The Cayman Island Stock Exchange (CSX) has expanded rapidly since it commenced operation in 1996. To...
The Cayman Island Stock Exchange (CSX) has expanded rapidly since it commenced operation in 1996. To date the stock exchange has grown to almost 400 listings, up 84% from last year. Over the last year aggregate market capitalisation was $31bn. Listings on the CSX include domestic debt and equity, mutual funds, international debt (including special purpose vehicles and eurobonds), derivative warrants and secondary listings. The majority of funds listed on the CSX are mutual funds.
The success of the CSX has been attributed to good investment, improved infrastructure and proximity to the US. Crucially, fund laws have been reviewed to guarantee political stability and ensure that growth continues.
The stock exchange is owned by the Cayman Islands government and is managed by the Stock Exchange Authority. It was approved by the London Stock Exchange in 1999.
Anthony Travers, chairman of the CSX, says: "In the first nine months of this year (2000), 17 new banks have registered in the Cayman Islands bringing the total to 465 including 43 of the world's top 50 banks. Eight new trust companies take the total to 114 and 246 new mutual funds take that total to 2,600 while 17 new insurance companies make a total of 544."
The emergence of the CSX has eliminated the need for funds domiciled in the Cayman Islands to find an alternative listing jurisdiction. It has also attracted additional funds to the Caymans.
The majority of listed funds are mutual funds. Presently, the Cayman Islands is the largest jurisdiction in the region for mutual funds. Andrew Hersant, lawyer at Cayman Islands law firm Walkers, said: "Mutual funds have been popular investment vehicles because investors are familiar with them. Domestic fund managers in the Caymans have been very successful and people know the Cayman Islands has a tax advantage if they hold their offshore funds there."
The Cayman Islands is a zero tax regime. There are no duties or taxes levied on securities dealings in the Cayman Islands and CSX-listed securities are specifically exempted from the provisions of Stamp Duty.
However, familiarity and tax benefits are not the only reasons why people are listing on the CSX. Fund managers have found the centre advantageous because of set-up time, costs and regulation of their products as well as geographical proximity to the US.
Jim O'Neill, managing director of the Bank of Austria, says: "People are finding that registration is quick, the government is more flexible than US and Europe and the laws are contemporary with transactions taking place in the international market."
The time difference has been a major advantage for companies and investors in the Cayman Islands. The Cayman Islands is six hours behind London. In addition, the Cayman Islands share a time zone with the US. Managers from investment companies in the Cayman Islands can be in New York in four hours if need be.
Hersant says: "The Cayman Islands is a competitive jurisdiction, a lot of US companies go there because it is in the same time zone. The Cayman Island Stock Exchange gets things done very quickly, most transactions only take a day, unlike other stock exchanges, which can take three days."
O'Neill adds: "People realise it is a stable and sound area to place funds. The Cayman Islands is a mature market and is much further along the learning curve."
The majority of investors who invest in mutual funds in the Cayman Islands are institutional. Hersant believes this is because it is politically stable and tax neutral (there are no withholding taxes). It also has a strong legal and accounting infrastructure and reflects the strength of the US economy.
However, the Cayman Islands, like other offshore centres, have been subject to scrutiny.
Recently, KPMG released its Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda. This examined whether the stock exchange, trusts and funds conform to the standards outlined in the International Organisation of Securities Commissions (IOSCO) paper Objectives and Principles of Securities Regulation.
This paper set out 30 principles of securities regulation based on the protection of investors, ensuring that markets are fair, efficient and transparent and the reduction of systemic risk.
The review found the Cayman Stock Exchange was in line with international standards in relation to membership, listings, money laundering and co-operation.
Furthermore the KPMG report found that laws relating to trusts meet good practice standards.
Regulations to be addressed
However, in relation to mutual fund laws, KPMG suggested there was a lack of regulation relating to the operation of the funds; including the segregation of client monies.
In other words, the majority of mutual funds in the Cayman Islands are non-public being directed at only institutional and sophisticated investors. Legislation did not clearly distinguish between non-public and public funds.
KPMG recommended that this distinction be made in order to meet IOSCO principles.
Mutual funds have been regulated in three different ways. They have been either administered, registered and licensed. There are approximately 603 administered, 1654 registered and 41 licensed schemes.
In the Cayman Islands mutual funds have included: unit trusts, exempted trusts, exempted companies, foreign companies, limited duration companies, non-profit companies, ordinary non-resident companies, ordinary resident companies, exempted limited partnerships and limited partnerships. Presently, this does not distinguish between non-public and public funds.
Furthermore the KPMG report addressed the need for an on-site inspection programme of mutual funds to take place to verify compliance of fund administrators. There should also be off-site inspections of mutual funds to identify poten
Partner Insight: Continuing the Architas education series for clients.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews