compiled by HedgeFund Intelligence, collectively raising assets of US$11.4 billion. It is estimated however that around 80% of the world's hedge funds are domiciled in the Cayman Islands, and at Maples and Calder we continue to see record growth in offshore funds. Similarly the European-funded CDO volume grew by close to 60% in 2006, reaching 60 billion by year end, and figures from Europrospectus on the basis of filings suggest that the European asset backed and CDO markets have grown by 235% and 310% respectively since 2003. However, these tables show that Cayman's growth has also increased in these areas (albeit not so dramatically) during the same period. In addition these figures ignore the much larger US market, for which, more often than not, Cayman remains the premier choice of domicile. In our view, and that of many of our clients, the conclusion to be drawn from current figures is that, as the funds and capital markets sectors continue to grow, a number of European onshore financial centres have successfully positioned themselves to benefit from the increased appetite for products in these areas. Principal among those who have recognised the opportunities are Ireland and Luxembourg, but their expansion has not been at the expense of OFCs such as the Cayman Islands. While their share of the cake may have grown somewhat, the cake itself has grown exponentially. The rise of Ireland and Luxembourg The Economist puts Luxembourg as home to more than 2,200 investment funds, with almost 1.8 trillion under management. The vast majority of these funds are UCITS funds (retail funds which can be sold freely throughout the EU once they have complied with strict regulations, which include minimum diversification requirements and having in place regulated service providers with sophisticated risk management procedures). We are also seeing increased recognition and appreciation of the UCITS brand outside the EU, in markets such as Switzerland, Hong Kong and Chile – the lower risk and security of regulation of UCITS funds make these popular products, and Luxembourg dominates the market in this area. In addition, the Grand Duchy has very recently introduced new legislation for institutional investor funds. The new law on Specialised Investment Funds (SIFs) came into effect on 13 February 2007 and provides a regulated vehicle, which is subject to regulatory supervision but greatly extends the

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OFFSHORE LAW

range of eligible investors and the organisational flexibility of the fund structure itself. SIFs are not subject to specific investment restrictions – instead they must maintain an adequate spread of investment risk – and they allow for investment in a wider range of asset classes, presenting opportunities for hedge funds, real estate, private equity and other alternative investment strategies. This move is indicative of the general trend we are seeing towards a more institutionalised European hedge fund industry, both in terms of the promoters of products and the investors in those products. Increasingly, hedge funds are becoming more accepted as mainstream investment vehicles, and onshore regulators are actively embracing the kind of products which, just a few years ago, they tended to view with some suspicion. The Irish experience also reflects this trend. During the 1990's considerable effort was put into attracting leading international fund administrators, custodians and trustees to Ireland, and to Dublin in particular, with low rates of corporate tax providing an incentive for businesses to establish, or move their headquarters to the jurisdiction. This, coupled with an appropriate legal and regulatory environment, an industry that has capability to support the business, and geographical proximity to and a common language and timezone with London, where the majority of Europe’s hedge fund assets are managed, has led to enormous growth in recent years in the number of non-Irish domiciled hedge funds that have chosen to be administered and serviced in Ireland. In order to encourage the homegrown hedge funds industry too, the Irish Financial Regulator (FR), after extensive industry lobbying, was persuaded to issue draft guidance notes (in April 2000, revised in June 2004) providing for the conditions under which certain types of Irish authorised funds (Professional Investor Funds and Qualifying Investor Funds) may enter into prime brokerage agreements. This guidance has been relied upon by the funds industry since its release as the basis for the establishment of Irish hedge funds utilising prime brokers. The FR has now agreed to re-assess in 2007 the requirement for an Irish custodian to be appointed to an Irish prime brokerage fund, and industry pressure is mounting to have the FR remove this requirement. Another significant development in Ireland was the implementation of the Investment Funds, Companies and Miscellaneous Provisions Act 2005. This Act:

nificant positive impact on performance by eliminating the tax drag which would be suffered by a SICAV or OEIC. In some instances, depending on the terms of the tax treaty between the country of domicile of the fund and the country of investment, the tax difference can be as much as 30%. Like Luxembourg, Ireland is also an active fund-exporting country in the UCITS arena, and is benefiting from the convergence of structured finance products and funds. An example of this is the increasing popularity of a UCITS product domiciled in Ireland which gains exposure to an index of structured finance instruments or credit instruments. This type of structure puts a UCITS wrapper around such instruments and brings structured products into the retail environment. The securitisation and structured finance market in Europe, that is in relation to European assets or deals sold to European investors, has tended not to use vehicles established in the usual offshore jurisdictions. The principal reasons for this are: - Imposition of withholding taxes on payments in relation to European assets; - Marketing restrictions on debt securities of Cayman issuers or other non-OECD issuers; and - Investor perception fuelled by international scandals (e.g. Enron and Parmalat). There is also a feeling among some that acquiring the necessary ratings to penetrate the more conservative pension fund and institutional products markets is more easily achieved with an onshore EU jurisdiction, although this is entirely unsubstantiated by the rating agencies. Many of the onshore "tax havens", principally Ireland,

To encourage the homegrown hedge funds industry too, the Irish Financial Regulator, issued guidance for the conditions under which certain types of Irish authorised funds may enter into prime brokerage agreements

- Created the general framework for the common contractual fund (CCF), which extends the legal framework of the CCF to all fund types (both UCITS and non-UCITS); - Included provisions to allow the segregation of liability at sub-fund level to remove cross-contamination risk across sub-funds within an umbrella structure. - Permitted sub-funds to cross-invest in each other within an umbrella structure. In addition, the Finance Act 2005 introduced provisions to ensure that CCFs are viewed as tax transparent vehicles, and it extended the eligible investors within the structure beyond pension funds to all institutional investors. Luxembourg also allows for investment funds to be structured as tax transparent – the Fonds Commun de Placement. Such structuring can have a sig-

Luxembourg and the Netherlands, have picked up this business and overcome the structuring difficulty of establishing SPVs in taxing jurisdictions by adjusting their domestic tax rules to achieve an effective zero tax rate for vehicles participating in securitisations and structured finance transactions. In Ireland, for example, section 110 of the Taxes Consolidation Act 1997 provides for a "qualifying company" involved in the holding or management of "qualifying assets" to be taxed as if it was carrying on a trade so as to allow it to deduct most, if not all, of its expenses. Another recent example of the introduction of legislation designed to facilitate the establishment of securitisation and structured finance vehicles is the Irish Investment Funds, Companies and Miscellaneous Provisions Act 2006, which permits a private company to issue bonds to the public if the issue falls within certain exemptions, including bonds with a minimum denomination of 50,000. Using a private company avoids public limited company capitalisation requirements and allows for a single shareholder. The tax regimes of the onshore "tax havens" therefore place the taxing jurisdictions in the same position as the offshore jurisdictions from the point of view of the taxation of the vehicle but,

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OFFSHORE LAW

unlike vehicles established in the Cayman Islands and many of the other offshore zero tax jurisdictions, the vehicle in the taxing jurisdiction also benefits from the domestic tax treaty network which allows it to receive income and other payments on European assets gross, or to claim back any tax withheld. Vehicles established in the Cayman Islands or other traditional zero tax jurisdictions are at a disadvantage in this respect. Although they pay no tax they do not have the benefit of a treaty network so payments are received by the vehicle net of any withholding tax. This makes Cayman vehicles less attractive for transactions involving certain types of European assets, payments on which are subject to a withholding tax. Nevertheless, for transactions where tax treaties are not required, because, for example, the underlying assets pay gross, the Cayman Islands remain the standard. Although this should mean in theory that European synthetic CDOs can be undertaken through Cayman Islands issuers, this has not in practice been the case. Instead, the trend has been for investors and arrangers to look to the usual European tax havens notwithstanding the higher costs. Cayman's prime work source in this sector has therefore been the North American and Asian markets. Offshore Response As mentioned above, traditional OFCs such as Cayman are seeing no diminution in the amount of funds and capital markets work being done in the jurisdiction, rather the opposite.

Although as a jurisdiction the Cayman Islands is theoretically interchangeable with any number of zero tax jurisdictions, the Cayman Islands dominates the landscape partly because of its professional infrastructure and partly because of its first mover advantage. The markets like a name they recognise and once a type of transaction has become established in a particular jurisdiction, it is a bold move to suggest doing it somewhere else just to reinvent the wheel. The expression "if it ain't broke, don’t fix it" holds as true in the selection of location for structured finance issuers as it does in the hedge fund sector. The Cayman Islands and its professionals have recognised this and while Maples and Calder have anticipated these trends and as a result established a significant presence in both Ireland, and through its fiduciary affiliate Maples Finance, Luxembourg, the Cayman Islands have continued to adapt their product to allow transactions to be undertaken with greater efficiency. This produces a selfgenerating cycle as the more cheaply and efficiently deals can be closed, the greater the number of deals that can be undertaken, as arrangers and fund promoters look to produce bespoke trades and products for particular investors. This aspect of "offshore work" has yet to find its way fully into the traditional onshore jurisdictions doing offshore work, such as Ireland and Luxembourg, but as the volume of work grows and the market demands greater efficiency and cheaper products, the need to tailor laws and develop structures that allow volume and commoditisation will grow.

