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September-October 2010 | special alfi & nicsa forum



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Don’t prepare for the world as it is. Prepare for the world as it’s going to be.

© 2010 EYGM Limited. All Rights Reserved.

What’s next?

Investment Funds in Luxembourg A technical guide - September 2010


3 editorial

Tomorrow’s competitive advantages for today’s decision-makers Thomas Seale, CEO, European Fund Administration; Vice-Chairman International Affairs, ALFI

Thomas Seale (text), Jules Julien (illustration)

The implementation of the European Securities Market Authority (ESMA) next January will have a significant impact on the European fund industry. Looking ahead, we can expect a more harmonised approach towards UCITS and AIFM fund legislation and in particular less room for local interpretation by regulatory authorities. This means that one of Luxembourg’s traditional strengths – local flexibility – will largely disappear. A relevant question then is this: How is Luxembourg developing sustainable competitive advantage in tomorrow’s post-ESMA environment? Being the largest fund domicile in Europe and the worldwide No 1 in cross-border fund distribution, the Luxembourg fund industry has an obligation to act as a leader in preparing this transition. Indeed, within ALFI, we have been actively working on analysing the future in order to develop new areas of sustainable competitive advantage for the Luxembourg fund centre. Our analysis shows that in the post-ESMA world, today’s decision-makers are evaluating fund domiciles, no longer based on local regulatory flexibility, but based on a new set of criteria. In addition, we know that the choice of locating a fund is a complex one, and the decision criteria contain

multiple facets depending on the decision-makers’ own perspective. To illustrate, let’s review how top asset-management decision makers evaluate competing fund domiciles. A chief investment officer (CIO) looks for a domicile with innovative product structures and a short “time to market”: Luxembourg offers many fund structures beyond UCITS including SIFs, SICARS, UCITS Part II funds. Some of the most innovative fund structures ranging from microfinance, Sharia-compliant money market funds to alternative investment and private equity strategies can be supported in the Grand Duchy. This industry experience, along with a focused regulator, results in swift turnaround times for fund launches. A chief financial officer (CFO) focuses on fiscal and operational costs: Luxembourg offers a highly competitive VAT and corporate tax regime. Several types of funds (e.g. ETFs, microfinance, institutional highly rated money market funds) are exempt from the subscription tax. The tax administration is open to discuss specific issues on a case-by-case basis. Luxembourg service providers use multiple operational models, including off-shoring, and draw from a large, educated local labour pool to keep costs competitive. A chief legal officer (CLO) seeks a domicile with a responsive regulator: the Luxembourg regulator, the Com-

mission de Surveillance du Secteur Financier (CSSF), is highly proactive given its knowledge of, and specialisation in, the investment fund sector. Dossiers can be submitted in English, French or German. A recent legal change means that the CSSF can now recruit professional staff from anywhere within the EU. A chief compliance officer (CCO) favours an environment where risk management competency exists: as Luxem­bourg is first and foremost a fund administration and depositary banking centre, deep knowledge of risk reporting and risk management exists. ALFI promotes integrity via an industry-wide code of conduct. A chief marketing officer (CMO) wants a domicile which supports global distribution: Luxembourg funds are distributed in over 50 countries, including some of the most important markets in Asia, the Middle East and Latin America. Luxembourg products enjoy a 75% market share of funds distributed in three or more countries. ALFI cultivates close, working relationships with local fund associations and the regulators in these markets via frequent visits and contacts. A chief operating officer (COO) requires a domicile with an efficient and reliable fund infrastructure: Luxembourg service providers operate sophisticated, dedicated operational platforms. Creating interfaces between a fund company and these platforms is efficient and rapid. In addition, local infrastructure includes efficient stock exchange listings, clearing and settlement platforms, and dedicated fund communication systems. Luxembourg service professionals include over 60 custodian banks with worldwide sub-custodian networks, over 100 fund administration companies and transfer agents. Finally, a chief executive officer (CEO) scrutinises a domicile’s political, fiscal and economic stability as well as its industrial dynamism: Luxembourg is one of the most stable EU member states with the lowest level of public debt and a low deficit. The government is accessible and actively supports the industry. ALFI is among the strongest and most effective industry associations in Europe. Within ALFI, we are analysing each of these perspectives and honing our skills to develop and maintain our competitive advantage in the new, post-ESMA regulatory environment. I am confident that the Luxembourg fund industry will retain the highest ratings by fund industry decision-makers for years to come.

paperjam  | September-October 2010 | special Alfi & nicsa forum

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5 contents

Contents 19 th ALFI & NICSA Forum





Dodd-Frank Wall Street Reform and Consumer Protection Act

Thomas Seale

Tomorrow’s competitive advantages for today’s decision-makers

An enormous indirect impact The recent US Congress decisions will have a limited direct effect on the mutual fund industry, but many things will change.



Asset Management

Endogenous risk Claude Kremer

What you always wanted to know about it but never dared to ask…

“The fund product is the best investment tool for the saver”

Investment fund industry



Commenting on the ongoing upheaval of laws and regulations, ALFI’s president has reaffirmed the privileged position of fund industry products with retail investors.

Exhibition plan

Future challenges

At the end of May 2010, the total assets of Luxembourg investment funds hovered around the 2 trillion mark, a gain of 23% over the preceding 12 months. The total number of funds increased by 440 year on year. Net subscriptions into Luxembourg UCITS were 112 billion during 2009. 32

Investment Products

The newlandscape in Hong Kong


Who? Where? Just take a plan...

