Hong Kong: Comments on the Proposed Foreign Account Tax Compliance Act (“FATCA”) Regulations

We, The Hong Kong Federation of Insurers (“HKFI”), The Hong Kong Investment Funds Association (“HKIFA”), and The Hong Kong Trustees’ Association (“HKTA”), have formed a joint industry FATCA working group (the “Working Group”) in Hong Kong to share thoughts, provide education and work together to address concerns raised by financial institutions in Hong Kong with respect to FATCA. Hong Kong is a special administrative region of the People’s Republic of China. The Working Group liaises with regulatory bodies in Hong Kong to solicit comment on FATCA. The Working Group’s membership is extensive and further details on the members are outlined below. 

The Working Group appreciates the opportunity to provide comments on the Proposed Regulations, and the attempt of the U.S. Department of Treasury (“Treasury”) and the U.S. Internal Revenue Service (“IRS”) to amend earlier guidelines and provide greater clarity through the Proposed Regulations. Through this submission, the Working Group wishes to provide some recommendations that we believe will lessen the burden of implementation, while still achieving the stated FATCA policy objectives. 

Background 

HKFI was established on 8 August 1988 and exists to promote insurance to the people of Hong Kong, as well as to build consumer confidence in the industry by encouraging the highest standards of ethics and professionalism amongst its members. It enjoys recognition by the Government of the Hong Kong Special Administrative Region (“Government of the HKSAR”) as the representative body of an important financial services industry in Hong Kong. 

The insurance industry is one of the few industries in Hong Kong that enjoys a high degree of self-regulation complemented by the Government of HKSAR's prudent regulatory framework. While maintaining a frequent dialogue with the Commissioner of Insurance of Hong Kong on legislative issues affecting the industry, the HKFI actively promotes and perfects its self-regulatory regime with the aim of improving the professionalism of and strengthening public confidence in the insurance industry. 

Currently, the HKFI has 90 General Insurance Members and 43 Life Insurance Members. 62,334 agents are currently registered with member firms. They combine to contribute more than 90% of the gross premiums written in the Hong Kong market. The life insurance sector represented over 10% of the GDP of Hong Kong with more than US$20 billion in revenue in 2010. 

HKIFA is the professional body that represents the asset management industry in Hong Kong. Established in 1986, the HKIFA has two major roles, namely consultation and education. On consultation, it acts as the representative and consulting body for its members and the fund management industry generally in all dealings concerning the regulation of unit trusts, mutual funds, retirement funds and other funds of a similar nature. Towards this end, it reviews, promotes, supports or opposes legislative and other measures affecting the fund management industry in Hong Kong. Another very important task is to educate the public about the role of investment funds in retirement planning and other aspects of personal financial planning. 

As of April 2012, HKIFA has 49 fund management companies as full/overseas members, managing about 1,270 Hong Kong Securities and Futures Commission authorized funds. Assets under management amounted to about US$1,000 billion as at the end of March 2012. In addition, HKIFA has 68 affiliate and associate members. 

HKTA was established in 1991 by members of the trust and fiduciary services industry to represent the trust industry in Hong Kong, particularly in the areas of legislation and education. Organized as a not-for-profit company incorporated in Hong Kong, the HKTA has more than 90 members. It represents thousands of professionals primarily working in the trust, private banking, fund services, legal and accounting covering all Mandatory Provident Fund (“MPF”) retirement plan trustees as well as corporate and individual trustees of Occupational Retirement Schemes Ordinance (“ORSO”) retirement plans. All 16 active MPF trustees and many ORSO trustees are members of the HKTA. 

HKTA works closely with various stakeholders of the pension and regulated funds industries to advance development of the industries’ overall and to promote higher standards of professionalism and pension or fund governance. HKTA has been active in raising FATCA awareness on the part of retirement plan trustees and other financial market participants in Hong Kong as well as providing education and updates where appropriate. 

The Working Group Submission 

We note that the key objective of the Treasury and IRS in the implementation of FATCA is to establish a regime that meets the goal of preventing evasion of U.S. taxes. We understand and recognise this objective. However, it is critically important that the Treasury and IRS achieve this objective through a workable and economical framework for the industries which are affected, which above all else, is consistent with local legal and regulatory regimes. In this regard, we attach the following submissions as Appendices to this letter voicing our members' concerns in greater detail which we would encourage you to consider. 

Appendix I – Hong Kong Retirement Plans 

Appendix II – Hong Kong Investment Funds 

Appendix III – Hong Kong Insurance Companies 

Appendix IV – Private Trusts

ICSA Global Registered Tuition Provider: Mauritius

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Contact: Jay Lallbeharry

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Jersey embraces flexibility in order to evolve with international funds landscape

Jersey will be well positioned to grow its alternative funds business when the Alternative Investment Fund Managers Directive comes into place, according to expert speakers at a conference organised by Jersey Finance in London last week.

An audience of almost 300 fund professionals at Jersey Finance’s London Funds Conference, held at the British Museum last week (18 April), heard that Jersey is in a good position not only to meet stringent international regulations but also to grow its funds business.

The conference featured a heavyweight line-up of finance and legal professionals, with keynote presentations by David Smith, Economics Editor at The Sunday Times, and Jersey’s Treasury and Resources Minister Senator Philip Ozouf. Two panel sessions explored the key issues and opportunities facing the industry, including the Alternative Investment Fund Managers Directive (AIFMD).