If You Get Funds We Get You

www.premier.ie

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FUND DISTRIBUTION

Leader of the pack Jim Clark of JPMorgan explores the extent to which Ireland is leading the charge for new fund sales

The fund markets in Ireland and Luxembourg continue to grow considerably faster than the rest of the European fund markets and represent the majority of new fund sales. Feri’s European Fund Market Data Digest for 2007 highlighted that together, Ireland and Luxembourg represented 89% of all European subscriptions in 2006. Such growth presents many new challenges for the respective local fund industries. JPMorgan Ireland takes on these challenges because we are able to successfully develop our own business by remaining at the forefront of such a dynamic and fast growing market. For the large fund administration companies, fund distribution is supported through their transfer agency businesses and at JPMorgan we offer a full service from our Dublin office.

The changes in the distribution landscape in recent years have transformed operational and client service demands. To meet these demands, the investment in new technologies and new operating models is significant. Transfer agency recordkeeping systems need to be robust to cope with increasing volumes, but also flexible to accommodate bespoke servicing and innovative product features. Client and fund information must easily be communicated between systems and available in multiple formats in order to meet the needs of fund managers needing cash forecasting, distributors needing commission reporting, fund promoters needing sales analysis, and others. The industry is also still challenged by supporting this strong growth in a cost efficient way. The automation drives of the last five years or so have had some successes. For example, more than 85% of fund orders received by JPMorgan are now in an STP format. Market infrastructure tools offered by Swift, FundSettle, Vestima and other fund platforms and order routers continue to develop. Web browsers, such as JPMorgan’s Funds Online, give investors and distributors another route for automation of trade orders. Without such developments, it is difficult to imagine how we could have supported our growth. We expect to see more third party distribution channels, driving further growth in fund values, dealing volumes and operational complexity. Our dual challenge is represented by creating automation for these new distribution channels, but at the same time encouraging the industry to move towards ‘standards’ to reduce distribution costs to the funds. Irish funds are today distributed to more than 50 countries. To service the fund promoters, distributors and investors means firms offering transfer agency services require substantial product capability and commitment to the business. For example, the Irish fund industry is number one globally for the servicing of money market funds and as a result of this, we have seen increasing demand from our US clients to service investors during US trading hours. The market has responded positively to this by either introducing extended opening hours in Dublin or implementing “pass the book” servicing using transfer agency colleagues in North America. The same logic is also being applied to Asia where the traditional Dublin operation can be enhanced by local service centres to support local distribution in places such as Tokyo, Hong Kong and Singapore. Using our specialist technology and flexible service models we can deliver the optimal mix of global operational consistency with local client servicing. Ireland is also the number one offshore centre globally for the administration of hedge funds. As a leading player in the Irish industry, JPMorgan has invested heavily in its servicing capability for these products, including new technology and operations staff. We have experienced rapid expansion of our hedge fund administration business in Dublin and have recently opened new offices in Northern Cross to support this growth. With the much expected ‘coming together’ of the traditional and alternative fund sectors, something that UCITS III greatly encouraged, Ireland is well positioned to benefit from this. The successful distribution of Irish funds will remain the lifeblood of the local fund industry and we will continue to see a changing landscape driven by strong sales growth and increasing product complexity. Jim Clark is head of Transfer Agency Product for Europe at JP Morgan

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INVESTMENT LEADERSHIP

Balancing on the

Edge

Loop Head , Clare

How Ireland is maintaining its investment leadership Mark Mannion reports In the nearly 20 years since Ireland began its emergence as a leading player in the international funds market, it has become the worldwide administrative center of choice, providing accounting, transfer agency, custody and other back-office services for mutual funds, alternative investment partnerships, unit trusts and other asset management vehicles. Today, Ireland – a nation of just 4.2 million people – services more than 6,000 funds with assets under administration of more than 1 trillion, including more than a third of global assets in the booming hedge fund space. The challenge for Ireland during the coming decade will be to maintain its preeminence, continuing to combine rapid growth in assets under administration with technological and regulatory innovation and highquality service. Ireland seizes the initiative Ireland’s rise to prominence stemmed from a conscious decision on the part of the government to capitalize on its assets of a welleducated, English-speaking workforce, relatively low costs, modern infrastructure, membership in the European Union and a location easily accessible to the world’s financial centers. Its location allows real time transaction processing with London, which

28 Annual Global Funds 2007

is in the same time zone, and overnight processing with the New York metropolitan area, the other global center of hedge fund management. Ireland also has significant financial advantages, including a stable currency and economy, a 12.5 percent corporate tax rate for most businesses (which is currently the lowest in the OECD) and beneficial treaties to avoid double taxation of profits. In addition, Ireland’s membership in both the European Union and the Eurozone (making it the only native English-speaking country using the Euro as its currency) offers further benefits, sometimes allowing foreign businesses to generate significant yields from cash management and currency exchange activities in Ireland and repatriate the profits without them being subject to additional taxes. The government’s effort to expand the financial services sector was jumpstarted in the late 1980s by the creation of Dublin’s International Financial Services Center, which kicked off a proactive national effort to attract foreign investment activities that would generate high-paying jobs and tax revenue. This early start provided a firstmover advantage that Ireland has not yielded even in the face of aggressive efforts by other nations to market themselves as financial centers. Progressive regulatory regime The Investment Intermediaries Act of 1995, which established a strong but prudent regulatory regime for financial services, was a landmark measure to attract investment. Companies could expect that the national Financial Regulator would provide the sound corporate governance they needed without imposing needless bureaucratic

requirements. Progressive regulators around the world recognize that there is a balance to be struck between the costs of a rule and its benefits, and Ireland has been effective in achieving an appropriate mean. An example of farsighted regulation is the Qualifying Investor Funds scheme. These funds are limited to individuals with a net worth of 1.25 million or greater or corporate investors of a certain size. Investors benefit from this regulation because, like all Irish funds, they require a custodian with the responsibility to ensure that illiquid positions are valued independently and the fund is managed in compliance with all applicable regulations. This is an example of the Irish corporate tradition of fiduciary responsibility, and the assurance it provides makes the funds more attractive and encourages managers to domicile new ventures in Ireland. Currently, more than 250 fund promoters have Ireland-based funds included within their distribution strategy, among them many of the world’s most important players. Because of the variety of funds that can be organized in Ireland, there is an unmatched depth and range in the experience of the fund administrators. As a result, Ireland is now recognized worldwide as a center for excellence in the provision of accounting and administrative services to the funds industry and a highly competitive marketplace for service provision. New challenges facing Ireland The test for Ireland is to maintain its leadership in the face of demanding new challenges, some of them resulting from the financial industry’s success to date. For example, the sheer number of investment funds serviced has drawn down the pool of qualified, skilled applicants, creating spot

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INVESTMENT LEADERSHIP

shortages both in management and in technical fields, such as accounting. Ireland recently has had an unemployment rate below 5 percent, about half the rate of other European Union countries. Higher property values and the rising cost of living in Dublin add to the cost of doing business, making it harder for businesses and workers to afford to locate in the country’s capital. The regulatory environment, while still highly favorable, needs continuous change to remain current with the needs of the rapidly evolving investment management industry, especially the alternative investments that make up a growing share of assets globally. In spite of these challenges, Ireland has the leadership, vision and critical mass of firstmover advantages necessary to maintain its position. The government and industry are responding with a variety of strategies, both organized and ad hoc, that are proving highly effective. Enhancing a favorable regulatory environment Regulatory innovation remains a driving force for attracting funds to Ireland. Funds and partnerships, especially alternative investments seeking institutional assets, want a regulatory regime that provides the standards and assurances required by pension fund managers and other fiduciaries. In this respect, Ireland actually may be providing a more appealing environment than do those jurisdictions that minimize regulation. Of course, regulation alone is not what makes Ireland appealing. The Financial Regulator has a worldwide reputation not only for high standards but also for a serious commitment to working closely with industry to create a progressive and sympathetic investment climate. For example, earlier this year the Financial Regulator agreed to provide same-day decisions on applications for certain new funds targeted at high net worth investors, including hedge funds and other partnerships. Such rapid turnaround accommodates managers’ need for flexibility in opening new ventures, creating a more level playing field with offshore locations such as the Caymans and increasing Ireland’s appeal as a domicile for alternative investments. The Financial Regulator is considering changes to make Ireland even more competitive, including easing licensing requirements that obligate administrators to perform a minimum of activities in-country. Doing so would allow outsourcing of lowmargin activities that add cost but little value. Although cost savings initially were among

the reasons that some funds chose to domicile or have their operations administered in Ireland, these decisions regarding location were never only about cost alone. So, although the cost of living and working in Dublin has increased, Ireland’s funds industry already has expanded well beyond its origins in the nation’s capital. In recent years, fund administration facilities have opened in locales as different as Galway, Cork, Kilkenny, Wexford, Naas, Waterford and Drogheda. Increased diversity of location, enabled by easy access to advanced communications and computing technology, will continue to be a notable trend. In the end, to the extent that cost is a factor, not only Ireland but even Dublin remains relatively more cost-effective than New York or London while still providing the qualities and amenities that fund managers desire in a location. Seeking workers abroad Ireland also has not been reticent about recruiting workers from elsewhere to meet current needs, particularly in specialized or technical fields. Not only is it easy for citizens of other European Union states to work in Ireland, but companies are actively recruiting in Eastern Europe, notably in Poland, which is a potential source of skilled workers who speak English. The hunt for qualified personnel extends even to the United States, where more than 30 million claim Irish ancestry and young Americans of Irish descent provide a receptive audience for recruitment. In fact, Foras Áiseanna Saothair, the Irish government’s employment authority, held a highly attended jobs fair in New York last year, and the number of Americans applying for Irish work permits exceeds the number of Irish workers seeking employment in the U.S. Ironically, the U.S., a nation which was built in part on the talents and hard work of Irish immigrants, appears to be starting to export skilled workers to Ireland. Ireland: Looking to the future During the past 20 years, fund managers have chosen to locate in or outsource to Ireland because of the nation’s progressive regulatory regime, its skilled workforce and its desirable and central location. By locating some or all elements of their operations in Ireland, they not only to save money but also improve efficiency, enhance service quality and free themselves to focus on their core competencies. Dublin, and Ireland, will continue to face longer-term challenges. These include