“As I write this, a number of weeks prior to the forum, renminbi-related business is gaining momentum in Hong Kong…”

Conferences Agenda 20

The whole programme at a glance.



New compliance obligations for the Luxembourg fund industry

In their quest to prevent tax evasion, the United States have enacted a new law which will require non-US financial institutions to disclose information regarding their US customers. The provisions of the new law are so broad that they will impact not only banks but also investment funds, brokerages, insurance companies and certain non-financial institutions. 40

T2S / LuxCSD

Why securities settlement plumbing matters

T2S has far reaching implications for the financial services industry in Luxembourg. All market players should take some time now to analyse its implications for their businesses and define a clear strategy for the future. 42

Why regulate investment funds?

A few thoughts about “good” fund regulation

On the occasion of this year’s ALFI-NICSA fall seminar we have been asked to give some thought to the question “why regulate investment funds?”


After Lehman and Madoff

Fund governance in a changing world

In the wake of the crisis and recent financial scandals, governance has once again become a key issue for the broader financial world and for the fund industry in particular. 36

Funding of retirement in Europe

Perspectives from 2010 to 2060

Picture Report 44



The previous ALFI/NICSA conference took place on 22 and 23 September 2009 in the Centre de Conférences in Luxembourg-Kirchberg.

Analysis of the “Green Paper towards adequate, sustainable and safe European pension systems” recently published by the European Commission.

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6 interview

Claude Kremer and Camille Thommes

“The fund product is the best investment tool for the saver” Commenting on the ongoing upheaval of laws and regulations, ALFI’s president and its director general have reaffirmed the privileged position of fund industry products with retail investors.

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7 interview

Jean-Michel Gaudron (interview), Jules Julien (illustrations)

Mr. Kremer, with in excess of 2,000 billion euros’ worth of assets under management, the funds industry in Luxembourg seems to be doing rather well… Claude Kremer (ALFI’s President): “This figure indeed shows that the industry is healthy. However, as we have always said, there are two things to consider when looking at the fluctuation of assets under management: market changes, whether up or down, as well as subscriptions and redemptions. Clearly, this second component is the most significant one for us. How are Luxembourg funds doing with respect to other European countries? CK: “In terms of asset growth, for the first half year in Europe, assets rose by 470 billion euros. In Luxembourg, growth represented 170 billion euros, or 36% of the growth in assets in Europe. The figures are equally good as regards net subscriptions. Between January and July 2010, we had 80 billion euros of net subscriptions, as against 40 billion for the same period in 2009. In Europe, for the single month of June 2010, there were fund redemptions worth 31 billion euros, during which time Luxembourg saw 11 billion euros’ worth of new subscriptions. How do you explain this fall-back across Europe? CK: “Most of those fall-backs come from money market funds. At the end of June 2010, the decline was of the order of 90 billion euros, because those funds do not have a very high level of return. We don’t know where the new subscriptions registered in Luxembourg have come from, but we can speculate on the fact that part is due to transfers from these money market funds.

How do you explain Luxembourg’s good showing in particular? CK: “The figures that we have before us show mainly two things. Firstly – and this is very reassuring for us –, we see that investor confidence in Luxembourg products is intact. Investors are truly seeking out Luxembourg structures to invest their savings. Secondly, if we take a look at the types of funds used, we see a very large amount of growth in specialised investment funds (SIFs). About 200 SIFs were set up in the whole of 2009, whereas 167 were set up between January and July 2010 only. This shows that we have properly anticipated the up-coming AIFM (Alternative Investment Fund Manager) Directive, since the SIF is a product that is designed to become an ideal vehicle for all future alternative investment funds. What is the position regarding traditional UCITS? CK: “The increase is more modest, but this comes as no surprise to us. For a while now, we have noted a certain amount of consolidation of sub-funds and funds, as well as a restructuring of certain fund ranges, the latter often due to the restructuring of asset management groups. Does the draft bill that was submitted at the end of July and that transposes the UCITS IV European Directive meet your expectations? CK: “Transposing that European Directive is part of one of five action points that we defined in 2009, and that provides for our support in creating an efficient and business-oriented regulatory framework. Camille Thommes (ALFI’s Director General): “Of course, we did a lot of preliminary work on that draft bill. Moreover, we must acknowledge the diligence with which our supervisory authority (editor’s note: the CSSF(1)) has also worked on preparing

the UCITS IV implementation by making it an absolute priority. CK: “ALFI was obviously fulfilling its role by acting in that way, and I must emphasise how impressed I am by the team spirit of ALFI members, and all the commitment that exists within our association. A large number of talented specialists have spent a lot of time and energy working on UCITS IV, in order to prepare the implementation as best as possible, especially also the section on tax support measures that are necessary to neutralise the impact of the transposition of the directive and to avoid having any negative tax consequences. We had a phase that involved lobbying as well as making a constructive contribution to the draft text. ALFI spoke with one voice, and our government was very willing to listen to the points we raised. Of course, the exercise is not over yet. We have been motivated by our desire to play a leading role in Europe. Being what we are, it is up to us to put everything in motion for Luxembourg to be the first – or amongst the first – to transpose the directive, thus opening the way for others. We hope that by the end of the year, the text will be approved by Parliament. Does being the first – or amongst the first – have only symbolic value, or does it carry a genuine competitive advantage? CK: “UCITS IV is a text that is harmonised at European level. One of its features is that it gives }  8

CSSF = Commission de Surveillance du


Secteur Financier – Supervisory Commission for the Financial Sector, Luxembourg

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8 interview


ALFI’s digest ALFI (Association Luxembourgeoise des Fonds d’Investissement) is the official representative body for the Luxembourg investment fund industry and was set up in November 1988 to promote its development. ALFI’s Articles of Association were amended in April 2000 and, as well as investment funds, the association now includes a wide selection of service providers: custodian banks, fund managers and administrators, transfer agents, fund distributors, law firms, consultants and tax advisers, auditors and accounting firms, IT services companies, etc. Its mission: “Lead industry efforts to make Luxembourg the most attractive international centre for investment funds.”