Panellists explained that, whilst there is still some clarity required around the AIFMD, Jersey is moving forwards with implementing a new regime that would allow regulated fund businesses and funds in Jersey wishing to avail themselves of AIFMD ‘passport’ provisions. Delegates were told that Jersey will adopt new regimes to provide for new categories of funds, bringing them into line with distinct ‘AIFMD Codes of Practice’, and also continue to offer fund promoters an option to remain outside of Europe and the scope of the Directive.

The Directive’s banning of ‘letterbox arrangements’ was also discussed by panellists, whereby fund managers are prevented from delegating large portions of their duties to entities in other jurisdictions. Whilst it was agreed that this may have some implications for the structuring of offshore funds, it was stressed that the Jersey model will be far removed from any kind of such arrangement, giving promoters, managers and investors added confidence in Jersey.

Geoff Cook, chief executive, Jersey Finance Limited, commented:

“The clear message to come out of this conference was that Jersey is taking compliance with the AIFMD very seriously indeed. We want to be at the front of the queue when it comes to signing the agreements required to comply with the Directive, something that should send out the strong message that Jersey is keen to embrace new regulatory benchmarks. With the moves Jersey is making, it will be ideally positioned to provide certainty in relation to continued access to EU institutional capital from 2013 under the private placement regime, and from 2015 under the passport regime.

“Ideally we would like to see the AIFMD developing to enable Jersey, as a seasoned non-EU alternative fund domicile, the potential to offer an attractive platform for fund managers and promoters around the world to launch products under the AIFMD brand.

“At the same time, whilst Europe is vitally important to Jersey, our expanded product range will also offer an appropriate route to market to all industry participants whether located in Europe, Asia or Latin America.  In this way, Jersey will be able to offer the flexibility demanded by fund promoters seeking a global outreach, which is a fantastic position for a reputable jurisdiction to be in, and excellent news for the UK, investors and managers.”

GIIF: India Visit

Nikhil Treebhoohun, GIIF CEO, was in India from April 15 to 22 in order to establish contacts for GIIF in India, to interact with PR firms, and to gauge the situation with respect to DTAA.

Contacts were established with a wide array of professionals both in Mumbai and Delhi. The discussions centred on how best to project the image of Mauritius as an efficient jurisdiction from which to do business not only in India but also in Africa and other regions of the world. Suggestions were made about holding a Global Africa Business Meeting in Mauritius to create a platform to facilitate financial services flow between India and Africa.

Meetings were also held with the Confederation of Indian Industries (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI).  CII is willing to sign a MOU with GIIF. It was suggested that we create a Services Industry CEOs Forum which could meet alternately in India and Mauritius. Mrs. Sudhakaran, the assistant secretary-general of FICCI, suggested the holding of a round table with selected financial institutions from here and some of her members to brainstorm on how Mauritius could be used to facilitate financial transactions between India and Mauritius. This could be held as early as June. She also mentioned the idea of an Africa Fund.

PR/COMMUNICATION

Two PR firms were met: LOWE Lintas in Mumbai and Ogilvy in Delhi. Both confirmed that Mauritius seemed to be totally absent in the communications battle, not only in the press but also in different networks. Mauritius does not have a presence on the ground. The perception that Mauritius is a pass-through was reinforced by the fact that no rebuttal was ever seen.

INDIA DTAA

Several informal meetings were held. The main message that was conveyed to GIIF’s interlocutors was that Mauritius was looking for clarity, certainty, no treaty override and time and assistance to build up more substance. Those in the ministry of finance were only interested by the fact that operators were avoiding taxes while those in the PMO were more willing to consider the special relationship angle.

The hawkish view is that Mauritius is being used essentially for round tripping and for treaty shopping. They believe that if the Mauritius route did not exist, there might be a drop in the very short term but India will not lose anything in the long term.  However, assurance was provided that Mauritius is not being specifically targeted. The GAAR will apply to all jurisdictions prospectively.

These issues will be discussed further at the first Quarterly GIIF Members Meeting which will be held on Monday 7 May.

FXPRIMUS Offers New Online Funding Option to Support its Forex Traders in 205 Countries Across 6 Continents

Driven by a focus on unprecedented fund safety, superior trade execution and straight through processing, leading global foreign exchange brokerage FXPRIMUS has introduced a new funding option that operates like Paypal. FXPRIMUS' new ClickandBuy option provides convenient and cost-effective funding for traders, joining the other flexible funding methods that FXPRIMUS provides, including funding via credit card, wire transfer, local deposit in 47 countries, and by Moneybookers.

ClickandBuy lets traders fund their accounts online from any location, in line with the expansion and diversification of the broker's customer locations to more than 205 countries in 2012, from 155 countries in 2010. The majority of new customer locations, are in South America, Africa, and Western and Eastern Europe.

Said FXPRIMUS President Terry Thompson, "Our new ClickandBuy online funding capability lets traders make their deposits more conveniently so that they can then trade Forex, Oils, Gold and Silver, Commodities and Major Indexes anytime, anywhere, using our award-winning MT4 trading platform or from any web browser and all popular smartphones; under a single account login.

"Unlike other conventional e-wallets where you have to pre-register and fund an account with the e-wallet provider, ClickandBuy completes your transaction in one simple step - directly into your FXPRIMUS trading account, so that you can fund your trading account more easily and with less hassle.