potential financial capacity constraints that could make it more difficult to handle growth; possible competition from new entrants in Europe and Asia; consolidation of funds even with growth in assets; and pressures from European and U.S. regulators for greater, but less efficient, controls over capital. The funds industry must continue its activist role in educating and training the next generation of Irish workers. These partnerships have proven beneficial and costeffective. In addition, industry must continue to make the technology investments that hold costs down and keep Irish enterprises globally competitive. Fund managers and service providers also need to maintain their close working relationship with regulators to anticipate and develop pioneering product offerings. Asset managers also need to build on the experience Irish providers have in the back office to handle a full spectrum of valueadded activities, including middle office (post-trade, pre-settlement) and front office functions. The Irish government must do its part, maintaining its traditional focus on a progressive, balanced regulatory regime and a moderate tax system; investing in the nation’s workforce and infrastructure; and trying to help costs remain competitive. Although cost is only of many criteria businesses use to determine location, the cost of living and working in Ireland should not begin to overshadow the country’s many advantages. During the past decade, Ireland has developed a reputation as a nation that can get the job done, without regulatory excesses and at a moderate cost. In a sense, this is Ireland’s brand, its franchise. It required a significant commitment on the part of both government and industry. If maintained, it will see Ireland through the challenges it faces in the coming years and position it to serve the global funds industry’s long-term growth. Mark Mannion serves as managing director for PFPC International Ltd., a Dublin, Ireland-based affiliate of PFPC Worldwide Inc., a member of The PNC Financial Services Group, Inc. (NYSE: PNC). Mannion has more than 15 years of experience in fund administration and product development for global funds, including service as senior director of fund administration for PFPC International from 1998-2004. Prior to his current position, Mannion was director, head of fund services, UBS, Ireland and has also served with Bank of Bermuda (Dublin) and KPMG.

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UCITS

Macgillycuddy's Reeks, Kerry

A world of alternatives Following the successful implementation of UCITS III in Ireland over the course of the last two years, we are now seeing a large increase in the range and diversity of UCITS III funds being authorised in Ireland. The expanded investment powers granted to UCITS under the new UCITS Regulations permit the extensive use of derivative instruments, as well as leveraging up to 100% of net asset value. With the advent of these changes, the migration of what were previously considered “hedge fund” strategies into the UCITS arena is now firmly underway. In particular, the UCITS regulations facilitate certain long/short investment strategies (typically, 130% long/30% short strategies), which would traditionally be regarded as alternative investment strategies. Although UCITS cannot hold direct short positions, they can achieve synthetic short positions through swaps or contracts for differences, while staying within the applicable leverage limit for UCITS. In addition to long/short strategies, an increasing number of structured products (including funds whose strategies are linked to eligible indices, funds which use

30 Annual Global Funds 2007

Dualta Counihan of Matheson Ormsby Prentice describes the growth of UCITS funds in Ireland

systematic trading models and/or funds that have capital protection features) are being established as UCITS. In response to these developments the financial regulator has engaged in a consultation process with industry in order to develop appropriate standards of disclosure for such complicated investment strategies (in particular those using a significant volume or complex derivative strategies). The intention is to create an agreed standard of disclosure for such funds that will address the need to provide comprehensive and accurate disclosure in a manner that can be readily understood by UCITS investors. This review process is being coordinated with developments at Committee of European Securities Regulators (CESR), which is currently reviewing the contents and format of the simplified prospectus which each UCITS must issue. The financial regulator has also continued to refine its requirements in relation to the risk management process required in relation to derivatives trading. A UCITS that uses derivatives is required to put in place a risk management process, which, among other things, will set out the proce-

dures and calculation methodologies for monitoring all exposures arising from such derivatives. A UCITS is required to limit its exposure through derivatives to 100% of its NAV. Exposure through the use of derivatives can be calculated through a commitment or value at risk (VaR) approach. A VaR approach is appropriate for UCITS using significant or complicated derivatives strategies. In the interests of providing greater clarity and guidance to the industry, the financial regulator has provided written guidelines in relation to the requirements for calculating exposure using the VaR method. The initial guidance from the financial regulator is that the typical VaR limit for a UCITS would be 5%. Our experience has been that advisors from some jurisdictions, which themselves do not have any written guidelines on risk monitoring, have sought to assert that the VaR limit of 5% suggested by the financial regulator is absolute and cannot be altered. However, the financial regulator has specifically confirmed in its guidelines that the 5% limit is not fixed and Matheson Ormsby Prentice has experi-

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UCITS

ence of UCITS adopting a higher VaR limit, with the agreement of the financial regulator. We expect the requirements of the financial regulator in relation to risk assessment for UCITS to continue to develop in a progressive and flexible manner. Authorisation for QIFs Following extensive consultations with industry representatives, the financial regulator has recently approved a significant overhaul of the authorisation procedures for qualifying investor funds (QIFs). Provided all the parties involved in the new QIF (the promoter, directors and investment manager) have been previously approved to act in relation to Irish funds, it is now possible to obtain authorisation for a new fund within 24 hours of the initial filing with the financial regulator. The new procedure has been successfully in operation since mid-February 2007. This new authorisation process marks a significant development in expediting the speed to market and attractiveness of QIFs. The proposal was one of the key proposals for investment funds contained in the Irish government's recently published strategy document for financial services “Building on Success”. The only notable disadvantage of this new procedure is it may result in greater pressure being applied to all service providers to match the financial regulator’s 24 hour turnaround time for new fund launches. Under the new procedure, the financial regulator will no longer engage in a detailed prior review of any of the key fund documents. The requirements applicable to QIFs have also been simplified and codified. The process of reviewing the draft prospectus, articles of association and custody agreement/trust deed takes approximately six weeks to complete. This is still applicable to other categories of Irish funds, including UCITS. Instead of undertaking this detailed review, the financial regulator will now rely on confirmations provided by the directors/manager and legal advisers of the fund to ensure compliance with applicable Irish regulations. Compliance by the key fund documents is also demonstrated by the completion of application forms that must be submitted with each new fund application. This new procedure is in

fact an extension of developments in the regulatory environment over the last few years, which has seen the financial regulator step back from the detailed prior review of many ancillary fund documents (circulars to investors, investment management agreements, administration agreements, prime broker agreements, sub-custody agreements and paying agent agreements) by placing reliance on completed application forms and written confirmations provided by the legal advisers and other service providers to a fund. The financial regulator does undertake postauthorisation spot checks on applications and if a QIF is not in compliance with the financial regulator’s requirements, difficulties may be experienced by the applicant should it wish to avail of the new authorisation regime for further QIF launches. Consultation process on currency hedging. The financial regulator has also recently initiated a consultation process

provided such valuation is approved or verified by an independent party on at least a weekly or monthly basis (depending on the valuation frequency of the fund in question). The financial regulator has received various submissions seeking approval for the use of model pricing for OTC derivatives in place of the use of counterparty quotes, which have focused on the accuracy and timeliness of valuations provided by counterparties. The financial regulator has also taken account of the draft European Commission Directive on clarification of definitions related to eligible assets for UCITS. The draft Directive provides for the valuation of OTC derivatives at fair value, which does not only rely on market quotations by the counterparty, where the basis for the valuation is “either a reliable or up to date market value of the instrument or, if such a value is not available, a pricing model using an adequate recognised methodology”. The financial regulator has proposed that OTC derivative contracts may be valued by the price supplied by the counterparty or by an independent valuation agent provided that any price obtained from an independent valuation agent is reconciled under pre-determined tolerance levels to the counterparty price. The consultation process initiated by the financial regulator is still ongoing and we are confident that the final conditions applicable to the use of model pricing for OTC derivatives will reflect the business needs of the industry. The changes summarised above illustrate the financial regulator’s commitment to protecting Ireland’s reputation for sensible and practical regulation, while also maintaining Ireland’s position as a leading regulated jurisdiction where innovation is actively encouraged.”