 { Member States very little freedom to transpose

the directive to fit the individual circumstances of each State. We are clearly playing the European card, and we want to show the extent to which Luxembourg wants to make itself available to promoters to enable them to derive all possible advantages from UCITS IV being transposed, and to ensure that they choose Luxembourg to develop their international activities. So being amongst the first clearly is not only of symbolic value. It is also a response to a desire to project a dynamic, pro-active image, giving the movement direction by showing an efficient and pragmatic ability as regards transposition. CT: “The text will not only enable promoters to lay down the basis for their ability to adapt their product ranges and derive benefits from the directive’s efficiency measures; end investors will inevitably profit from the cost reductions that will thus be generated. You spoke of certain tax support measures that have also been taken. What are they specifically? CK: “They are measures necessary to reduce any risk of tax insecurity that could act as an impediment to some promoters who fear the possibility of specific taxation. I should like to mention two essential measures. The first concerns master feeder funds. The law had to be changed to assure that when a foreign feeder fund has invested in a Luxembourg master fund, the foreign feeder fund is not subject to tax when it divests itself of its investment. Next, take the case of a Luxembourg management company managing both Luxembourg and foreign funds. It became necessary to clarify that foreign funds were not subject to tax in Luxembourg. There was a risk that from a taxation point of view, those funds would be treated as Luxembourg funds, since they were managed from Luxembourg. So the law sets up this legal safeguard for foreign tax specialists who could have been asking themselves all those questions. We are increasingly aware that in discussions within international groups, legal safeguards and legislative clarity influence decisions to set up a fund or develop an activity in one country or the other. More than ever, promoters want to be where there

is no legal or tax uncertainty and insecurity. We want to show them that Luxembourg has not only anticipated those problems, but has solved them as well. The other legislative work being done is in respect of the AIFM directive. The vote that was expected for the beginning of July has been delayed. Are you surprised by this? CK: “The European Commission prepared a draft directive in April 2009. Since then, there has been a great deal of political goodwill shown, and a great deal of progress has been made. If we can tie up this piece of legislation, we think that the AIFM directive can become a great opportunity in Europe and in Luxembourg. If we manage to develop a model based on what we have already done for UCITS, it will be possible to develop a second ‘brand’ for alternative classes of assets, by setting up a distribution market for professional investors who are clearly the target for this type of product. The initial draft was put together in haste, and it is difficult to put right a draft that contained drawbacks from the very outset. There are currently three versions: the initial one drafted by the European Commission, that of the Council of Europe, and that of the European Parliament. The challenge is to find a compromise across the three texts, so that pending difficulties can be resolved to the satisfaction of all. What are those difficulties? CK: “One of them has to do with the treatment of third-country managers and third-country funds. Our position is to see to it that the AIFM directive should not turn Europe into an ‘impenetrable fortress’. That would be heavyhanded. The solution would be to have a passport for managers within the EU, but in such a way that managers in third countries could still distribute European and non-European alternative funds through private placements in Europe, as has always been the case. The situation will thus remain unchanged for them, and this status quo, which is working well, could then open the door to later improvements when we have gained experience in working with a directive that func}  10 tions well.

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Créer. Innover. Développer. Une nouvelle entreprise commence souvent par une bonne idée. Ajoutez-y de la créativité, de la compétence et du travail, et l’idée deviendra vite une réalité. Si la Banque Degroof est devenue l’une des premières banques privées d’affaires indépendantes du Luxembourg, c’est, entre autres, grâce à son sens de l’innovation. Ses performances sont reconnues partout où elle est active : gestion patrimoniale et institutionnelle, corporate finance et activités de marché, activités de crédit et de structuration. Fondée en 1871, elle compte aujourd’hui, dans six pays, plus de 1000 collaborateurs au service de ses clients. Contact au département Marché National : tél. : 45 35 45-2049 - mail :

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10 interview

– from a technical point of view – the entity does not have AIFM status, as is already the case in the UCITS regime. Moreover, we ought to follow the UCITS model in many respects, because it is based on twenty years of experience. Do you think that these various points of disagreement will be resolved by the autumn? CK: “There is no choice in the matter! From a political point of view, this directive must be passed. Solutions will only be found through compromise. That is where the support from the industry through ALFI and EFAMA (European Fund and Asset Management Association) becomes essential. These problems are addressed by studying their concrete applicability in the field, and ensuring that the legal framework is truly adequate. At the beginning of September 2010, the Belgian Presidency of the Union brought out a new version of the compromise. Change is continuous.