"But no amount of technology can replace the human touch," he added. "With experience in retail Forex brokerage, banking, hedge fund management and technology development, the team at FXPRIMUS supports new and experienced Forex traders with 24 hour-a-day, 5-days-a-week customer support through live chat, email or phone.

"We enhance and build on our market-leading support with free personal coaching via FXPRIMUS Coach, to ensure that FXPRIMUS maintains its market-leading position as "The Safest Place to Trade" for new and experienced Forex traders," he said. Peter Vesco, Group CEO of ClickandBuy, said "I am very excited to have FXPRIMUS working with us", FXPRIMUS has previously set itself apart by providing consistent customer service availability, promotional benefits, and the safest fund protection in the industry, which includes a Trust account option for all clients, in which client Trust account funds are completely segregated from the assets of FXPRIMUS.

This unique arrangement lets traders fund their accounts through a Trustee, providing institutional hedge fund style protection regardless of their account size, giving them the assurance of knowing their funds are 100% safe and secure - a level of protection not provided by any other broker in the industry.

ABOUT CLICKANDBUY

The ClickandBuy online payment and money transfer service is one of the world's leading online payment systems. Confidential data such as bank or credit card details are not disclosed during transactions, as ClickandBuy holds the data to ensure safe and simple settlement. ClickandBuy supports a number of common deposit methods including major credit cards, e-wallet transfers, debit cards, and local bank transfers. ClickandBuy is an approved Electronic Money Institution according to the Electronic Money Regulations 2011 and is subject to the regulations of the British Financial Services Authority (FSA), whose licence stands for quality and security at the highest European level. ClickandBuy meets a great number of international security standards that far exceed statutory requirements, including the MacAfee Certificate. More than 14 million people already use ClickandBuy for their online transactions. Click here to visit the ClickandBuy website for more details about this payment solution.

ABOUT FXPRIMUS

FXPRIMUS, The Safest Place to Trade, offers retail traders a level of trade execution, service quality and fund safety that are normally reserved only for the largest investors. Serving traders in 205 countries across 6 continents, FXPRIMUS provides an unmatched level of fund safety combined with Straight Through Processing, top notch execution with tight spreads, prompt and responsive customer support, and an industry-leading trader toolset that includes free access to powerful trading tools and personal coaching via FXPRIMUS Coach.

FXPRIMUS is based in Mauritius and is regulated by the Mauritius Financial Services Commission (FSC), which provides one of the world's safest and best-regulated offshore environments. Mauritius is one of the world's leading offshore financial centres, and has attracted more than 550 investment funds with a Net Asset Value of USD50 billion. More than 35,000 businesses and investment funds engaged in a wide range of global activities, make use of the Mauritius global financial services platform. Mauritius maintains double tax treaties with approximately 200 countries worldwide.

Economics After the Crisis: Objectives and Means

The global economic crisis of 2008–2009 seemed a crisis not just of economic performance but also of the system's underlying political ideology and economic theory. But a second Great Depression was averted, and the radical shift to New Deal-like economic policies predicted by some never took place. Perhaps the correct response to the crisis is simply careful management of the macroeconomic challenges as we recover, combined with reform of financial regulation to prevent a recurrence. In Economics After the Crisis, Adair Turner offers a strong counterargument to this somewhat complacent view. The crisis of 2008–2009, he writes, should prompt a wide set of challenges to economic and political assumptions and to economic theory.

Turner argues that the faults of theory and policy that led to the crisis were integral elements within a broader set of simplistic beliefs about the objectives and means of economic activity that dominated policy thinking for several decades. This dominant discourse cast economic growth as the objective, markets as the universally applicable means of achieving it, and inequality as inevitable and necessary. Turner takes on these assumptions point by point, arguing that more rapid growth should not be the overriding objective for rich developed countries, that inequality should concern us, that the pre-crisis confidence in financial markets as the means of pursuing objectives was profoundly misplaced, and that these conclusions have broad implications for the case for economic freedom, for specific areas of public policy (including financial regulation and climate change), and for the discipline of economics itself.

About the Author

Adair Turner was appointed Chairman of Britain’s Financial Services Authority in September 2008. A Visiting Professor at the London School of Economics and at Cass Business School, London, he is the author of Just Capital: The Liberal Economy. 

View Inside

April 2012
6 x 9, 128 pp.
26 figures, 2 tables
$24.95/£17.95 (CLOTH)
Trade


ISBN-10:
0-262-01744-X
ISBN-13:
978-0-262-01744-2

Re-Affirming the FSC’s role to sustain the sound reputation of the Mauritius International Financial Centre

Following a Meeting of the Board of the Financial Services Commission (‘FSC’) held on 26 April 2012, the Board took note of the following:

• The FSC is participating fully with African counterparts within the SADC - Committee of Insurance, Securities and non Banking Financial Authorities (CISNA) to implement a common action plan for capital Market and insurance regulators
• The FSC will host the Islamic Financial Services Board (IFSB) Regional Seminar from 04 to 06 June 2012.
• The FSC is taking measures to ensure that Mauritius meets the international standards set by the International Organisation of Securities Commission (IOSCO), the International Association of Insurance Supervisors (IAIS) and the International Organisation of Pension Supervisors (IOPS).