Under the new procedure, the financial regulator will no longer engage in a detailed prior review of any of the key fund documents with industry to address issues of concern in relation to the use of currency hedging transactions at share class level and valuation of OTC derivatives. The financial regulator currently permits funds to engage in currency hedging transactions at a share class level provided any such share class must not be leveraged as a result of the hedging transactions (the share class may not be over-hedged). The financial regulator has proposed amendments to this strict requirement to provide additional flexibility in relation to share class hedging policies. In the case of a fund sold to retail and professional investors, a limit of 105% of the net asset value of a class is proposed, subject to a requirement to monitor such hedging on at least a monthly basis and reduce any over hedge position to 100% of net assets on a monthly basis. It is proposed that QIFs would not be subject to any hedging limit, provided the prospectus in relation to the fund contains appropriate disclosure in relation to its intended hedging strategies at share class level. In relation to valuation of OTC derivatives, the financial regulator currently requires that such instruments be valued at a price supplied by the counterparty,

Dualta Counihan

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QIF AUTHORISATION

24 Hour Party People Qualifying investor funds – Authorisation in a day! Mark White, a partner at McCann Fitzgerald reports

Authorisation in Ireland as a Qualifying Investor Fund (‘QIF’) has proved to be an attractive option for fund promoters, particularly those establishing hedge funds. This is mainly due to the significant investment flexibility which the Irish regulatory regime offers in respect of these vehicles. A QIF is targeted at ‘sophisticated’ investors, as opposed to retail investors and, consequently, certain minimum investment thresholds and net worth tests must be met. The Financial Regulator has recently issued new procedures designed to simplify the authorisation process of a QIF. These procedures allow for a one-day authorisation process, provided certain conditions are met. This development is expected to increase significantly the attractiveness of the Irish QIF to fund promoters. Regulatory Framework for QIFs QIFs are established in Ireland under the non-UCITS regulatory regime. As a nonUCITS, a QIF, unlike a UCITS, cannot avail of an EU passport. On the other hand, by virtue of the fact that the

32 Annual Global Funds 2007

Financial Regulator is not constrained by the retail-type investment and borrowing restrictions contained in the UCITS Directive, it has greater flexibility regarding the regulation of non-UCITS. Accordingly, all investment and borrowing restrictions which apply to retail funds are automatically disapplied in the case of a QIF. Fund Structure A QIF may be established as an investment company, a unit trust, a common

trusts. If an investment company is chosen, it will be incorporated in Ireland as a public limited company. A unit trust is often favoured by fund promoters who are marketing funds to Irish, UK, US or Japanese investors. Characteristics of a QIF A QIF has two main characteristics: (a) Minimum Subscription The minimum subscription must be at least 250,000 or its equivalent in another currency. The minimum subscription may be spread among various sub-funds of an umbrella QIF. (b) Qualifying Investors As the name suggests, only Qualifying Investors can invest in a QIF. A Qualifying Investor is: (i) a natural person with a minimum net worth (which excludes main residence and household goods) in excess of 1,250,000; or (ii) an institution (defined as an entity other than a natural person) which owns or invests on a discretionary basis at least 25,000,000 or its equivalent in another currency, or the beneficial owners of which are qualifying investors in their own right. There are a limited number of exceptions to these requirements. Authorisation Process In February of this year, the Financial Regulator announced a most welcome development with regard to the authorisation process for QIFs. Up to then, the timeframe for authorisation of a QIF was somewhere between six and eight weeks. The Financial Regulator has now replaced this timeframe with a simple one-day filing procedure, subject to certain condi-

Qualifying Investor Funds proved to be an attractive option for fund promoters, particularly those establishing hedge funds, due to the significant investment flexibility which the Irish regulatory regime offers contractual fund (‘CCF’) or an investment limited partnership (‘ILP’). QIFs are most commonly established in Ireland as either investment companies or unit

tions being met (see further below). The practical effect of the new procedure is that, where the Financial Regulator receives a complete application for the

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QIF AUTHORISATION

authorisation of a QIF before 3.00pm on a particular day, a letter of authorisation for that QIF can be issued on the following business day. A pre-requisite to the new procedure being available in a particular case is that the promoter, investment manager, custodian/trustee, administrator and all of the directors of the QIF must have been approved in advance by the Financial Regulator. Furthermore, any policy issues relating to the QIF must be cleared in advance with the Financial Regulator. It should be noted, also, that the prospectus for a closed-ended fund that will be issued pursuant to the Prospectus Directive will continue to be subject to approval in the usual way. The investment company or management company, as appropriate, is required to certify that all of the fund documentation complies, in all material respects, with the Financial Regulator’s Notices and Guidance Notes. In addition, the custodian/trustee of the QIF must provide a similar confirmation in relation to the provisions of the custodian agreement or trust deed. Key Documentation The fund’s legal advisers will prepare, in consultation with the promoter and other relevant parties, the following documentation in connection with the application for QIF authorisation: (i) Application form for fund authorisation: In consultation with industry participants, the Financial Regulator has issued a simplified application form for QIFs; (ii) Prospectus or Offering Memorandum; (iii) Memorandum and Articles of Association (in the case of an investment company), Trust Deed (in the case of a unit trust), Deed of Constitution (in the case of a CCF) or Limited Partnership Agreement (in the case of an ILP); and (iv) Material Contracts to be entered into by the fund, which will include some or all of the following: • Management Agreement; • Investment Management Agreement; • Custodian Agreement; • Administration Agreement; • Prime brokerage agreement; and • Distribution Agreement. The application for authorisation must

be made in writing, specifying the legislation under which authorisation is required. In the case of a unit trust or a CCF, the application must be made jointly by the proposed management company and trustee/custodian. Prospectus As is the general requirement for all investment funds, the prospectus must describe the investment objectives and investment and borrowing policies of the QIF. This description must be comprehensive and accurate, readily comprehensible to investors and must be sufficient to enable investors make an informed judgement on the investment proposed to them. The description should provide

example the European Venture Capital Association or the Royal Institute of Chartered Surveyors. QIFs with Limited Liquidity In order to be authorised as an openended fund, a QIF must provide redemption facilities on at least a quarterly basis. QIFs that offer redemption facilities on a less than quarterly basis are classified by the Financial Regulator as investment funds with limited liquidity. These QIFs are not subject to any regulatory restrictions in terms of dealing frequency and minimum redemption quotas. A QIF with limited liquidity is required to indicate this status on the cover of the prospectus.

The new arrangements will, undoubtedly, further enhance Ireland’s attraction as a jurisdiction comprehensive information in relation to proposed investments. The prospectus must also set quantitative parameters on the extent of leverage which will be engaged in by the QIF. A QIF which will not be subject to any leverage limits should clearly indicate the typical levels of leverage, or range of leverage, that may be employed. Name of QIF/Sub-Fund As with other funds, the Financial Regulator has stipulated that the name of a QIF or its sub-funds must not be misleading. Where the name is intended to reflect the investment policy, it should be consistent with that policy. As a general rule, the only entity whose name may be included in the title of the QIF/sub-fund is that of the promoter. Investment Manager In the case of QIFs which will invest in private equity or property, the applicant must confirm that the investment manager has appropriate expertise in relation to the particular area of investment. Valuation of Assets All assets must be valued in accordance with the Financial Regulator’s requirements. Where a QIF proposes to value assets under alternative provisions, these must be cleared with the Financial Regulator in advance. For valuation of private equity or property-type investments, it is acceptable to refer to the valuation standards established by recognised professional bodies as appropriate, for

Offer Period The offer period cannot commence prior to the authorisation of the QIF and should be for a period no longer than six months. In the case of QIFs which are established as private equity or property funds, this period may extend up to one year provided the terms of the offer ensure that early investors are not prejudiced by the arrangements. Extensions to initial offer periods may be made without prior notification to the Financial Regulator provided that no subscriptions have been received at the date of the proposed extension. Notifications of extensions should, however, be made to the Financial Regulator on a quarterly basis. Proposals to extend an initial offer period where subscriptions have been received must be approved in advance by the Financial Regulator. Irish Stock Exchange The Irish Stock Exchange has indicated that it will facilitate the listing of QIFs under the new one-day authorisation process. The new QIF authorisation procedure has been widely welcomed by funds industry participants, both domestic and international. The new arrangements will, undoubtedly, further enhance Ireland’s attraction as a jurisdiction in which to establish a regulated investment fund for sophisticated investors, particularly in the alternative investment arena.

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INTERNATIONAL REGULATION

On the Santa Fe Trail International views on hedge fund regulation The role of independent third party administration in the new hedge fund corporate governance consensus By Peter O’Dwyer, director of marketing and strategy, Trinity Fund Administration The recent statement by Federal Reserve Chairman, Ben Bernanke, (15 May 2007), that US financial watchdogs should in future look to a more principle-based, riskfocused approach, rather than the traditional US rules based supervision, seems to follow a trend that has been taking shape internationally over the past few months. Mr. Bernanke, who was speaking at a Fed. Conference in Atlanta, mentioned in particular the approach in the UK, which he said was gaining “considerable influence on this side of the Atlantic”. He also made reference in his paper to a decision by the US President’s Working Group in February 2007 not to call for tighter federal supervision of hedge funds, but rather to look towards a combination of market discipline and more vigilance by regulators. Mr. Bernanke’s statements on hedge fund regulation were 34 Annual Global Funds 2007