“ We must acknowledge the diligence of our supervisory authority” Camille Thommes 8


The European Parliament has considered the possibility of creating a passport for non-EU managers. This is an interesting idea, but we would be concerned by the fact that setting up such a regime may be extremely difficult in practice. Another problem concerns depositaries. Many consider that the matter should have been addressed differently, by re-working the current UCITS regime from which a regime for alternative funds could be derived. The approach that has been adopted is, unfortunately, the reverse. The debate is essentially focused on the role of the depositary. There is also the question of delegations. To what type of third party can a manager delegate the management of an alternative fund? The European Parliament feels that the manager can only delegate to another manager who is subject to the directive. We feel, as does the European Council, that a better solution would be found in the possibility of more generally being able to delegate this management to any entity that is subject to an equivalent level of prudential supervision, even if

At a more national level, in 2009, ALFI presented an action plan that rested on five pillars. Over and above providing support for regulatory and legislative developments, of which we have just spoken, where do we stand where the other four pillars are concerned, one year on? CK: “These various pillars are all based on the same ambition: to make Luxembourg a centre of excellence when it comes to disseminating crossborder funds. Our number one priority was to listen more than ever to investors. There have already been concrete developments in that direction, with the setting up of a dedicated web site: the ALFI Investor Centre. It is operational, and we are currently translating all the various documents published there in French, German, and perhaps Italian. CT: “We have noticed that the site is consulted regularly, and that it has provoked genuine interest. We have also noticed that this site is a useful tool from an international point of view. Where EFAMA is concerned, a working group on investor education has been set up. It is chaired by Charles Muller (editor’s note: Deputy Director General at ALFI), who co-ordinates all the work done by each of the national associations – of which there is a lot! }  12

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12 interview

United States

NICSA’s digest NICSA is the leading provider of independent education and networking forums to professionals in the global investment management community. The association was established in 1962 as a forum for operations and shareholder servicing professionals in the mutual fund industry. Today, NICSA is a network of nearly 10,000 business professionals from within the investment management industry and the firms that support the industry, including mutual fund complexes, investment management companies, custodian banks, transfer agents and independent providers of specialized products and services. The Association consists of more than 250 corporate member firms with over 600 member offices operating in major financial centers around the world. Membership fees are surprisingly small, yet the benefits of membership are anything but. NICSA offers the most comprehensive range of services in the industry, allowing members to learn, network and share best practices locally, nationally and globally. Its mission: “to be the leading provider of independent education and networking forums to professionals in the global investment management community.”


 { In the medium term, the idea would be to be able to

publish joint documents that could all be used at the same time. What would be your priority target? CK: “Young people! We want to draw the attention of the authorities to the need to train young people from as early an age as possible, and to make them understand that it is essential to know how to save up for old age. This ought to be part of the education of young people: to learn how to be an ant rather than a grasshopper. There is, therefore, a need to find solutions so that the investor can concentrate on long-term savings. That is a subject on which we would like to get going. This summer, the European Commission published an essential green paper on the subject. The economic crisis has worsened problems linked to pensions: unemployment rates have risen, growth is more limited, sovereign debt is more significant, market volatility… Will retirees of the future have a financial future that is guaranteed over the coming decades? Of course, this subject is not specific to Luxembourg; it is Europewide, and all Member States are affected by it. ALFI is not the only organisation to take a look at the question. EFAMA has published a ‘think tank’ report according to which, in particular, governments should be encouraged to create longterm savings systems, with the possibility of portability between countries, employers, and pillars. The USA’s 401K model works well, and Europe needs to start thinking about the subject. EFAMA even proposes setting up a standardised savings plan, one that is certified at European level and portable from one country to another, in the knowledge that the current ‘pay as you go’ system runs the risk of having severe long-term limitations. The link with investment funds is obvious, since UCITS and, where appropriate, the SIFs, are vehicles for accumulating savings. That is why we want to take hold of this subject, because we have an instrument that seems pre-destined to be used in launching such an idea. Pension funds represent an increasingly specific demand on the part of investors. Meeting their needs in terms of new products is also part

of the pillars of development that you set up. CK: “Indeed so, and this covers a large number of areas, because requests have been numerous and varied. For example, I have in mind Islamic finance, which is being developed as a niche product that is in great demand by investors. Moreover, Luxembourg is already positioned as the leading centre in Europe for setting up such funds. CT: “In this field, we should also remember the study recently carried out by a European supervisory authority concerning investments from Gulf countries. The study mentions Luxembourg as a domicile of choice for a significant number of those investors, for structuring their portfolios and developing their investments abroad. CK: “There is also microfinance and, more widely, socially-responsible funds, which are very important. Investors feel the need to invest in ecological or ethical funds. Those funds are also developing, and Luxembourg wants to find its place. Once again, this is a niche, but we don’t want to dismiss any one of them. On this particular subject, we are working with the association Luxflag – once again, a case of joint working. I would also like to refer to the ETFs (ExchangeTraded Funds), which represent an area in full expansion. They already represent about 1,000 billion dollars worth of assets across the world, and that figure continues to rise. The Luxembourg government has given its agreement for the taxe d’abonnement (subscription tax) for ETFs in Luxem­bourg to be reduced to zero, as is also the case of funds linked to microfinance. Once again, the authorities have listened to us. Where tax income is concerned, doing away with the taxe d’abonnement represents almost nothing. On the other hand, to the extent that this abolition may attract new players to Luxembourg, this will create fresh employment and develop activity, thus leading to a rise in tax income for the State. What about the competitiveness of the European funds industry? CK: “This is another of our work priorities. In Europe, we have set up a ‘UCITS brand’ that has secured international credibility and acknowledgement around the world. Let us therefore come together in Europe to defend this wonderful }  14

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14 interview

Net assets of Luxembourg domiciled UCIs (figures at July 30, 2010)

euro billions

The Luxembourg investment fund sector July 2010 2,019.223

operational competence in Luxembourg is unique. We must sell this strength even better when we go prospecting abroad – given that European regulation is becoming increasingly harmonised, it is in the quality of operational service and in the effectiveness of the supervisory authority that we shall be able to set ourselves apart.