The Board also discussed the issues raised by investors in relation to the India-Mauritius Double Taxation Avoidance Convention (‘DTAC’). The Chief Executive of the FSC, Ms. Clairette Ah-Hen reassured the Board that the FSC, as regulator of financial services other than banking and Global Business continuously consolidates its efforts to fully meet international norms and standards set by leading organisations like the Organisation for Economic Co-operation and Development (OECD), the International Association of Insurance Supervisors (IAIS), the International Organisation of Securities Commission (IOSCO) and the International Organisation of Pension Supervisors (IOPS). The FSC ensures effective exchange of information with its counterparts when required to do so.

Mauritius fully supports international initiatives to prevent money laundering and to combat terrorist financing. The FSC believes that the long term sustainability of the finance industry in Mauritius is best served by the implementation of best practice standards. The FSC recently reviewed its existing codes on the Prevention of Money Laundering and Terrorist Financing and issued a single comprehensive Code for its licensees. The new Code includes, inter alia, recommendations from the last IMF/World Bank Financial Sector Assessment Program, a revised list of equivalent jurisdictions, a list of non-cooperative countries and territories and countries with deficiencies in their AML/CFT regime.

The FSC will reinforce its collaboration with industry partners and stakeholders to foster a sound environment conducive to the development of the sector so as to preserve and maintain the good repute of the Mauritius International Financial Centre as a jurisdiction of substance.

Following measures announced by the Indian Government in the recent Budget speech and Finance Bill 2012, the Mauritian Government has requested, in a statement issued by the Ministry of Finance and Economic Development (‘MOFED’) on 17 April 2012, an early meeting with the Joint Working Group on the India-Mauritius Double Taxation Avoidance Convention (‘DTAC’) to clear any uncertainties arising following the measures announced by India. For more information, the Communiqué of MOFED may be downloaded on the website of the Ministry on the following link:

http://www.gov.mu/portal/goc/mof/Presscommunique17412.pdf

For the time being, uncertainty still persists and further clarifications are awaited from the Indian Government with regards to the new provisions announced at the beginning of April. Since the Indian Minister of Finance announced in the Budget Speech the introduction of guidelines on the General Anti Avoidance Rule (‘GAAR’) and because of the possibility of overriding effects of the GAAR on tax treaties signed by India with other countries, the impact of the measures announced has raised the concern of these countries. There is apprehension that the GAAR provisions and the treaty overriding provision will have a majorly impact on taxpayers within and outside India. This will also affect all countries which have signed a Treaty with India other than Mauritius, and have a negative impact on foreign investment in India.

The existing DTAC between Mauritius and India has helped Mauritius in the development of its financial services sector and the Treaty also benefited India in terms of Foreign Direct Investment over the last 20 years. The renegotiation of the DTAC has been considered at the highest levels by the Government. Mauritius is committed to ensure that there is no misuse of the Convention and addresses itself to the concerns of India. More information on the Mauritian government’s position in relation to the DTAC is available on the Prime Minister’s Office website on the following link:

http://www.gov.mu/portal/site/pmosite?content_id=fa17be543dda5310VgnVCM1000000a04a8c0RCRD

Foreign investors begin flight from India's anti-avoidance rule (GAAR)

As expected, the Indian federal Government's new retrospective general anti-avoidance rule is frightening private investment funds away from their traditional base of Mauritius, according to press reports.

STEP Journal News article

Sources:

India Economic Times

Investment Europe

Ernst & Young (PDF file)

J.P. Morgan - Continuous Innovation in Asset Servicing: The Convergence of Mutual and Hedge Funds

The volatile global economic climate and changing industry landscape have driven investors to review their strategies and asset allocations. Both hedge fund and mutual fund managers have responded to investors’ changing priorities, seeking to provide new products that offer diversification, enhanced return and volatility profiles. The result is a convergence of the mutual fund and hedge fund markets, creating both opportunities and challenges.


Continuous Innovation in Asset Servicing: The Convergence of Mutual and Hedge Funds

FSA: Liquidity and the regulation of markets

Speech by David Lawton, Acting Director, Markets, FSA at the TradeTech Liquidity Conference, London on 26 April 2012

Introduction

EU policymakers, legislators and regulators have certainly been very busy formulating measures to strengthen confidence in the trading environment following my appearance on this podium last year.

We now have:

• a pan-European regime for the regulation of credit rating agencies in operation;

• a soon-to-be implemented pan-European regime for short selling;

• an agreed text on the regulation of OTC derivative contracts in line with G20 commitments; and

• negotiations well underway on revisions to the EU framework for securities market regulation and the market abuse regime.

Our counterparts across the Atlantic have also been working hard to put in place similar measures for the trading of OTC derivatives through their Dodd-Frank rulemaking.

So when I was asked to speak to you to today, there was clearly a rich set of regulatory topics I could haven chosen to focus on.

But, having looked at the programme, it is obvious that you are all preoccupied with liquidity – how to find it, how to deliver it to your customers, and where to trade – and how the current set of regulatory proposals may impact on this important concept.

I will start by setting out why liquidity matters to regulators and how we think about it.

I will then turn to discussing some of the trade-offs that policymakers are confronted with when considering how to strengthen confidence in the trading environment.

I will then round off my remarks by touching on some of the specific regulations currently on the table that will potentially have an impact on the trading and liquidity of financial instruments.

Importance of liquidity

Regulators often state that their objective is to ensure fair, resilient and efficient markets – encompassed within that is the notion of liquid markets.

A liquid market can be defined as one in which there are ready and willing buyers and sellers at all times. Or more narrowly, as a market where large trades can be executed quickly, at low cost, when you want.

Insufficient liquidity in financial instruments can lead to:

• issuers, including governments, not being assured of raising sufficient funds;

• investors being exposed to very wide spreads or, at worst, being locked in to their investments;

• corporate hedgers being exposed to increased costs; and

• market-makers being exposed to increased risks.

Liquidity is not a binary concept – it is multi-dimensional and exists as a spectrum. We can’t for example directly compare the liquidity of a FTSE100 share with that of a mortgage-backed security or a commodity option. 

And we should not confuse genuine liquidity with the volume of trading turnover. There is also a danger, in already liquid markets, of quickly decreasing marginal benefits of additional liquidity. What we are after is transparent and resilient liquidity.

Liquidity can be encouraged by opening up competition in trading venues, mandating certain pre- and post-trade transparency data and issuer disclosures, permitting trading on own account, and promoting orderly trading.

Speculators and market makers are key contributors to the liquidity of many markets by putting up their capital in seeking to arbitrage differences in risk or time preferences.

Trade-offs facing policymakers

But liquidity is not an end in itself; rather, a contributor to the wider regulatory objectives I noted earlier.

And it is those wider objectives a policymaker needs to consider when designing rules to strengthen confidence in the trading environment. Getting the balance and trade-offs right is key.

For example, many would support the objective of enhancing trade transparency because of the benefits it can bring in terms of fostering competition between dealers, facilitating best execution and assisting in the valuation of financial instruments.

But it is also clear that equity-like pre-trade transparency requirements, in particular, have the potential to negatively impact on liquidity provision in fixed income and derivative markets, if not properly calibrated.

The academic literature on market microstructure theory also shows that increasing disclosure in the form of greater pre-trade or post-trade transparency may have ambiguous effects on liquidity as ‘informed’ traders, who often act as market makers, may react differently to ‘uninformed’ traders.

So, policymakers need to get the balance right between enhancing transparency and not damaging liquidity.

Policymakers are also concerned about the impact on orderly trading and market resilience that may arise if market participants rapidly withdraw from providing liquidity.

The response has been to contemplate banning certain market practices such as market operators using their own capital to trade and putting limits and obligations on High Frequency Trading (HFT) firms. But, it is not clear whether policymakers have fully considered the possible impact on liquidity provision from such measures.

Academic studies suggest that liquidity provision is more robust when market participants have a choice between trading models.

The UK government has been sponsoring research on the future of computer trading in financial markets. One of the research papers published in September last year found a broadly beneficial impact on liquidity, price formation and transaction costs but warned that HFT provided threats to market stability. Other research on FTSE 100 stocks has found that, around the scheduled release of US macroeconomic figures, HFT participants return to providing two-way prices far earlier than other market participants, lending support to the argument that HFT does not abandon the market at the sign of volatility. This just goes to show how important it is to determine the real impact on market stability and liquidity resilience from such participation.

Regulatory measures impacting on liquidity

I have set out how liquidity needs to be seen in the context of wider regulatory objectives. Let me now turn to some of the measures legislators and regulators have, or are proposing, to come up with that may impact on liquidity.

The first is the proposed creation in the Market in Financial Instruments Regulation (MiFIR) of a new type of trading venue, the organised trading facility (or OTF). This is one avenue through which Europe would meet the G20 commitment to bring standardised and sufficiently liquid OTC derivatives contracts into a more structured trading space.

The OTF also brings with it pre- and post-trade transparency requirements and a proposal to ban OTF operators from using their own capital.

We believe the introduction of this new type of venue category is a necessary part of the revised regulatory structure, and we support extending the scope of regulation – such as organisational requirements and access obligations – to some of the trading that currently takes place outside organised trading venues.

But, as regulators, we need to ask ourselves whether it is in the best interest of end users – such as investors and corporations – to go further and prohibit certain structures without considering explicitly the impact on liquidity.

For example, the ban on OTF operators using their own capital, if adopted, has the risk of damaging liquidity in bond and derivative markets.

The potential conflicts of interest when a firm is both an operator and a participant of a trading platform can be addressed by requiring OTF operators to apply rigorous conflicts management processes, as is proposed for MTFs.

A second important issue in MIFIR we need to reflect on is whether firms deploying algorithmic trading should be subject to continuous market-making obligations. We recognise that this proposal is motivated by a rational concern that, in times of crisis, algorithmic systems are likely to withdraw liquidity from the market.

But, on the other side, we need to consider the potential impact such market-making obligations might have on trading participants if the law prohibits them from stopping trading when they experience losses.

It may be that, in times of market stress, firms will ignore the market-making obligations and withdraw from trading. Alternatively, firms may decide to pull out of trading certain instruments or strategies, and the knock-on effect may be a reduction in liquidity across markets.

Either way, we are not convinced that this is desirable and more thought is needed on how to increase liquidity resilience without jeopardising market stability.

And while we are on the topic of market resilience, can I take this opportunity to remind you that from 1 May, the ESMA Guidelines on systems and controls in an automated trading environment come into effect. They represent best practice for trading venues and investment firms to comply with existing legislation for maintaining efficient, orderly and resilient trading, and are part of extensive work undertaken by ESMA in the area of micro-structural issues and highly automated trading.

A third area of changes that may impact liquidity are the G20 obligations to centrally clear and trade on organised markets OTC derivatives that are sufficiently standardised and liquid. In Europe, ESMA is working on technical standards which will be used to determine which OTC products will be subject to the mandatory clearing obligation. Two consultation papers have been published so far, with final standards required by September and national implementation from January 2013.

