New Cayman Islands Private Funds Law Extends Opportunities For Depositaries
The Cayman Islands Private Funds Law 2020, which commenced on 7th February 2020 but will apply to all existing funds from 7th August, will extend the oversight role played by depositaries for many Cayman investment funds, according to INDOS Financial, the independent depositary and oversight group.
The new law requires closed-ended investment funds domiciled in the Cayman Islands to register with the Cayman Islands Monetary Authority (CIMA) and to comply with a number of new operating requirements, including:
Implementation of appropriate and consistent valuation procedures
Arranging custody of custodial assets
Verification of ownership and title of all other assets
Monitoring cash flows including the checking of cash accounts and receipt of investor contributions
“These new requirements are based on similar rules within the European AIFMD (Alternative Investment Fund Managers Directive) where they are required to be performed by a fund depositary,” said Bill Prew, CEO of INDOS Financial.
“While the Cayman Islands Private Funds Law permits these functions to be carried out by managers, they should be carried out independently of the investment management process and conflicts of interest need to be properly identified, managed, monitored and disclosed to investors. We expect many managers will choose to outsource these obligations to third parties that have a track record in this area,” Bill Prew continued.
“Many managers of Cayman funds that are marketed in Europe will be familiar with these requirements. INDOS already provides similar services for over 100 Cayman funds across a range of strategies and that are managed by European, USA and Asian managers. We are therefore well placed to enable managers to meet these new requirements.” Bill Prew added.
About INDOS Financial
Founded in 2012, INDOS is the leading independent provider of depositary services to alternative investment funds. As of May 2020, client assets under depositary oversight have grown past $35 billion and a further $10bn which form part of the INDOS AML (Anti-Money Laundering) Reporting Officer service clients. INDOS also provides a range of Environmental, Social, Governance (ESG) services for funds and is the only ESG Depositary in the market.
Is Mark Carney ‘Eco-warrior of the year’?
Mark Carney is always immaculately turned out, typically in a dark suit with white shirt and tie, which is what one would expect of a former Governor of the Bank of England. After spells at Goldman Sachs followed by the Central Bank of Canada, where he helped Canada weather the storms of the Financial Crisis, he has established himself, well and truly, as a qualified member of the financial establishment. On the surface then he is an unlikely candidate for “Eco-warrior of the year”. If there was such an award, then surely it should go to more obvious contenders, including Roger Hallam and Gail Bradbrook, the co-founders of Extinction Rebellion, or Time Magazine’s Person of the Year, the Swedish student eco-activist, Greta Thunberg. However there is a case to be made that Mark Carney, working behind the scenes, has had a bigger impact in the battle to tackle the climate crisis and therefore it should be his name on the trophy.
It has long been understood amongst the experts in the scientific community that, in order to avert a climate crisis, the world has to transition to a low carbon economy and quickly. After the Paris Agreement in 2015, the Finance Ministers of the G20, recognising that climate change was a threat to the financial system, turned to Carney, then Chairman of the Financial Stability Board, to take action. He had spoken previously of the dangers that climate change posed and outlined them clearly in his “Tragedy of the Horizon” speech to Lloyds of London in September 2015, stating that atmospheric concentrations of greenhouse gases were at levels not seen in 800,000 years. His words: “The more we invest with foresight, the less we will regret in hindsight” are similar to these uttered by Bill Gates, also in 2015, regarding the risk of a global pandemic.
In 2016, Carney established the TCFD (Task Force for Climate-related Financial Disclosure). In order to create a smooth transition to a low carbon economy and to break the tragedy of the horizon three things were required:-
Transparency with regard to the climate risks faced by companies;
Risk management which included a focus on climate risk;
Coherent and credible public policy frameworks.
In 2017 the TCFD published their recommendations: a reporting framework for companies designed to achieve the first two objectives above by recognising the relevant, financially material risks and acting thereon. The core elements of the climate-related financial disclosures are:
Governance: the organization’s governance around climate-related risks and opportunities.
Strategy: the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
Risk Management: the processes used by the organization to identify, assess, and manage climate-related risks.
Metrics and Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Key features of the recommendations are that they are adoptable by all organisations, should be included in mainstream financial filings, are designed to solicit decision-useful, forward-looking information on financial impacts, and have a strong focus on risks and opportunities related to the transition to a lower-carbon economy.
Establishing a reporting framework is one thing – there are many around – but the real challenge is to achieve widespread acceptance. Since the initial recommendations were made, the TCFD has won recognition from the majority of the world’s largest Central Banks, asset managers, (recently including Blackrock), pension funds, insurers, credit rating agencies as well as the big four accounting firms. In doing so, the TCFD is fast becoming a global standard.
After developing a framework for corporates to consider climate risk as part of their normal everyday business, Carney has now taken on the role as the UN Special Envoy for climate action and climate finance as well as the UK Government climate advisor. In doing so he is taking on the 3rd requirement listed above for the world to undergo a smooth transition to a low carbon economy– that of developing a coherent and credible public policy framework. Helping to find common ground amongst the developed and developing countries will test Carney’s diplomatic skills to the limit. His ultimate challenge will be to tackle Trump and persuade him that climate change is not a hoax.
Their tactics might be different but there is no doubt that Mark Carney stands alongside Greta Thunberg as an Eco-warrior.
Centigen Case Study: DEPOcheck®-Fully Integrated Software Platform for AIFMD Depositary & Fund Oversight
Take a look at our system development partner Centigen’s latest case study on how they helped us develop DEPOcheck, the INDOS integrated workflow management and fund oversight system for all our depositary activity. You can view the case study by clicking the link below:
INDOS Financial’s Private Equity, Real Estate and Infrastructure assets grow through $10bn underlining the importance of independent depositary services.
INDOS Financial, the independent fund depositary and financial oversight business has announced that, its ‘assets under depositary’ in closed-ended private equity, real estate, infrastructure and debt funds now exceed $10bn. The new total, spread across 30 clients, splits to $5.4bn (private equity), $3.2bn (real estate), $1.4bn (infrastructure/debt).
Overall INDOS Financials assets exceed $35bn from 75 clients represented by some 145 funds.
“INDOS Financial is the only independent depositary in the alternatives space with the experience to service both hedge funds and other alternatives (including private equity, real estate, infrastructure and debt funds),” said Bill Prew, INDOS founder and CEO. “Having initially concentrated on the open-ended hedge fund sector following the introduction of AIFMD, our investment programme, initiated in 2015 and aimed at developing depositary services for closed-ended funds, is now paying off.”
INDOS’s continued growth reflects the increasing requirement of institutional clients for proper operational oversight which enhances fund governance. The independent depositary model is in strong demand as asset managers increasingly question the level and quality of service they are receiving from their depositaries, the majority of which are offered as a minority part of a packaged service with fund administration taking precedence.
“In our experience, firms complain about a lack of engagement by their depositaries and that any reporting lacks detail, raising concerns about whether the whole process is simply a box-ticking exercise.” Bill Prew added.
Concerns have also been raised about the potential for conflicts of interest in the packaged, as opposed to independent, depositary model and, at the same time, investors in the private funds market are becoming more diligent during the fund selection process, especially when reviewing fund operations and the broader control environment.
“These and other factors such as the increasing requirements of fund directors for reliable, detailed information about what is happening on an operational level at the fund, are all contributing to the strength of the independent depositary model and driving the growth of INDOS Financial,” concluded Bill Prew.
About INDOS Financial
Founded in 2012, INDOS has grown organically, developing solutions recognised as industry-leading within the fund oversight and depositary service space. As of April 2020, client assets under depositary oversight had grown past $35 billion and a further $10bn which form part of the INDOS MLRO (Money Laundering Reporting Officer) service clients. INDOS also provides a range of Environmental, Social, Governance (ESG) services for funds and is the only ESG Depositary in the market.
Liquidity Risk Management – The Times are Changing
A lot has been written about liquidity risk management, driven by regulatory pressures but also due to fears that a liquidity crisis similar to or worse than 2008 now seems inevitable.
ESMA and the SEC, for instance, are both being vocal on the issue, having previously insisted that fund managers adopt appropriate liquidity stress testing arrangements.
ESMA’s new Liquidity Stress Testing Guidelines, published in September 2019, come into effect in September this year, and will require managers to take an ever closer look at their liquidity risk profiles.
The ongoing Coronavirus situation has heightened the importance of liquidity risk management, as performance stutters and managers face redemption requests. In response, more firms are now ramping up their cash or cash equivalent positions. Liquidity risk management is now key to fund survival.
So what should investment firms be thinking about?
Carry out regular and appropriate liquidity profiling on portfolios and define clearly any thresholds or limits where escalation may be required.
Ensure appropriate and regular stress tests are being conducted and that the tests themselves are reviewed to ensure the process is adequately tailored.
A risk/liquidity/pricing committee/Board must oversee and sign off on the results of the test. Documentary evidence is vital here. The findings need to then be shared with a depositary.
Trends are just as important as a snapshot of the situation – ensure the results are presented to enable an ongoing assessment to be made.
Be prepared to amend the Liquidity Management Policy to reflect necessary changes to the level and type of tests performed together with the risk appetite of the firm.
However, the whole liquidity scenario is not just centred around the portfolio. The composition of the fund’s investors is another key element. While the use of a nominee company can mask the underlying breakdown of investors, especially in the alternatives space, most managers should have a good insight into who their clients are.
Although the use of redemption “tools” such as gates will offset a run of redemptions, this does not ultimately stop a fund from having to suspend if it cannot service its exiting investors.
A manager should therefore be closely monitoring its investor profile by looking at the percentage of the fund held by each investor, typical redemption levels together with the ongoing highest level where applicable. These assumptions should also be based on a multiplication of factors increasing the downside effects.
What has caused some backlash among managers is the discussion around reverse stress testing and what this actually means. There is no a one size fits all answer here as the threshold for a fund pursuing a global macro strategy will be totally different to a hybrid credit fund. Essentially, the reverse stress test is the worst case scenario. It therefore needs to be designed to capture the relevant data points and risk parameters that directly impact the fund’s strategic objective. This may include moves in base rates, FX, indices, credit ratings and any other relevant input which, either individually or as combination of some or all, would have a detrimental effect on the fund’s liquidity profile.
Ultimately, liquidity management together with stress testing should now be considered as a compulsory requirement. It needs to be based on appropriate data, robust modelling and effective methodologies.
Coronavirus has resulted in some extreme issues but few managers would have included such a worst case scenario in their prior stress tests. Many core portfolio securities, such as airlines, hospitality services and travel companies have seen significant rises in volatility and the valuation of these assets may prove challenging. If the valuation is problematic, it follows their liquidity may also have declined indicating it is not just the small cap securities that experience such issues.
Managers may need to train their personnel in the understanding of liquidity measures as this is not a tick box exercise. Regulators may well be engaging fund boards, risk managers and other individuals to explain the measures a fund has in place and how they are interpreting the output. The clock is running down to 30 September to ensure all policies, procedures and training are in place. At a minimum, regulators are likely to insist managers, including their boards, become more transparent about their funds’ liquidity terms and their ability to meet redemptions during distressed market conditions.
