The Cayman government explains how its innovative and flexible approach to business, regulation and technology has contributed to Cayman’s development into a leading financial services centre.
Over the past 40 years, the Cayman Islands has developed into one of the world’s leading financial services centres, in large part due to the ability of the government, the regulator and the private sector to effectively work together to balance commercial needs with a proportionate legal and regulatory framework. In recent years, this approach has helped create an attractive domicile for global institutional investment focused on specialised services such as funds, structured finance and captive insurance.
A closer look at the Cayman Islands fund industry—which includes hedge funds as Cayman’s regime doesn’t differentiate between fund types—shows significant growth and specialisation, coinciding with the global uptake of various types of hedge fund structures as key vehicles for institutional investment and capital flow. For these complex and sophisticated investment funds to meet their business objectives, they must operate in an environment that provides the ideal balance of operational flexibility, financial industry infrastructure and regulatory oversight, all of which are key features of the Cayman Islands’ industry.
By offering everything from quality financial services and infrastructure, a regulatory regime in place since the inception of the funds industry and effective jurisdictional oversight, Cayman has ensured that international investors and financiers can maintain complete flexibility in fund investment objectives and risk management within the framework of clear and carefully enforced laws and regulations.
Global financial expertise
Cayman is well regarded among high-level market participants for its depth of expertise in global finance, delivered by world-class law, accounting and fund administration firms. The long list of global institutions with a presence on the Cayman Islands include leading accountancy and audit firms such as Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers; globally recognised fund services providers such as UBS, Citgo and Butterfield; and world-class financial institutions such as Goldman Sachs, HSBC and Deutsche Bank, and are complemented by several Cayman Islands-based international offshore law firms, including Maples and Calder, Walkers, Ogier and Appleby.
Each of these firms employs expert professionals in all areas related to global financial services drawn from a highly skilled, diverse and experienced workforce. Market access, flexible fund structures, positive investor perception and a tax-neutral environment all contribute to this competitive edge.
The establishment of the Cayman Islands Stock Exchange (CSX) in 1997 further enhanced the industry by providing access to a first-class listing facility. A combination of progressive listing rules, professional expertise and quality service has helped the CSX grow significantly since its inception. The CSX currently has more than 1,200 issues approved for listing, a large proportion of which are investment funds; these include sophisticated structures such as umbrella funds, funds of funds and master-feeder structures.
Business-friendly legal and regulatory regime
Commercial excellence fits well with the Cayman Islands legal framework, which is rooted in English Common Law, and its regulatory regime. The introduction of the Mutual Funds Law in 1993 established the legal structure that has provided a user-friendly basis for the institutional investment industry ever since.
Cayman’s legislative framework allows for sophisticated investment techniques, including leveraging portfolios to a substantial extent, making loans of securities on an unlimited basis and investing without restriction in any currency or instrument.
The law ensures that only those with appropriate expertise are permitted to establish, administer or operate mutual funds in Cayman. In addition, regulatory and licensing procedures that are flexible and straightforward, along with a reliance on self-regulation backed with regular auditing, provide the appropriate reassurance to all involved.
The Cayman Islands regime recognises the significance of ‘professional investors’ and the existing legal and regulatory obligations associated with their domiciles of origin. Given the institutional and sophisticated nature of investors choosing the Cayman Islands as a domicile for their fund activities, there are also no restrictions placed on investment objectives, risks, rates of return or other commercial matters.
Cayman’s regulatory approach to funds is therefore to balance effective, transparent regulation with business needs. As a result, the regulatory system in the Cayman Islands is based on international standards of supervision and co-operation with overseas regulatory authorities.
Fund administrators are regulated by and fund auditors must be approved by the Cayman Islands Monetary Authority (CIMA). CIMA carefully reviews applications from funds and securities firms, and provides regulatory oversight throughout the funds’ lifecycles. Cayman understands the need to balance regulatory effectiveness with competitive demands and has invested resources to ensure an efficient jurisdiction from which to conduct business. It is a structure that is both effective and transparent, and that offers the right mix of regulation and commercial flexibility.
CIMA recently announced a new electronic reporting initiative for funds to make filings more secure, streamlined and paperless. Following successful industry testing, CIMA released on its website the electronic Fund Annual Return (FAR) form and has opened the internet portal through which funds’ local auditors will submit the required returns. Related guidance notes have also been released. The documents and portal can be accessed at www.cimoney.com.ky/ereporting. The submission of these returns is a requirement for all funds regulated under the Mutual Funds Law.
Prior to the e-filing initiative, quantifying fund flows and other statistical data has been challenging, because funds were only required to file paperbased or .pdf forms that had to be transcribed manually.
CIMA had been developing the electronic reporting initiative for funds for several months, with assistance from its retained business advisor Ernst & Young and with input from the funds industry. CIMA expects the initiative to facilitate more efficient collection and processing of returns from the more than 8,300 funds it now oversees.
The goal of the e-filing initiative is not only to allow fund managers to submit their annual reporting using a secure, streamlined and paperless system, but also to strengthen data collection efforts. The system requires Cayman-registered hedge funds to disclose 31 key data points, including assets managed, key personnel, strategies employed and significant corporate changes.
CIMA contracted the UK-based software company DecisionSoft Limited, a leading supplier of XBRL tools and systems, to implement the data validation and processing engine on which the FAR and auditor portal run. (XBRL—Extensible Business Reporting Language—is the emerging electronic standard for reporting business and financial data.)
It is anticipated that the heightened data collection, which will be made available on an aggregate basis, will help international regulators and industry participants’ better track and assess the impact of the hedge fund industry by providing information such as size, growth, change, market share and investments by and in funds. It is anticipated that the data are likely to give a more accurate picture of the global hedge fund industry, since such a large concentration of the world’s hedge funds are domiciled in the Cayman Islands.
Finding the proper weighting between commercial flexibility and appropriate regulation is a challenge; the success of the Cayman Islands in attracting funds demonstrates that the right balance has been struck.
Ted Bravakis is director of the Public Relations Unit of the Portfolio of Finance & Economics of the Cayman Islands Government. Its website is at: www.caymanfinance.gov.ky.