These standards will be based on: the level of standardisation; the volume of trading and liquidity; and, the availability of reliable pricing information for the product.

The FSA and HM Treasury will be consulting on implementation, but firms shouldn’t wait for this before starting to prepare.

MiFIR, still under negotiation, sets out a procedure for the determination of whether a derivative should be subject to the trade obligation. Again a key criterion is being deemed ‘sufficiently liquid’.

We’ll have to wait and see what the precise impact on liquidity in instruments meeting the trading and clearing obligations will be. It could be that the increased costs for users of central clearing will result in reduced market liquidity in some instruments as users decrease their hedging activity, or it could be that as more and more contracts become standardised, liquidity will increase.

A fourth area of change, is that of the application of rules across jurisdictions where it is important we do not segment and splinter hitherto more integrated markets.

The MiFIR proposals would only allow firms from outside the EU to solicit business in the EU where their home jurisdiction is deemed to have equivalent regulation and offers reciprocal access rights to all EU firms. This is a much higher access threshold than under the existing regime.

The proposals also require third country firms that wish to provide investment services to professional clients to do so through the establishment of a physical branch presence in the EU.

Given the global nature of activity carried out in the EU’s international financial centres, this restriction is potentially very harmful to market end-users that rely on non-EU firms on a daily basis for their funding and investment needs.

There has been some positive progress in the European Parliament. The recent ECON rapporteur’s report helpfully proposes amending the transitional provisions so that third country firms can continue to do business in the EU under existing national regimes until a year after an equivalence determination is made. The original Commission proposal, on the other hand, sets a hard, four-year transitional period. The report also proposes to clarify that a third country firm, when providing services to persons who are genuinely considered to be professional clients, can do so on a cross-border basis without having to establish a physical branch presence. But no changes have been proposed to the nature of the equivalence assessment or the reciprocity rights.

Looking the other way, out from the EU, we, together with other international regulators and industry representatives, have similar concerns with aspects of the draft Volker rule, which prohibits banks and their affiliates from engaging in bond trading for their own account. The rule also imposes itself on non-US banks with a US presence, that is, it is extraterritorial in its application.

A fifth area where liquidity and regulation interact is in the European Short Selling Regulation, where measures of liquidity are used to determine trigger levels for the temporary suspension of short selling or reporting of net short positions in sovereign debt. A share admitted to trading on a regulated market is considered to have a liquid market if it is traded daily, with a free float of not less than €500 million, and either the average daily number of transactions is not less than 500, or the average daily turnover is not less than €2 million. Under this definition, only 785 shares out of over 6,000 listed on the ESMA website, meet the definition. ESMA is therefore proposing three different trigger levels for non-liquid instruments. So here we see liquidity being defined in a certain way and being used as a means to capture various activities.

That completes my run-through of current regulatory proposals most relevant to the liquidity of markets.

Conclusion

So to summarise, liquidity is clearly an important element of a well-functioning market, but it is not a regulatory goal in itself.  

Integrity, resiliency, efficiency and investor protection are the foremost regulatory goals that need to be considered when designing measures to enhance confidence in markets.

Negotiations among Member States and the EU institutions are well underway in the Council and Parliament on the Commission’s proposed MiFIR text. The Parliament has produced a draft report and amendments from MEPs are to be tabled by 10 May. The Council is also working to produce a compromise text in May. But we expect that negotiations will continue into the Cypriot Presidency. On EMIR, ESMA has published two consultation papers thus far on the technical implementing standards which will need to be finalised by September, ahead of national implementation from January 2013.

Trade-offs are inevitable, but judgements need to be taken on objective and empirical grounds.

London professionals welcome positive update on Jersey’s funds industry

An audience of almost 300 fund professionals heard that Jersey is well placed to meet stringent international regulations and grow its funds business at a major conference held in London last week, organised by Jersey Finance.

Two-thirds of delegates attending Jersey Finance’s London Funds Conference, held at the British Museum last week (18 April), were UK-based, and they heard from a heavyweight line-up of finance and legal professionals who considered the future of the international funds industry and explored how market trends might impact International Finance Centres.

Two keynote presentations opened and closed the event, with David Smith, Economics Editor at The Sunday Times, offering his insights into the economic crisis and Jersey’s Treasury and Resources Minister Senator Philip Ozouf underscoring the States of Jersey’s commitment to supporting the future growth of Jersey’s funds industry. Two panel sessions also explored the key issues and opportunities facing the industry, including the Alternative Investment Fund Managers Directive. The event was moderated by Anthony Hilton, City Editor of the Evening Standard.

Geoff Cook, chief executive, Jersey Finance Limited, commented:

“That such a significant proportion of those attending our flagship London funds conference were based in the UK is real evidence of just how attractive Jersey’s funds offering continues to be to the London market. The feedback we have had about the event, particularly from the London-based funds lawyers, managers and advisors, has been extremely positive. They were incredibly impressed with what independent industry experts had to say about Jersey’s funds industry.

“Those attending were particularly pleased to receive an update on Jersey’s commitment to working with AIFMD, learn more about Jersey’s recently launched Private Placement Fund regime, and hear that fund managers are increasingly considering relocating to Jersey. Having Treasury and Resources Minister Senator Philip Ozouf offer his governmental level support to the funds industry was also extremely well received by delegates.”