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Rossbeigh Strand, Kerry also reflected in comments earlier this week from Japanese Vice Finance Minister, Hideto Fujii, who said that there was no difference between the Group of Eight member countries concerning the monitoring of hedge funds. He stated that “I think there is no difference between the G8 member countries with regard to their basic opinions on this”, (Reuters 14 May 2007), referring to the emerging consensus that the risks to the global economy have more to do with the entities that do business with hedge funds, rather than with the hedge funds themselves. This new found sophistication by the international regulatory and political community would appear to reflect the fact that, having had an opportunity to stand back from some of the more inflammatory “locust” type attacks on hedge funds, politicians and their regulatory colleagues are at last beginning to differentiate between the obvious liquidity and market advantages of hedge funds, versus the risk that from time to time lenders, or creditors of hedge funds may become overexposed. Indeed the difference between the two poster children of hedge fund collapses in the 90s and 00s reflects just this point. Whereas an exceptionally highly leveraged LTCM in 1998 resulted in a USD multi-billion bale out by a consortium of investment banks, encouraged by the Fed., the recent problems with Amaranth, (which on the face of it was a larger incident than LTCM), seem to have been more of a zero sum game of big winners and big losers. This would also anecdotally reinforce the common view that the amount of leverage out there is significantly less than in the 1990s. The EU seems also to be reluctantly getting on this bandwagon. In a recent statement from Ecofin, the council of 27 European finance ministers, strong support emerged for what were previously considered the heretical views of Internal Market and Financial Services Commissioner, Charlie McCreevy. In their first official statement on the issue, (8 May 2007), the finance ministers stated that the present system of supervision was adequate and that hedge funds, on the whole, contributed to the efficiency of the financial system. Peter Steinbrück, the German finance minister and current Ecofin president said that he was hopeful that a code of conduct could be signed with industry by the

end of 2007. Whereas, there would, therefore, now appear to be a widespread consensus on the new voluntary approach, it remains to be seen, whether going forward this will be put in place by the hedge fund industry itself, (the approach favoured by Mr. McCreevy), or by some new Brussels based bureaucracy, (the approach not surprisingly favoured by Germany and France). Attention will now focus on the G8’s upcoming meeting at Schileowsee near Berlin on 18 May, where these issues will be discussed. It would appear, however, from the statements from Japan, the US and Europe, that a welcome consensus is beginning to emerge. PWG In his comments concerning the President’s Working Group, Mr. Bernanke was referring to the President’s Working Group on Financial Markets, (“PWG”), which was originally established after the LTCM collapse of 1998. The PWG is chaired by the Treasury Secretary and is composed of the Chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Its mandate is to further the goals of enhancing the integrity, efficiency, orderliness and competitiveness of financial markets and to maintain investor confidence. In their first report, which followed LTCM, the PWG recommended that no changes be made to the exemptions for hedge funds under the Investment Companies Act and the Investment Advisors Act, which govern the mutual fund industry in the United States. The PWG took the view, that the registration of hedge fund and their advisers did not appear a useful method of monitoring hedge fund activity. Following the successful court challenge in 2006 by New York hedge fund manager, Philip Goldstein to new hedge fund regulations introduced by the SEC, the PWG was reconvened to look again at hedge funds and what they term “private pools of capital”. In February 2007 the PWG reported by issuing a set of new principles and guidelines, which, following on from their 1999 statements, are designed to guide US financial regulators as they address public policy issues associated with the rapid growth of private pools of capital, including hedge

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Co-operation with third parties funds. The first significant statement of the PWG which is Independent administrators also perform an important role worthy of note was that, in supporting the independent boards of funds by providing The current regulatory structure, which is based on these them with timely investment and risk information. The principles is working well. As we noted in 1999, “in our maradministrator is also a counter-party and counter balance to ket based economy, market discipline of risk taking is the the role of the prime broker, particularly in start up situarule and government regulation is the exception.” The PWG tions, where the prime broker can be performing a multitude would seem, therefore, to be strongly of the view that the of functions market is the from client best disciplinarintroduction to ian of hedge funding. New funds. Treasury S e c re t a r y, Henry Paulson, US Treasury Secretary hedge fund managers typically do Henry Paulson, not come hard wired with strong back, or middle office expeelaborated on this view by stating; “Those who would believe rience. In the early days of getting funds up and running, the that the role of regulators is to guard against any losses, or support that an independent administrator can provide can somehow prevent losses, or to prevent a hedge fund from often be critical. having problems, they have a different philosophy about regulation than I do” (New York Sun, 23 Feb. 2007). Selection of an independent administrator The PWG’s robust assertion of their view on market forces The selection of an independent hedge fund administrator is was also picked up by the EU’s Commissioner for Internal a process, which should only be undertaken with care and of Market and Services, Charlie McCreevy, who stated, “I necessity involves management time on the part of the probelieve that private equity houses and activist fund managers moter of the fund. While good assistance can be relied on of all kinds, including hedge funds, play a more valuable role from professional advisers, there is no substitute for physicalthan any government or any regulator in propelling the liqly visiting the administrator at their workplace and kicking uidity of our capital markets, in reducing the cost of capital” the tyres. Getting it right first time is so much better than (Reuters, 23 Feb. 2007). having later to switch administrators, which from common In a press statement from the Commission, Mr. McCreevy industry experience is a process often compared to root canal further stated: “In Europe we are continually reviewing the work, but not as enjoyable. situation. We have a well-developed system of checks and Hedge fund administration also tends to be a highly spebalances in place to address the possible impacts of hedge cialised business and you need to be confident that the fund/private equity businesses on the overall financial sysadministrator you select is able to manage your strategies. It tem. I don’t see any case for complementing them by a set of is usual to send out a detailed RFP to the administrator and EU legislation specific to hedge funds. The focus must be in this regard the pro forma RFP produced the the clearly on strict enforcement of existing rules, market disciAlternative Investment Management Association, AIMA, is a pline and continuous monitoring by banking regulators. In good starting point. Most reputable administrators will have this sense we are at one with the PWG agreement.” already completed an AIMA questionnaire, so ask for it up front. The role of independent administrators In its report, the PWG sets out clearly that investors in private What is independence? pools of capital should obtain accurate and timely historical In looking for an independent administrator, what is generand ongoing information to enable them to make informed ally meant is an administrator who is not otherwise connectinvestment decisions. They particularly identify the impored to the promoter, its investors, or its key third party supplitance of: ers. Critical is the ability of the administrator to independently value the portfolio. This provides important reassur- Clear and meaningful disclosure ance to both promoters and investors alike. Administration - Proper management of conflicts of interest arrangements where the administrator take its valuations - Appropriate valuation methodologies from the investment manager, (so called “NAV Lite”) are generally to be avoided and in many jurisdictions are heavily and Recent studies also indicate that hedge fund managers are correctly circumscribed. increasingly adopting best practice when it comes to third Googling the word “independence”, like so many Google party fund administration and independent valuation. A activities is a fun, but very distracting occupation. The math2007 Deloitte study found that, whereas for older stronger ematical definitions of independence are fascinating, but hedge funds, raising monies without these practices was still unfortunately outside the scope of this article. I like “freein certain cases possible, it was becoming increasingly unusudom from the control or influence of another, or others”. I al for new US funds to start up without an independent especially liked, “Independence – a city in Western Missouri, administrator. the beginning of the Santa Fe Trail”. That sets the mind racIt would appear, therefore, that there is both a strong reguing, the independent administrator, spread sheets and price latory push and a market pull for hedge funds to have and to feeds in his saddle bag, heading down the Santa Fe Trail to be seen to have an independent third party service provider. hunt down the last of the hedge fund cowboys. Fetch me my Such an administrator provides the services of administrahorse…that’s real independence! tion, investor liaison and independent valuation.

“They have a different philosophy about regulation than I do.”

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NET ASSET VALUATION

Artistic endeavours

White Park Bay, Antrim

Does the valuation of a fund have more in common with art than science? Asks Richard Newbury of Telekurs

38 Global Funds 2007

How can a fund be valued? Well, by valuing its underlying assets, of course. But how true is that? Back in pre-history (or 10 years ago), it may have been true that the value of a fund could be fairly well calculated by taking the value of underlying assets and deducting costs. In the new world of hedge funds, exchange traded funds and UCITS III funds – where investment rules are relaxed – the valuation of a fund becomes something more of an art than a science. So what can we say a NAV represents? It is really a snapshot at a specific time which provides a reasonable fair value for the underlying assets. A NAV created at midday for example is already out of date at 12:05, let alone at 16:00, or the following day. Changes to regulation and investment in a wider range of derivative instruments have brought into focus the need for Fund Managers, Administrators and fund investors to have a much clearer knowledge about the processes used to reach a value. In fact, does there need to be a better dialogue between manager and administrator? How many administrators verify

that the price they take for a snapshot is the correct one? An example from the day of writing shows the following pricing for trades on a London listed asset: Any fund administrator taking a price at 4.30pm would normally take the £27.914809 price to use in the fund valuation. The next trade of this asset was carried out at 4.30pm and15 seconds at £28.30 and again was an automated trade (see below). This means that the fair value of the asset was around £28.27 at the time of the 4.30pm snapshot. However, processing requirements mean that the administrator would not have seen the later or earlier price and probably would not have processed the “bar-