Growth rate 12 months: 18.36% YTD: 9.68%


Source: CSSF



10 20

09 20

08 20

07 20

06 20

05 20

04 20

03 20

02 20

01 20

00 20

99 19

98 19

97 19




 { brand, so that we are well positioned with respect

to possible competitors. Of course, this does not prevent each one from having a role to play in Europe: Luxembourg has acquired an unblemished reputation for being, together with Ireland, the two great fund ‘producers’. Let us put everything in place so that we can maintain ourselves in those roles for the greater good of all those who wish to use these markets. We therefore have a legitimate reason for maintaining and improving our competitiveness, which will serve all those who wish to use Luxembourg as a base for developing their business. It is essential to keep costs under control. Hence, we should speak of something other than the mere content of regulations. Luxembourg enjoys extraordinary operational advantages, a well performing and competitive market infrastructure, and service providers who are highly specialised in the field of e.g. complex NAV calculations, transfer agency functions, competitive infrastructure depository functions, investor communication services, and all spin-off areas of work such as legal and tax consultancy and auditors. Many recognise that this

A final pillar of work concerned your presence on the international scene. There was a plan to set up shop in Hong Kong. Where does that stand? CK: “The plan has been turned into reality, since we are in the process of opening our representative office there. It will not be focused solely on the Hong Kong market, but will be a true Asia Representative Office for us. The official inauguration is set for 11 November in the presence of Minister Luc Frieden, on the occasion of a road show that will take place in Asia. The office will be headed by Ching Yng Choi, who has already worked in Luxembourg and who, being a citizen from Hong Kong, has a perfect knowledge of the field as well as of local and regional players. We are also setting up another road show in October, organised by Luxembourg for Finance, in Latin America, once again in the presence of Minister Frieden. We shall go to Chile, Brazil and Uruguay, with a very rich and varied programme. What are the major challenges that you currently intend to take up through those action points? CK: “Demonstrate our added value with respect to investors, and demonstrate that the fund product is the best investment tool for the saver. This principle was largely called into question at the height of the financial crisis. We must, therefore, continually demonstrate our worth and our contribution to reinforce this confidence on the part of investors. This is clearly an aim that is common to the entire fund industry, be it Luxembourg or European. Specifically where Luxembourg is concerned, we must work from the principle that we are a centre of excellence for international funds, given our long-standing experience in crossborder distribution and our advantages in terms of operational strengths.”

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floor plan


exhibitors plan For the third time, the ALFI/NICSA conference takes place in the new Centre de conférences in Luxembourg-Kirchberg.


How to find us? By bus: With most bus lines to Kirchberg

booth n°

8 34 12 5 29 6 11 05_p16_17_plan.indd 1


acarda SaRL + Intalus Gmbh atlantic Fund Services bnp paribas Securities Services cacEIS bank Luxembourg citi co-link S.a. confluence 16 Deloitte

booth n°

– stop at “Philharmonie / Mudam” – company

transit via Centre Aldringen, central station and boulevard Royal. Funds Europe Further information can be obtained hSbc from the “Mobilitéitszentral” hotline (+352) 24 65 24 65

33 3 44 IFbL 9 IGEFI Group S.à r.l. 45 Interactive Data (Europe) Ltd paperjam  |  September-October 2010 | special alfi & nicsa forum 23 KnEIp 40 KpmG 4 Loyens & Loeff

By car: Direct and covered access from the “Place den° l’Europe” car park; entry booth company on avenue John F. Kennedy From the “Trois Glands” car park; 20 nEWSmanagers via avenue John F. Kennedy and the Place tunnel; or via rue 27de l’Europe northen trust du Fort Thüngen.

10 13 39 22 37 31

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Why should you be a sponsor or have an exhibition booth at the next event, in 2011? The Forum will offer you a unique opportunity to position your company as a major player in the investment fund area, to meet with an impressive number of professionals of the fund industry in a single place over a two-day period and, last but not least, increase brand visibility amongst key-decision makers.

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paperjam  |  September-October 2010 | special alfi & nicsa forum

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Agenda Programme day 1 – Tuesday 28th September 2010 a.m.