Nigel Strachan, Chairman of the Jersey Funds Association and who participated in the second panel discussion at the conference, added:

“Overall, the message taken home by delegates was that the outlook for Jersey’s funds industry is positive.  With competition increasing significantly in the international funds arena, this event served Jersey well in terms of provoking debate and opening up new channels of discussion with key intermediaries in London, which remains a key market for Jersey. It is vital that we maintain momentum and continue with our efforts to promote a key pillar of our finance industry through events like this.”

Mauritius: Industry Training Session on the Guide to Global Business

The Financial Services Commission (‘FSC’) is conducting training sessions on the Guide to Global Business (‘the Guide’) on 25 and 26 April 2012 with representatives of Management Companies (‘MCs’) in line with the FSC’s commitment to strengthen the existing joint collaboration with industry partners and ensure continuous common standards of practice by licensees.

The Chief Executive of the FSC highlighted, in her welcoming address, the importance of the support of the industry to work with the FSC to sustain the competitiveness of the financial services sector. Ms. Clairette Ah-Hen also said that this forum is an opportunity for the industry to have a closer interaction with the FSC staff and understand the Regulator’s point of view on the conduct of licensing process.

The Licensing Team of the FSC made a presentation on the salient features while applying for a Category 2 Global Business Licence and Category 1 Global Business Licence. The Team spoke on the conduct of Global Business (‘GB’), the determination of GB test and also spoke on common case studies to hint on issues that can cause delay in the application process.

The Global Business Guide was issued on 25 January 2012 and the main objectives of the Guide are inter alia to:

• provide guidance to investors and service providers;

• remove bottlenecks to the application process;

• strengthen the continuous and efficient collaboration between the FSC and Management Companies; and

• contribute to enhancing the competitiveness of Mauritius as an international financial centre of substance and as a preferred destination for starting a business.

The Guide is a working tool which will be updated as and when new products are developed and in line the FSC’s commitment to improve the licensing processes.

FSA - Delivering effective corporate governance: the financial regulator’s role

Hector Sants, chief executive of the Financial Services Authority (FSA) delivered a speech today in which he reviewed the progress of regulatory reforms since the financial crisis and, in particular, focused on how more action is needed to deliver effective corporate governance.

He stressed that this was crucial to delivering financial markets and institutions that we can trust and that act in the interests of everyone.   

He explained that the principal regulatory deficiency, pre-crisis, was the inadequate capital and liquidity standards in banking. A great deal of progress has been made in addressing this deficiency and this will go a long way towards dealing with the symptoms of the crisis but he warned that less progress had been made on the specific issue of delivering effective corporate governance and that this needed to be urgently addressed.

Hector Sants said:

“Management are responsible for running firms and ultimately firms fail because of the decisions taken by their boards and their management. These decisions are made within a firm’s corporate governance framework.  The crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them.  This is not principally a structural issue.  It is a failure in behaviour, attitude and in some cases, competence.” 

He stressed that:

“Ultimately, the purpose of financial markets is to serve everyone, not the personal interests of individuals.   We will only really have learnt the lessons of the crisis when this is recognised by all.” 

He highlighted the regulator’s role in achieving this goal and talked about the Significant Influence Function (SIF) interview process.  He explained that, in his view, the crisis exposed that there were many senior executives and non-executives in key board positions who lacked the technical skills to manage the risks in their banks.  There was, in consequence, a general recognition that the regulator should seek to address this problem.  The FSA does this by assessing the suitability of a candidate to undertake a role, and crucially, by ensuring an appropriately robust, rigorous and yet proportionate appointment process is undertaken by the firm.  This assessment needs to take into account the overall composition of the board as well as the individual’s knowledge and competence.

Importantly, however, he said:

“The FSA is certainly not trying to be ‘gate keeper’ to everyone.  When we revised our SIF process we made clear that our focus is on the Chair, the senior independent director, the chair of the risk and audit committee and on the principal executive functions: CEO, finance director and chief risk officer. Outside of these functions the need for an interview for other individuals is judged on a firm specific basis.”

He explained:

“Except in rare circumstances the FSA will not interview non-executives unless they intend to occupy senior non-executive roles. There may be exceptions to this but in those circumstances firms should expect their supervisors to explain the reasons behind this decision.”

He also made clear that the FSA is assessing whether the board collectively understands and can address the breadth of the business.  The FSA does not expect all non-executive directors to be technical experts in financial services and it does not expect every member of the board to have the same degree of technical knowledge.  Indeed, if that were the case, it would bring a different set of issues. 

He said:

 “A diverse board encourages creativity and is less likely to demonstrate ‘group think’ and ‘herd mentality’.”

Hector went on to discuss the role that incentives play, explaining that too often reward structures continue to encourage short-term gain and excessive risk-taking. 

He said:

“It is also important to recognise that whilst progress is being made in relation to these issues, this will need patience and resolve in the face of the market’s remorseless focus on the next earnings announcement.”

Crucially, he concluded by explaining that, central to achieving good governance, is a firm’s culture.  He re-emphasised it is not for the regulator to determine culture. 

He said:

“Ultimately, however, even a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, firms need to have an appropriate culture and one that is focused on the firm delivering the right long-term obligations to society. The right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles, rather than short-term commercial considerations. In particular, this means that when a regulator expresses a clear instruction then firms should not continue to resist for reasons of expediency and short-term gain.”

He concluded that history has shown that we cannot rely on the self-motivation of individuals alone and that we do need credible enforcement to require individuals to be driven by principles rather than just by commercial expediency. 