Example NAV snapshot Time

Price

16:29:15

27.914809

16:28:57

28.25

Type Bargain Conditions Automated Trade

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NET ASSET VALUATION

gain conditions” information. Using the £27.91 price in fact undervalues the fund’s holding in this asset by around 36 pence. A substantial figure if the fund holds a million shares. Actually finding a value for the underlying asset at all can be a challenge. Equity trading is fairly transparent – and will become even more so under MiFID – whereas assets such as bonds and derivatives become difficult to find a price for. Recent changes to international accounting standards have meant that administrators now have to look at their prices for their “hard to price” assets and decide whether the source they use is suitable. Prices must now be “objectively determinable” and a specific hierarchy must be used – market value first, third party evaluation second, and own calculation third. The question is, can third party evaluations really be trusted? Are they objectively determinable, or is there a possibility that a firm’s commercial relationship with a fair value provider could cause a price to be changed in the firm’s favour? In 2004, a US-based data vendor was fined a large sum of money by the Securities and Exchanges Commission (SEC) for colluding with a client to reduce the value of an asset over time. Far be it for me to second guess the SEC, but it seems more likely that a desire to provide good customer care and a lack of proper control systems is the more likely cause of the error. This is, however, just one example out of millions of prices calculated every day. It doesn’t make it right though and, to my mind, highlights the need for the requirements of the new International Accounting Standards. By providing good customer service, and lowering a price, the evaluator I mentioned above was actually working in a wholly non-transparent way. Indeed, that company may have published general guidelines as to how they arrived at their evaluations, but any client who had not queried the price would not understand why the price was changing. The key to evaluating whether a fair value price is objectively determinable is to ignore the price completely and concentrate on the inputs used to arrive at the price. The only reason a price should change is if one of the inputs changes. Sure, the input should be challengeable, but by changing only the input value and

not the price itself, the process remains transparent and free of collusion risk. Telekurs Financial has recently begun offering a service where all the inputs used to create a fair value price can be seen online, downloaded and reproduced for audit purposes. One may wonder why yet another vendor is starting to provide fair value prices in such a crowded market. The key differentiator is the provision of the transparency with which anyone now valuing a portfolio or fund must act. Some assets are easier to value than others. European ABS and MBS are particularly hard to price. A number of providers calculate fair value prices for some of these assets. However, in the European

So how good is a NAV? As I said at the beginning, it can really only be looked at as a snapshot at a particular time. In the past, the variance may have been less important as the investor would obtain a different price when buying into or selling out of a fund. However, with the introduction and rapid uptake of exchange-traded funds (ETF), the price becomes critical at all times. ETFs track indices, many of which comprise a certain number illiquid instruments. The fund however can be traded continuously, so a liquid price for the fund must always be available. The valuation of an ETF though, cannot be carried out by an administrator. It has to be done automatically by the exchange on which it is traded. Telekurs Financial has recently announced that it is calculating iNAVs for ETFs traded on the American Stock Exchange, bringing value to the pricing of the fund by providing price levels of the underlying fund constituents, which are not listed or traded on the American Stock Exchange. The final type of fund valuation is for hedge funds. This market segment is worth an enormous amount of money, yet has some of the lowest level of rules and regulations. European regulators are making noises about regulating hedge funds. The SEC seems to have gone quiet on the matter. What does this mean for valuations? The wide variety of prices available for a particular fund, for a particular client, as well the way in which interim NAVs are provided on a weekly basis, and “confirmed” month end NAVs are delivered part way through the following month, means that transparency is not a word that can be applied to a hedge fund. This hampers other market participants and there is very little a data vendor can do to help, beyond collecting and organising the myriad prices in a consumable and comprehensible way. Hedge fund managers prefer the lack of transparency as it helps their performance. So is there a conclusion to be drawn from this? Remain alert, challenge valuations, be aware of the issues and communicate clearly with your investment manager or your administrator. The answer is never 100% right or 100% wrong, but lies somewhere in between. These days, you might just need divining rods to work out the correct answer.

So should an investment manager provide prices to their administrator? Does this present a conflict of interest? arena, the fragmented nature of the market means that there are some ten thousand deals in the marketplace with numerous, different legal structures, all of which need different inputs for pricing providers to create a model to price them. In the US, the world’s biggest market for these asset types – there is a homogenous market with one legal basis. The fragmentation in Europe makes it difficult for pricing providers to create reliable or profitable models for the European market, meaning that pricing remains unavailable for a large part of the market. So should an investment manager provide prices to their administrator? Does this present a conflict of interest? There are a number of ways to look at this. Fund managers in open and transparent funds rely on their reputation and are rewarded on their performance. It seems clear that the investment manager would not reap any benefit from falsely inflating the value of an underlying asset. This simply risks harming their reputation and falsely raises the performance bar for the following month. From an auditor’s point of view, the independence of the price may be paramount. Auditors and clients might not accept the case where an investment manager also provides the price to the fund administrator. Sometimes, though, the investment manager is the only one who has a real view on where the price level is. However, the separation of trading and valuation is quite simply a matter of good governance.

Global Funds 2007 39

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INVESTMENT MANAGEMENT

Creative thinking It is difficult to think about securities lending being en vogue among institutional investors given that it is a secondary investment activity. However, it is an increasingly important investment management decision argues Luke McCabe of eSecLending Increasingly, beneficial owners are thinking of securities lending as an alpha generating activity and are taking an active approach to managing their programs. C level executives are spending time to better understand their lending activities and are evaluating the potential for increased revenues, greater transparency and comprehensive risk management for their programs. Pension funds, investment management groups and other institutional lenders are appointing dedicated internal resources to monitor and manage their lending programs. This is no longer an aberration, in fact, it is becoming the norm. Beneficial owners that are not taking an active approach to their lending activities and are not seeking to optimise their risk/return profile are at risk of falling behind their peer groups. Performance, however, is not the only consideration. As regulators, auditors and boards of directors globally are paying closer attention to securities lending trading strategies, pricing methodologies, program risks and fee arrangements, beneficial owners need to ensure their programs are adhering to evolving market best practices. The industry, in a broad sense, is beginning

40 Global Funds 2007

Phoenix Park, Dublin

to respond to these concerns but it still has a way to go before it achieves full transparency. The demand side of the business has always maintained the information advantage due to their market position supporting hedge fund and proprietary trading desk strategies. There are however, many efforts being made throughout the industry in terms of benchmarking and performance measurement tools to help better inform beneficial owners and promote general market price transparency. Beneficial owners are seeking lending agents who act as partners not vendors in their efforts to negotiate these changing market conditions. Investment management discipline Treating securities lending as an investment management decision allows beneficial owners to consider traditional investment management techniques such as competition, use of specialists and multiple manager strategies. Lending is now decreasingly viewed as an operational or back office function associated with the custodian. Beneficial owners are viewing lending as an incremental alpha proposition.

From an investment management standpoint, it is a widely accepted practice for beneficial owners to use multiple asset managers based upon their core competencies and particular investment style and expertise. When selecting these investment managers, beneficial owners typically perform considerable due diligence to ensure they are hiring the best provider for each asset class consistent with their risk profile. These mandates are periodically reviewed and optimised based on carefully selected criteria. In order to retain client business, providers will inevitably improve performance and service when they are faced with greater competition. In theory, securities lending mandates shouldn’t differ from this process. However, lending mandates have historically been awarded passively with less attention paid to provider performance. By introducing competition and using various routes to market, including auctions, exclusive arrangements and custodial and third party agents, beneficial owners can effectively enhance returns on their lendable assets. At the same time, they can also assume greater control over their lending activities. One provider may not be the best securi-

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SECURITIES LENDING

ties lending agent for all asset classes and cash collateral management strategies. Unbundling securities lending from custody, and cash management from securities lending is the first step in finding the best providers for a program. Diversifying routes to market and providers also acts as a risk spreading mechanism. Alternative routes to market The good news for beneficial owners today is that they have options. With the evolution of the securities lending industry, there are many available routes to market to optimise lending returns. The traditional route to market for lending is via a beneficial owner’s custodial bank. Custodial agency lending programs are efficient and effective for a broad range of beneficial owners. However, the market has evolved and now third party specialists, exclusive principal arrangements, auction providers and inhouse lending desks are widely accepted alternatives. In addition, recent advances in technology have made noncustodial lending a viable option without a corresponding increase in risk or loss of control. Third party specialists, or non-custodial agent lenders, act in a similar fashion to the custodial lending model. However, they tend to offer greater expertise and specialisation for specific asset classes. Exclusive principal lending or direct arrangements with broker/dealers often provide premium market returns in exchange for a beneficial owner agreeing to provide exclusive borrowing access to their portfolios. Auction providers offer the best of both worlds, as beneficial owners receive premium returns from exclusive principal arrangements with the added benefits of operational support and oversight common in traditional agent structures. Inhouse lending programs are typically managed when a beneficial owner can allocate the necessary internal resources to staff all the components of a lending program including trading and operations. Traditional custodial providers are also increasing their third party mandates as they continually adapt to an ever changing marketplace. As a result, the lines that delineate custodial lending agents from third party lending agents have been blurred, as service providers seek to compete in this evolving space. As such, the industry has established an RMA working group to standardise a baseline operational model for third party lending. Objectives of

the working group include the development of a common industry service level agreement (SLA) and the establishment of a best practices document. Risk management Securities lending risk management should be in line with a beneficial owner’s broader investment management controls and strategies. Asset allocation for collateral reinvestment, compliance guidelines, trading and administration should all be closely monitored on a daily basis. Performance should be tracked and benchmarked and adjusted for the level of risk being taken by the provider or trading strategy. All lending and investing activities involve an element of market risk, which can be defined as the exposure to uncertain mar-

reviewed in an all encompassing fashion, rather than agent by agent. One key to effectively monitoring securities lending risk is ensuring that data and information are reported in a timely, consistent and accurate fashion across all lending providers. Consolidating all agent programs in a cogent fashion provides a true measure of not only program performance, but also total exposure to all counterparties in a securities lending program. With the inclusion of reinvestment exposures to lending counterparty data, a holistic view of a program’s entire risk provides a level of transparency and control required by most governing boards and also flows into a firm’s overall risk measurement system. Ultimately, the ideal solution for risk management in securities lending programs is an integrated metric system that can provide robust reporting and risk measurement of various relationships among and between four key areas. These areas comprise: counterparty quality (default probabilities, credit ratings, CDS spreads); market volatility (VaR of liabilities at a CUSIP by CUSIP level); appropriateness and levels of collateral (cash and/or securities correlation and VaR); and diversification (counterparty exposure). With proper measurement of key risk metrics on a regular basis and review with the beneficial owner’s lending agents, a securities lending program can be ideally managed to provide superior returns in a reduced risk environment while simultaneously providing transparency and accountability to governing boards.