Registration & breakfast

Refreshment break and visit of the exhibition area

08.00 – 09.00

10.35 – 11.05

Welcome & introduction Fund Governance – developments in the US and Europe and what the industry should be focused on

Theresa Hamacher, CFA, President, NICSA, Westborough Claude Kremer, Chairman, ALFI and Vice Chairman, EFAMA, Luxembourg

Interview: A view from the top 12.30 – 13.05 Maarten Slendebroek, Managing Director, BlackRock, London

Interviewer: Denise Voss, Conducting Officer, Franklin Templeton Investments, Luxembourg

11.05 – 11.45

Chairperson’s introduction José-Benjamin Longrée, Deputy CEO, CACEIS Group, Paris

Opening speech

Moderator: John Parkhouse, Partner, PricewaterhouseCoopers, Luxembourg

Chairperson’s wrap up

Panelists: Stuart Fross, Partner, K & L Gates, LLP, Boston

Lunch sponsored by

Stefan Seip, Director General, Bundesverband Investment und Asset Management e.V. (BVI), Frankfurt

09.20 – 09.50 Luc Frieden, Minister of Finance, Luxembourg Government, Luxembourg

13.05 – 13.10

13.10 – 14.20 Ernst & Young State Street Bank Luxembourg

Patrick Zurstrassen, Associate, The Directors’ Office, Luxembourg

Luxembourg – the future opportunities and challenges for investment funds

Fund distribution in Latin America – the practical realities

09.50 – 10.35

11.45 – 12.30

Moderator: Michael Ferguson, Partner, Asset Management Leader, Ernst & Young, Luxembourg

Moderator: Francisco Vidal, Senior Vice President, Financial Institutions, Latin America, Brown Brothers Harriman, New York

Panelists: Martyn Cuff, Managing Director, Allianz Global Investors Europe, Munich

Panelists: Leticia Costa, Head of International Distribution, BTG Pactual, Rio de Janeiro

Campbell Fleming, Head of Distribution, Threadneedle Asset Management, London

Steve Haswell, Senior Managing Director – Americas, MFS International, London

Jean-Marc Goy, Counsel for International Affairs, Commission de Surveillance du Secteur Financier, Luxembourg

Bill Pingleton, Managing Director, Franklin Templeton Investments, St. Petersburg

Jon Griffin, Managing Director, JP Morgan Asset Management Europe, Luxembourg Alexa Lam, Policy, China & Investment Products, Securities & Futures Commission, Hong Kong

Marc Raynaud, Chairman, BNP Paribas Investment Partners, Luxembourg

PAPERJAM | September-October 2010 | SPECIAL ALFI & NICSA FORUM

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Agenda Programme day 1 – Tuesday 28th September 2010 p.m.


Chairperson’s introduction 14.20 – 14.25 José-Benjamin Longrée, Deputy CEO, CACEIS Group, Paris

What you always wanted to know about “Endogenous Risk in Asset Management” but never dared to ask 14.25 – 15.00 Jean-Pierre Zigrand, Professor, London School of Economics, London

FATCA – current status of the regulation and what it could mean for the European fund industry 15.00 – 15.40 Moderator: Georges Bock, Partner, KPMG, Luxembourg Panelists: Roger Exwood, Director of Tax, iShares Europe, BlackRock, London Peter De Proft, Director General, EFAMA, Brussel

Refreshment break and visit of the exhibition area 15.40 – 16.10

T2S / Lux CSD: Simply new securities settlement plumbing or a tidal change in the fund industry? 16.10 – 16.55 Moderator: Olivier Maréchal, Partner, Banking Industry Leader, Deloitte, Luxembourg Panelists: Brenda Bol, Senior Vice President, Sales Investment Funds Services, Clearstream Banking, Luxembourg Jean-Michel Loehr, Chief Industry and Government Relations, RBC Dexia Investor Services, Luxembourg Bernard Simon, Vice President, Head of IT Department, Finesti, Luxembourg Pierre Thissen, Head of Market Infrastructure, Central Bank, Luxembourg

Global financial market structure – market dynamics and trends 16.55 – 17.25 Andrew Simpson, Head of Business Development, Depositary Trust & Clearing Corporation, London

Chairperson’s closing remarks 17.25 – 17.30

Cocktail reception sponsored by 17.45 – 19.30 PricewaterhouseCoopers Luxembourg

PAPERJAM | September-October 2010 | SPECIAL ALFI & NICSA FORUM

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Association Luxembourgeoise des Fonds d'Investissement

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9/7/10 9:41 AM


Agenda Programme day 2 – Wednesday 29th September 2010 a.m.


Registration & breakfast 08.15 – 09.00

Chairperson’s introduction 09.00 – 09.05 Rafik Fischer, Director General, Head of Global Investor Services, KBL European Private Bankers, Luxembourg

John Nugée, Senior Managing Director, Official Institutions Group, State Street Global Advisors, London Malcolm Small, Director, Centre for Retirement Reform, London

Refreshment break and visit of the exhibition area 10.45 – 11.15

Interview: 2011 – what are the regulatory challenges? 09.05 – 09.35 Simone Delcourt, Directeur, Commission de Surveillance du Secteur Financier, Luxembourg Interviewer: Dominic Hobson, Editor-in-Chief, Global Custodian, London

Investment products – the new landscape in Hong Kong 09.35 – 10.05 Alexa Lam, Policy, China & Investment Products, Securities & Futures Commission, Hong Kong

Funding retirement in Europe: Current trends and policy issues in European Pension Funds 10.05 – 10.45 Moderator: Gerd Gebhard, Director, PECOMA International, Luxembourg Panelists: Michael Atzwanger, Managing Director, Pensplan Centrum AF – SpA, Bolzano

Interview: A new generation of investment funds designed for today’s and tomorrow’s challenges – what’s here and what’s next 11.15 – 11.45 Matthias Liermann, Global Head of Fund Platforms db-X, Deutsche Bank, London Interviewer: Bernard Lhoest, Partner, Ernst & Young, Luxembourg

Life after Near Death – how the financial crisis is reshaping the investment industry, public policy and American politics 11.45 – 12.15 Paul David Schaeffer, President, ReFlow, San Francisco

Chairperson’s wrap up 12.15 – 12.20

Lunch hosted by 12.30 – 13.45 BNP Paribas Deloitte

Yoon Ng, Senior Analyst, Cerulli Associates, London

PAPERJAM | September-October 2010 | SPECIAL ALFI & NICSA FORUM

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Agenda Programme day 2 – Wednesday 29th September 2010 p.m.