He said:

“Commercial success should not place an individual above the law.”

Mauritius Hosts a High-Level International Arbitration Workshop

The International Council for Commercial Arbitration (ICCA) in collaboration with the Permanent Court of Arbitration will organise a high level international workshop on 3-4 May 2012 at  Trou aux Biches resort. In addition to the participation of Mauritian Judges some 25 foreign delegates comprising Chief Justices and Judges from the Southern African countries will attend the workshop.

The workshop will be run under the auspices of the ICCA with assistance from the Mauritius Office of the Permanent Court of Arbitration (PCA) and volunteers from the Young ICCA Africa Desk. It will be conducted by Professor Albert Jan van Berg, a world pre-eminent specialist on the New York Convention, and Ms Marike Paulsson. The workshop which will focus  on the implementation by national court Judges of the 1958 New York Convention on the Recognition of Foreign Arbitral Awards will be an opportunity for capacity building amongst Mauritian and African Judges in implementation of the New York Convention.

Based in The Hague the PCA was established by the 1899 Convention for the Pacific Settlement of International Disputes. As the first global mechanism for the settlement of inter-state disputes, the Arbitration Court  was created to facilitate immediate recourse to arbitration for countries seeking a peaceful resolution of their differences through third-party intervention. The Republic of Mauritius is a Contracting Party to the 1899 Convention.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention or the New York Arbitration Convention, was signed at New York on 10 June 1958. It is considered to be the most important legal cornerstone of international business arbitration and is also acclaimed to be the most successful international convention in international private law.

India-US Relations on Strong Footing: FM India Reaffirms ITS Position Regarding Retrospective Amendments in Certain Tax Provisions

The Union Finance Minister, Shri Pranab Mukherjee said that the relations between India and the United States have evolved in recent years into a global strategic partnership, based on shared values and increasing convergence of interests on regional and global issues. He said that relations between two countries has deepened and grown across a broad range of areas. Shri Mukherjee was speaking during the bilateral meeting between India and US when he met the US Treasury Secretary Mr Timothy Giethner in the latter’s office in Washington D.C. yesterday. Shri Mukherjee further said that our political and strategic engagement is at an unprecedented level. The Finance Minister Shri Mukherjee said that our cooperation in all areas, including defence, counter-terrorism, trade, investment, science and technology, education, and energy are growing. 

During the meeting, both the leaders discussed bilateral economic and financial cooperation as well as the recent developments in the global economy. 

The officials at the Indian Mission in Washington DC informed that US Secretary Mr. Geithner and the Finance Minister Shri Mukherjee discussed the broad range of global and bilateral macro-economic and financial issues relating to foreign investment and tax matters. While discussing tax issues, Mr. Geithner mentioned about certain amendments proposed in tax provisions of India’s Income Tax Act with retrospective effect. In this regard, the Finance Minister Shri Mukherjee informed that the tax changes proposed are not substantive but clarificatory in nature as the changes reiterated only the intent of the legislation. During the meeting, it was also pointed out that as per Section 149 of the Income Tax Act, no tax cases can be opened beyond 6 years. It was also informed that tax cases which have already been assessed and finalized up to April 1, 2012 cannot be reopened. Further the Indian tax laws are very clear that the companies making capital gains from the assets located in India will have to pay taxes either in the country of their origin or in India. It is not a case of double taxation but ensuring that companies that are liable to pay tax must pay some tax. On the issue of categorization of software sales as royalties, it was informed that discussions have been held in the past between the tax authorities in both the countries and they had agreed to disagree on such characterization. 

India-Mauritius DTAC- Mauritius Requests an Early Meeting for Discussions

Mauritius has requested the Indian authorities for an early meeting of the Joint Working Group on the India-Mauritius Double Taxation Avoidance Convention (DTAC), according to a press communiqué from the Ministry of Finance and Economic Development.

The communiqué points out that this will build on the discussions already started in December last year, and will give an opportunity for Mauritius to discuss its concerns regarding the uncertainties that have arisen following the measures announced by the Indian Government in its 2012 Budget speech.

For recall, at the December 2011 meeting of the Joint Working Group, Mauritius has been attentive to the concerns expressed by the Indian authorities arising from the operation of the DTAC. Mauritius has offered, as part of an all-inclusive package, to consider changes to the treaty that would address the Indian concerns, while ensuring that these do not affect the mutually beneficial effects of the treaty. Concrete proposals have been made to India. The communiqué holds that the Mauritian Government is optimistic that both sides can conclude a mutually acceptable package that would yield a win-win outcome for both parties.

It will be noted that the DTAC has helped Mauritius in the development of its Financial Services sector. India has on the other hand benefitted in terms of foreign direct investments, which for the last ten years stand at a cumulative figure of around USD 55 billion, and also in terms of job creation.

Mauritius Committed Towards Transparency

Mauritius continues to be recognised for its commitment towards transparency and exchange of information on the International front. The country also figures among the four countries that have been invited by the OECD Global Forum to make a presentation on its information exchange system to the competent authorities of more than a hundred countries, in the context of the Peer Review Group meeting which will be held in Madrid in May 2012.

In order to further consolidate its framework on exchange of information, Mauritius proposes to become a party to the Convention on Mutual Administrative Assistance in Tax Matters, which has been jointly developed by the OECD and the Council of Europe. This will further improve the effectiveness in the exchange of information mechanism and allow the country to provide assistance to its partners in the collection of foreign taxes.