Long gone are the days of monitoring and allocating counterparty risk through simple changes in ratings by agencies such as S&P and Moody’s ket value of a portfolio. Often in a securities lending program, value at risk (VaR) methodology is used to measure this risk by integrating the loan and the collateral portfolio. VaR is a function of volatility of the assets and loans and the correlation between them. As with other aspects of securities lending, VaR based risk models have evolved from rudimentary market or index linked measures to complex daily valued securities level techniques. Beneficial owners would be well served to ensure they completely understand the modelling used by their agents and the underlying assumptions to that model with respect to items including confidence intervals, holding periods and decay factor among others. A properly developed and thoroughly understood VaR methodology can also be used to better allocate credit limits and determine what type of collateral is the best in terms of reducing the securities lending risk. Additionally, VaR can help to better allocate lendable assets to borrowers by taking into account the market and credit risk factors. Long gone are the days of monitoring and allocating counterparty risk through simple changes in ratings by agencies such as S&P and Moody’s. Counterparty risk management now is a daily discipline utilising sophisticated analytics like VaR in conjunction with leading market indicators such as credit default swap spreads. To the extent that the beneficial owner uses multiple providers, risk must be

Moving forward These are only a few elements involved in the development of a modern securities lending program. Many other elements must be considered in truly making the beneficial owner’s program their ‘own’, such as comprehensive corporate governance policies, customised and thorough board and management reporting and the unbundling of fees to name a few. Finding trusted business partners that can assist in the negotiation of these waters, who offer sound counsel and thought leadership requires time and proper due diligence by the beneficial owner. However, the end result can be a securities lending program which is truly unique to a beneficial owner; best matching its risk/return requirements, not simply an off the shelf product.

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AUTOMATION

Coming of age?

Will the year 2007 see the European market finally mature in its level of automation? Ponders Phil Boland of Bravura Viewed from the perspective of a long time supplier of software solutions for automation to the funds industry, the answer is certainly yes. But why only now? The benefits of automation, such as cost savings through reduced error rates and reduction of manual effort, have been well understood for a number of years, by players such as fund companies, third party administrators and distribution platforms. Platforms such as Clearstream’s Vestima+, Euroclear’s FundSettle, EMX, and a number of others, are well established on the European scene, having provided STP for orders and other transactions for a number of years. Additionally, with the NSCC in the United States providing a clear example of efficiency, surely the European market would have taken steps to radically increase levels of its own automation years ago. Wouldn’t it? So, why only now? Again, looking at this question as a supplier of technology, the answer, or at least an important part of it, lies in two underlying areas. First, a prerequisite to overall market maturity is the internal maturity of market players. By this I mean the ability and readiness of order management, transfer agency (TA) and fund administration packages, as well as centralised platforms to automati-

42 Global Funds 2007

cally accept and process transactions and report to clients and counterparties in a timely manner. Back office procedures must be adapted accordingly, and technology platforms brought up to speed; in recent years, this has happened. Package vendors now offer a level of automated interfaces unheard of a few years ago, and the so-called ‘middleware’ tools available to those companies that build in-house are better and cheaper than ever before. New centralised processing initiatives developed purely for the funds industry are also more evident. A good example is Clearstream’s recent Central Funds Facility, which was built specifically to process fund settlement and payments via a single, simple set of instructions. Such services illustrate that not only the buy and sell counterparties, but also the infrastructure providers that service them, are maturing to the point where automation is the norm rather than the exception. Second, there is the external maturity of the market - the manner in which players execute transactions with counterparties and generally communicate across the market with one another, either directly or via an intermediate platform such as a clearing system or distribution concentrator. One of the critical success factors in this second category

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AUTOMATION

St Patrick’s Day, Dublin

may be termed as ‘open standardisation’. Advances in technology, especially in the area of standard interfaces known as ‘web services’, allow remote communication between different packages. It is important to note that these web services are not specifically related to the internet. rather, they are published ways to access a particular application for a particular purpose, such as processing an order, generating a statement of holdings, or registering and maintaining an account. Vendors of TA systems and other packages are now beginning to offer their web services publicly. However, it is in the area of message standards that true market maturity is being achieved. The fragmented European market, with its multi-lingual, multi-currency, multi-platform, multi-regulatory environment, has traditionally tackled automation via a disparate and varied set of message standards. It has also used a similarly bewildering array of ways to send those messages (anything from automated faxes to one-off proprietary networks).

Standards, such as Swift’s ISO 15022 message set, (adapted for funds processing) have been available for some time. However, it is the advent of standard and openly available messages, built specifically for processing of subscriptions, redemptions, switches and other transactional and reporting processes particular to funds, that automation through STP messaging becomes cost effective enough to attract a critical mass of participants. But the creation of that critical mass is a snowball effect, where the more participants that already subscribe to a particular standard, the more new participants are attracted to use that standard. Put simply, to communicate automatically, you need a counterparty that can do the same, and to the same standard - ‘takes two to tango’. The increasing traction of the ISO 20022 message standard, built specifically for funds with direct input of ideas from the market, is a clear example of external market maturity. One of the best true indicators of critical mass in this area – far better for measuring the situation on the ground than market surveys or other published views – is the appetite of companies to order the necessary software products to achieve ISO 20022 automation. My own experience, combined with that of other vendors I have spoken to, shows this appetite to have significantly grown in the first few months of 2007. This opinion is borne out by the statistics compiled by Swift for usage of the message standard across its network, with Michèle De Boe, regional head of Funds Markets in Europe, commenting, "We now have around 160 clients signed up to the SwiftNet Funds service, with more than 30 already using it live for day to day business. In total, we now know that our annual funds related message volumes are in excess of 16 million messages per annum, a figure that proves that the industry sees Swift as the solution to their operational challenges. The impact of this automation has already saved our clients from having to bring on up to 10 additional staff, and changes the cost of processing an order from around 30.00 to 0.15," De Boe explains. So why now, in 2007, are we finally seeing the efforts of a number of years of hard labour in the field of automation come to fruition? Because the technology has matured, we can communicate with one another using that technology, and so, reap the real cost, efficiency and enhanced service benefits that have been so difficult to fully achieve in the past. The market is ready.

It is in the area of message standards that true market maturity is being achieved

Phil Boland, based in Luxembourg, is head of product and strategy for STP at Bravura Solutions, the global provider of business applications and services to the Wealth Management industry, and vendor of products such as the Babel Integrator STP messaging platform and the Rufus GTA Transfer Agency platform.

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SPEAKER PROFILES

IFIA / NICSA Speaker Profiles Martin L. Flanagan, CFA, CPA, President and Chief Executive Officer, AMVESCAP PLC Martin L. Flanagan is president and chief executive officer of AMVESCAP, a position he has held since August 2005. He is also a member of the Board of Directors of AMVESCAP.

Michael J. Cosgrove, President & CEO – Mutual Funds GE Asset Management Mike is President & CEO – Mutual Funds. He is responsible for all business aspects for the Mutual Funds and sub-advisory activity for GE Asset Management. He is also a Trustee of the GE Pension Trust and GE's employee savings program. Mike has held several positions in GE Asset Management (GEAM), most recently as Chief Commercial Officer.

E. Willem van Someren Gréve, Senior Executive Vice President Robeco Asset Management, Robeco Willem van Someren Gréve is a Senior Executive Vice President within Robeco. As Client Relations Director he is responsible for the promotion and distribution of all retail and institutional products of Robeco through indirect distribution channels.

Sven Askenberger, Chief Operating Officer, Third Swedish National Pension Fund (AP3) Sven is the Chief Operating Officer at the Third Swedish National Pension Fund (AP3) since the year 2000. Prior to that he has held positions as COO, CFO and Business Controller in Chase Manhattan Bank (1981-1986); Kreditkassen (19861987); Gota Bank and Retriva (1987-1996).

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SPEAKER PROFILES

Charlie Porter, CEO, Thames River Capital Charlie Porter started Thames River Capital in 1998 with his partner Jonathan Hughes-Morgan. Their aim was to poach the best talent from large institutions and build an absolute return, performance focused modern asset management company where the majority of the economic value lies with the fund managers.

Diana Mackay, LLB, Joint CEO, FERI Fund Market Information Ltd Diana is a recognised expert on Europe’s mutual fund markets. She is now responsible for a new body of data and research to aid fund management groups in gathering assets in Europe’s diverse markets.

Charles Beazley, President, Nikko Asset Management Europe Ltd Charles was appointed in November 2006 and is responsible for building Nikko AM’s European operations. He is well known within the industry for his expertise in the field of alternative and specialist investment management.

Paul Freeman, Managing Director, BlackRock Paul Freeman, Managing Director, is Head of International Product Development at BlackRock. The International Product Development team is responsible for the development and ongoing product management of all funds domiciled or distributed internationally by BlackRock.