Chairperson’s introduction 13.45 – 13.50 Rafik Fischer, Director General, Head of Global Investor Services, KBL European Private Bankers, Luxembourg

The business implications of regulation on distribution 14.30 – 15.15 Moderator: Mark Evans, Partner, PricewaterhouseCoopers, Luxembourg

Learning to talk about distribution networks – a revolution in how we make fund sales agreements, reconcile positions and pay commissions

Panelists: Henriette Bergh, Head of International Funds, Morgan Stanley Smith Barney, London

13.50 – 14.30

Lou Kiesch, Partner, Deloitte, Luxembourg

Moderator: Noel Fessey, Head of Fund Services, Schroder Investment Management (Luxembourg), Luxembourg Panelists: Vanessa Grueneklee, Head of Cross Border Client Operation Management, AXA Investment Managers Deutschland, Frankfurt am Main Benoît Durand, Head of the Client Service, Edmond de Rothschild Asset Management, Paris Dr. Dieter A. Grüninger, Legal Switzerland UBS Global Asset Management, UBS, Basel

Philip Warland, Head of Public Policy, Fidelity International, London

Refreshment break and visit of the exhibition area 15.15 – 15.45

Regulation matters to you 15.45 – 16.30 Moderator: Freddy Brausch, Co-Chair of ALFI’s Legal & Regulatory Committee and Partner, Linklaters LLP, Luxembourg

Slawomir Muszkatel, Senior Manager – TA Products, Metrosoft, New York

Panelists: Gilles Dusemon, Partner, Arendt & Medernach, Luxembourg Jacques Elvinger, Partner, Elvinger, Hoss & Prussen, Luxembourg Charles Muller, Deputy Director General, ALFI, Luxembourg

Chairperson’s closing remarks 16.30

PAPERJAM | September-October 2010 | SPECIAL ALFI & NICSA FORUM

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26 speakers

Theresa Hamacher, CFA, President, NICSA

Dodd-Frank Wall Street Reform and Consumer Protection Act

An enormous indirect impact The recent US Congress decisions will have a limited direct effect on the mutual fund industry, but many things will change…

Theresa Hamacher (text), Jules Julien (illustration)

In at least one very important respect, the US mutual fund industry has recovered from the credit crisis: asset levels have rebounded. The Investment Company Institute (ICI) reports that assets in US registered mutual funds were $10.7 trillion at the end of May 2010, compared to only $9.6 trillion at the end of 2008. That’s no surprise given the recovery in the US economy – which officially pulled out of recession in 2010. But the effects of the credit crisis linger on. While total fund assets are up from the lows, just like the market averages they remain below their pre-crash highs. And the number of funds cont­ inues to decline, falling to 7,618 in May 2009, down from 8,022 in December 2008, also according to the ICI. More cost-conscious fund sponsors are increasingly willing to close down funds that have not met profitability targets. Their caution is warranted, since the regulatory aftershocks of the credit crisis are still being felt. The U.S. Congress has only just weighed in, passing the Dodd-Frank Wall Street Reform and Consumer Protection Act in mid-July. While the legislation will

have a limited direct effect on the mutual fund industry, it will have an enormous indirect impact. The Act will change the way fund managers evaluate fixed income holdings, because it establishes new standards for oversight of credit rating agencies and for use of the ratings they provide. Fund operations will change because the new law encourages standardization of derivatives. The broker-dealers that distribute fund shares to the public will be subject to new – and tougher – standards of client care. And the legislation could change the competitive landscape in the U.S. significantly, because it requires that hedge fund managers register with the Securities and Exchange Commission. These newly-registered investment advisers might be more interested in managing mutual funds than they have in the past, especially since the Act also reduces the pool of potential hedge fund investors by raising net worth requirements. But it will be some time before the full extent of the legislation’s impact becomes clear. SEC actions, on the other hand, are already having a significant direct impact on the fund industry. Three categories of funds have been most affected:

Money market funds. To make it even less likely that a money market fund will “break the buck”, as the Reserve Fund did during the credit crisis, the SEC has imposed tougher investment restrictions on these funds. It is also contemplating more dramatic changes, such as mandating a floating NAV, replacing the stable $1 per share NAV that money market funds have now. The ICI is also examining the feasibility of establishing a “liquidity bank” that would provide a backstop for money market funds in periods of market disruption. Target date funds. The SEC has proposed that target date funds provide more information to consumers about their asset allocation policies. These funds have been very popular in retirement plans – but disappointed many investors in the credit crisis. They have an asset allocation that grows more conservative as the fund approaches its “target date” which roughly matches the planned retirement date of fund investors – but the allocations weren’t conservative enough for many investors nearing retirement. Exchange-traded funds. In March, the SEC announced a moratorium on approvals of new ETFs that use derivatives extensively in their investment strategies, after consumers complained about the performance of some of these leveraged and inverse ETFs experienced during the credit crisis. Trading in ETFs has come under scrutiny as a result of the “flash crash” in May, when the Dow Jones Industrial Average plunged by 1,000 points in a matter of minutes; over half the trades cancelled in the aftermath of that event involved ETFs. The SEC is also considering two proposals supported by ETFs sponsors who are eager to bring new offerings to market. One proposed rule would standardize and speed up the exemptive order process for launching new ETFs. The other would reduce concerns about front-running of activelymanaged ETFs by allowing these ETFs to provide summary statistics about a portion of their portfolio, rather than full details on holdings. If the SEC supports this proposal, there could be a surge in the number of active ETFs leading to even more rapid gains in this already fast-growing category of funds. Overall, the atmosphere in the US mutual fund industry is cautiously optimistic. Firms are planning for growth, but carefully monitoring regulatory developments.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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28 speakers

