The Cayman Islands Stock Exchange has earned an international reputation for the 'blue chip' listing environment it provides and the products it specialises in
The Cayman Islands Stock Exchange (the CSX) is one of the fastest growing stock exchanges in the world. In 2002, the number of listings exceeded 700, representing a rise of more than 70% over the previous year. Its current total market capitalisation exceeds US$36bn. The CSX is recognised as a 'blue chip' listing environment for all the products in which it specialises, providing investors with the degree of regulation and comfort they require when making investment decisions.
The CSX is a private limited company owned by the Cayman Islands Government, but it is operated as an independent entity. The Stock Exchange Authority is responsible for the policy, regulation and supervision of the CSX. The Authority reviews and must approve any rules which the CSX introduces.
The CSX's listing requirements are carefully balanced to ensure the safeguard of investors' interests and appropriate regulation, while at the same time encouraging issuers to apply for listing by maintaining an appropriate degree of flexibility. The CSX carefully screens applications for listing and examines the parties involved. However, the focus is on disclosure of all relevant information without imposing unnecessarily onerous conditions upon the issuers.
The CSX has earned international recognition. In July 1999, the CSX was granted approved organisation status by the London Stock Exchange (LSE). This means that securities listed on the CSX are eligible for trading on the LSE's international equity market and for quotation on the SEAQ (Stock Exchange Automatic Quotation) international trading system. The CSX has established a co-operative link with Euroclear which enables CSX-listed funds to participate in FundSettle.
The CSX is also an affiliate member of the Inter-Market Surveillance Group and the European Securitisation Forum.
When it was originally set up in 1997, the CSX was designed to cater for Cayman Islands specialised products: offshore mutual funds and specialist debt securities. Since then, the CSX's readiness to accommodate new products and structures has brought about new listing facilities for collateralised debt obligations (CDOs), derivative warrants, depositary receipts and eurobonds, and special listing requirements to accommodate primary listings of preferred shares issued by special purpose vehicles as well as debt and derivative programmes.
The Cayman Islands is recognised worldwide as a leading centre for offshore mutual funds. Over 500 of the issues currently listed on the CSX are mutual funds, including umbrella funds, funds of funds and master feeder structures.
Listing on the CSX offers multiple benefits to a mutual fund. A listing enhances a fund's marketability because certain types of investor may only invest in listed securities. For closed-ended funds, where there is no facility to redeem, a listing on the CSX can provide a secondary market with a trading platform.
The CSX does not impose restrictions on a fund's investment policy, nor does it insist on any prescribed degree of investment diversification or prohibit newly incorporated funds from changing their investment policies for a specific period of time. This provides a fund with flexibility and makes a listing particularly attractive to those funds offering highly focused investment strategies and to hedge funds in particular.
When deciding whether a fund is suitable for listing, the CSX focuses on the parties involved with the fund, its directors, promoters, the investment manager and adviser and their relevant experience. It does not, for example, apply a benchmark figure for assets under management to decide whether a fund manager is adequately experienced. It looks instead at a manager's track record. This makes the CSX attractive to newcomers as well as to more established players.
Once admitted to listing, investors know that a fund has satisfied, and must continue to satisfy, the conditions for listing imposed by the CSX, and that those conditions meet international standards.
A significant recent amendment to the Cayman Islands Companies Law (2002 Revision, as amended) permits any Cayman Islands Exempted Company to apply to the Registrar of Companies to be registered as an Exempted Segregated Portfolio Company (SPC). Once registered, an SPC can operate segregated portfolios with the benefit of statutory segregation of assets and liabilities between portfolios. Mutual fund structures can benefit from this statutory ring-fence to protect against cross-liability issues. The use of an SPC may also facilitate a more streamlined offering structure for certain mutual funds.
The CSX has recently listed several funds utilising the new Cayman Islands SPC structure, including three funds from The Scotiabank Mutual Funds SPC, managed by the Bank of Nova Scotia Trust Company (Cayman). The investment adviser to the fund is Alliance Capital Management LP of New York, one of the largest money managers in the world.
Specialist Debt Securities
The Cayman Islands is also the leading offshore financial centre for structured finance, securitisations and capital markets transactions.
The CSX specialist debt listing facility continues to attract the attention of the major institutional arrangers. The CSX's understanding of this highly specialised market has enabled it to develop sophisticated listing rules specifically tailored to meet the needs of debt issuers and to accommodate the latest structures and products. Merrill Lynch International, Deutsche Bank, JP Morgan, Nomura International, Lehman Brothers and Schroders Salomon Smith Barney have all used the CSX for listing issues of asset-backed securities, credit-linked notes and CDOs.
The debt listing facility offers a significant advantage for asset-backed securities. Only limited information on the underlying assets need be disclosed in the offering document if the CSX is satisfied that investors will be able to obtain the information necessary to form an opinion as to the value of the underlying assets.
The CSX approved several specialist debt security programmes for Cayman Islands special purpose vehicles during 2002. These include Capital Instruments Limited, with a programme arranged by Deutsche Bank AG in London. The CSX also listed a series of variable coupon and redemption amount secured notes issued by Space Ltd, a Cayman Islands special purpose vehicle arranged by Morgan Stanley.
In 1998, in response to market demand, the CSX adopted special rules for listing CDOs. Following on the success of that initiative, the CSX introduced special rules in 2001 to facilitate the listing of preferred shares issued by special purpose vehicles. These listing requirements are a combination of those for specialised debt and equity and emphasise the disclosure of relevant information to enable investors to assess the value of the securities. Since introducing these special rules, the CSX has established a niche market in listing the preferred share element of CDOs. Since 2001, the CSX has listed 12 of these issues.
Listing rules which specifically facilitate the listing of derivative warrants were introduced in March 1999 and these were met immediately with great interest from major international financial institutions.
The CSX listing requirements for derivative warrants avoid duplication for the issuer by recognising that disclosure requirements can be significantly reduced where the underlying assets are already listed on a recognised exchange.
Strong interest in listing derivative warrants continued during 2002. Morgan Stanley continued to be the primary issuer of derivative warrants on the CSX with the majority of the underlying assets being Taiwanese or Indian-listed equities.
The CSX offers special rules for listings under approved programmes. Once an application for listing a debt or derivative warrant programme has been approved, special provisions allow the issuer to issue and list securities under that programme for a period of five years for debt programmes or one year for derivative warrant programmes.
A specific provision accommodates issuers who wish to list a tranche or series of securities under a debt or derivative warrant programme in circumstances where all the securities to be issued under the programme have already been approved for listing on another recognised exchange. The CSX accepts the offering document prepared for the issuer's application to the other exchange. So only the pricing supplement setting out the final terms of the issue and any supplementary offering document needs to be prepared.
One of the most recent additions to the rules is the facility to list depositary receipts. Depositary receipts are an effective mechanism for equity investment by international investors because they are generally more liquid and easily traded than the underlying shares. They may also be used to overcome settlement, foreign exchange and foreign ownership difficulties which may exist in the company's home market. The listing requirements for depositary receipts are less demanding than those for shares because the market is dominated by sophisticated investors, primarily financial institutions. The CSX provides the world's first listing facility for unsponsored depositary receipts.
The CSX is the fastest growing stock exchange in the world with over 700 listings in 2002, 70% up on the previous year.
The exchange is a private limited company owned by the Cayman Islands Government, but it is operated as an independent entity.
The CSX's readiness to accommodate new products and structures has brought about new listing facilities.
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