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IFIA / NICSA CONFERENCE

Programme of Events Tuesday 5th June 2007 7.00pm

Opening ceremony & dinner The conference opening dinner will take place in the Carton Suite of Carton House Hotel. Carton House was once the home of the 19th Earl of Kildare who chose this spectacular location for the Fitzgerald family’s country seat. Built in 1739 and designed by the famed architect Richard Castles, the magnificent silhouette of Carton House overlooks one of Ireland’s most impressive country estates with majestic authority. dinner speaker: Alan Dukes

Wednesday 6th June 2007 8.00 - 8.30am

Registration and continental breakfast

8.30 - 8.45am

Opening remarks speaker: Deirdre Power, chairperson, Irish Funds Industry Association (IFIA)

8.45 – 9.15am

Keynote address Future outlook of the investment funds industry in the global marketplace speaker: Martin L. Flanagan, President and chief executive officer, AMVESCAP & chairman, Investment Company Institute

9.15 – 10.45am

Senior industry executives round table Current industry issues and developments including managing investor needs/expectations Moderator: Mark Tennant, Senior Adviser, JP Morgan & Chairman, Blue Rock Consulting speakers: Sven Askenberger, chief operating officer, AP3 Swedish Pension Fund Michael J. Cosgrove, president and chief executive officer, Mutual Funds, GE Asset Management Ashley Kovas, manager CIS policy, FSA William J. Salus, executive vice president, PFPC Willem van Someren Gréve, senior executive vice president, Robeco Asset Management

10.45 – 11.15am

Coffee break

11.15 – 11.45am

Keynote address Regulatory outlook for the European funds industry - challenges and opportunities speaker: michael murray, Member of Cabinet. Commissioner Charlie McCreevy, European Commission

11.45 – 12.15pm

Keynote address Asset Management – an alternative approach? Speaker: Conor O’Neill, Managing Director, Delta Index

12.30 – 5.00pm

Golf Team Competition – Montgomerie Course (Shotgun start 1pm)

12.30 – 2.30pm

Lunch for non-golfers followed by non-golfer activities

7.00pm

Conference BBQ: Carton Suite and Terraces, Carton House Hotel. A drinks reception from 7.00pm will be followed by the conference BBQ and the golf competition prize giving will take place during the BBQ. Prizes will be presented by Francis Howley, Head pro at Carton House and former EuropeanTour Player.

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IFIA / NICSA CONFERENCE - PROGRAMME OF EVENTS

Thursday 7th June 2007 8.30 - 9.00am

Continental breakfast

9.00 – 9.10am

Opening remarks

9.10 – 9.40am

Fund industry trends in europe Key theme: The perversity of investor psychology and its impact on industry trends speakers: diana mackay, managing director, FERI and mauro baratta, business development and project director, FERI

9.40 – 11.00am

Alternative investments Key theme: Hedge Funds – Anticipating the challenges before they arise What really are the risks in the first place? How do you protect against the perceived risks? What are the best ways to identify and manage those risks? Does more leverage mean more risk? Analysing other managers for fund of funds Model based pricing Valuing hedge funds Estimated Pricing Valuing a hedge fund in trouble When the bank calls the loan? Security over underlying funds Liquidity constraints moderator: Charlie Porter, chief executive officer, Thames River Capital speakers: Alice Bordini, head of research, Carlton Capital Partners Donnacha Loughrey, portfolio manager alternative investments, KBC Asset Management David Woodhouse, chief due diligence officer and partner, Fauchier Partners

11.00 - 11.30am

coffee break

11.30 – 12.45pm

New products / evolution of fund products Key Theme: Product development - The evolution of products within both the UCITS and non UCITS framework UCITS - ETF developments within UCITS Enhanced yield cash funds Securitisation CDOs within fund structure Moderator: jim firn, General Counsel – Europe, Russell Investment Group speakers: paul freeman, Managing Director, BlackRock andrew v lodge, Managing Director, Nedgroup Investments tim west, Chief Operating Officer, Barclays Global Investors - iShares Europe matteo rigginello, Executive Director, Albemarle Asset Management

12.45 – 2.15pm 2.15 – 3.45pm

Lunch Global product distribution – examining global distribution landscapes Key Theme: Global Distribution Strategies Key to gaining competitive advantage in distribution Brand versus performance: what brings the most success? Major changes and trends in global distribution themes Impact of costs on a global distribution strategy moderator: Jervis Smith, MD Funds and Insurance, EMEA, Citigroup speakers: Gareth Adams, executive director – Regulatory Strategy, Fidelity International Charles Beazley, president, Nikko Asset Management Europe Vincenzo Falbo, chief executive officer, Eaton Vance Management (International) Michael Thompson, VP & Co-Head of European Institutional Remarketing, PIMCO

3.45pm

Conference closes Global Funds 2007 47

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IFIA / NICSA CONFERENCE - VENDOR PROFILES

RBS Fund Services (Ireland) Limited is an independent UCITS III management company. Our aim is to support fund promoters through the provision of capital and local substance to enable them to comply with the provisions of the UCITS III Regulations. RBS Fund Services (Ireland) Limited takes responsibility for delegated functions and thus mitigates promoter liability and risk. We also offer the same service to non-UCITS Funds. We have particular expertise in risk monitoring and can offer this as a separate service to other management companies or self-managed VCICs. Our raison d’être is investor protection, and our business model is unique because of our full independence: we are not tied to any custodian, administrator, registrar, transfer agent, asset manager, legal or accountancy firm. C: Thierry LOGIER, Head of Sales and Marketing E: [email protected] A: 3rd Floor, 1 George’s Quay Plaza, George’s Quay, Dublin 2 T: 353 1 448 3310, Fax: 353 1 448 3390 Managing Director: Antonio Thomas E : [email protected] W: www.rbs.com

eSecLending is a global securities lending manager and a leading provider and administrator of customized securities lending programs. Its programs attract some of the world's largest and most sophisticated asset gatherers, including pension funds, mutual funds, investment managers and insurance companies. Over the past six years, the company has auctioned more than USD 1 trillion in assets and has achieved significant growth in its client base, lendable assets and assets on loan. The firm awards principal securities lending business through a competitive auction process that has provided clients with higher returns compared to traditional program structures and improved transparency and objective criteria upon which to make decisions. More information about eSecLending can be found at www.eseclending.com.

We are the leading provider of securities services and investment operations solutions to the world’s financial institutions. Our extensive range of innovative solutions includes investment reporting, performance attribution and risk measurement services for 2,500 portfolios. In addition, our expertise in global securities lending, foreign exchange and collateral management can help you to achieve higher investment returns, as well as reduce risk. Our local presence in all key European markets as well as in the US and Australasia, and a global network in 90 markets, is another reason why eight out of the world’s top ten investment managers already have a relationship with us. Call us today to find out why being closer is better.

Fund Services is a dedicated fund administrator providing services for retail/institutional funds, alternative/hedge funds and other collective investment vehicles.

Contact Margaret Harwood-Jones, Global Head, Sales & Relationship Management, Institutional Investors. +44 (0) 207 410 3989 Stand No: 22-23-24

48 Global Funds - Ireland 2007

Contact: T: US- +1 617 204 4500 T: UK- +44 (0)20 7469 6000 C: Dan Ahern E: [email protected] W: www.eseclending.com A: 175 Federal Street, 11th FL, Boston, MA 02110, US A: 1st Floor, 10 King William Street, London EC4N 7TW, UK

With a comprehensive offering - from product design, set-up and registration through to accounting, net asset value calculation and reporting - we offer a tailored, cost effective service. Making best use of the latest technology coupled with superior client service, we work in partnership to meet your every need. As an integrated business of UBS, we can also offer a range of services including custody, brokerage and foreign exchange. www.ubs.com/fundservices

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World’s #1 global custodian

Our clients consistently vote RBC Dexia Investor Services the world’s #1 global custodian in annual surveys from Global Investor (2004-2007) and R&M Consultants (2005-2007). Our broad product suite and global reach are backed by the highest quality service in the industry, giving you the peace of mind that comes with having the world’s best global custodian in your corner. See what our fresh perspective can do for you. rbcdexia–is.com

RBC Dexia Investor Services Limited is a holding company that provides strategic direction and management oversight to its affiliates, including RBC Dexia Investor Services Trust, which operates in the UK through a branch authorised and regulated by the Financial Services Authority. All are licensed users of the RBC trademark (a registered trademark of Royal Bank of Canada) and Dexia trademark and conduct their global custody and investment administration business under the RBC Dexia Investor Services brand name.

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©2007 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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In a marketplace where national boundaries are becoming less and less relevant, investment managers need professional advice that is truly international. In the investment management industry, there are issues of globalisation, restructuring, information technology and regulation that must be tackled on a cross-border basis. These challenges include MiFID, UCITS III and the growth of the Asian Market. Success depends on the right structure, maximum tax efficiency, effective risk awareness as well as outstanding performance and distribution capability. KPMG provides a global service to the investment management industry through our international network of offices. Our Funds and Fund Management Survey (www.kpmg.ie/funds2007) is tangible proof of how we at KPMG work together seamlessly across functions and jurisdictions to deliver value to our clients. Our Dublin office has a dedicated team of fund professionals offering audit, taxation, regulatory and advisory services to meet all your needs. To find out more on how we can help you achieve your objectives, please call Darina Barrett on +353 1 410 1376