Jean-Pierre Zigrand, Professor, London School of Economics

Asset Management

Endogenous risk What you always wanted to know about it but never dared to ask… Jean-Pierre Zigrand (text), Jules Julien (illustration)

Financial crises are often accompanied by violent price changes. Such swings would be efficient if they were entirely driven by payoff related fundamental news, the first component of price movements. A large part of this volatility is however due to various feedback effects that arise entirely by the way the system is set up, the second component of price movements, labelled endogenous risk. Endogenous risk exhibits sudden and violent nonlinearities only at those pain points where the market capitalisation of financial institutions (FIs) is low. For long periods systemic risk is off investors’ minds and the financial markets are able to absorb risk and provide financing. But occasionally short and violent bouts of risk aversion sweep the markets during which the FIs’ apparent willingness to bear risk evaporates. The root cause is not that investors suddenly all together look right and left ten times before crossing the street, but because modern risk systems (say à la value-at-risk pushed by Basel II) lead to what is called the fallacy of composition: the overall system may be unsafe precisely because individual FIs act individually prudently. An analogy can be drawn with the wobbly Millennium bridge in London. A small gust of wind set the bridge to sway a tiny bit. Pedestrians crossing the bridge slightly adjusted their stance as a response, pushing the bridge further in the same direction. Provided sufficiently many pedestrians found themselves in the same situation, they spontane-

ously coordinated, acted in lockstep, and thereby reinforced the swaying. Even with the gust of wind gone, the bridge went on wobbling. Similarly, as financial conditions worsen following an initial negative piece of news, FIs suffer capital losses and an increase in perceived risk. These two effects lead through individually prudent risk rules and marking-to-market to an instantaneous and coordinated reduction in risk exposure. This in turn worsens financial conditions through further asset sales, closing the loop. Banks are hit as well, some doubly if they are short correlation, and in turn they are compelled to restrict credit, reinforcing the feedback loop from hell. There is even the risk that once more OTC derivatives are centrally cleared, such feedback effects become more institutionalised and pronounced still. This is why markets necessarily behave in a short-termist manner. Lessons for Asset Management

Endogenous risk can to some extent be reverse engineered. Since it unleashes the powers of hell on the downside but not on the upside, assets such as out of-the-money put options incorporate this asymmetry, and are therefore used by various asset managers as a way to express views on endogenous risk. One of the most insidious effects of endogenous risk on asset management is mediated through comovements. Correlations (or more generally dependence, linear or non-linear) between assets are of key importance to investors. Diversification

is often said to be the only free lunch. Well–meaning risk– sensitive constraints imply that in a downturn many FIs need to unload risk. By reducing their overall risky exposures they put downward pressure on all asset classes sold. This creates (additional) positive correlations and denies investors the diversification benefits they expected. A risk manager needs to understand that risk is not invariant under observation. Exogenous risk can be a useful and quite innocuous assumption in normal times with an acceptable level of biodiversity in markets since different beliefs and motivations cancel out to some extent. In times of crisis, beliefs, motivations and actions become much more uniform. The increase in comovements is larger the more similar the risk models of the various FIs, and the more similar the trading positions precrisis. The famous “Quant Meltdown” from 2007 can be understood in this light. Not only had many quant investment funds been following similar well-known strategies, but once the snowball was rolling downhill, the funds felt compelled to reduce risk by liquidating the same assets, increasing correlations and losses, which in turn meant they had to reduce risk even further etc. Endogenous risk can also wreak havoc to asset managers through delta-hedged short gamma derivatives. The events of October 1987 specify that feedback effects from synthetic delta–hedged puts embedded in portfolio insurance mandates were largely responsible for the vicious selling pressure. Similarly, while we may never be sure what exactly caused the “flash crash” of May 6th 2010, it is highly likely that endogenous risk in the form of program trades executed on behalf of algorithmic high frequency traders played a crucial role. Conclusion

Each financial crisis has its own peculiarities that make it look different and unique. But once the trigger is pulled, crises develop in much the same fashion. Delevering and the selling of risk imply that asset price movements increase manyfold through the feedback effects that are programmed into the financial system itself. The result is a natural combination of liquidity and solvency issues based on individually prudent but socially hurtful actions. Asset and risk managers need to work on third generation models that in-corporate such non­ linearities as well as the insight that by acting, they themselves will impact markets as one of a herd.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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30 speakers

Investment fund industry

Future challenges At the end of May 2010, the total assets of Luxembourg investment funds hovered around the 2 trillion mark,  a gain of 23% over the preceding 12 months. The total number of funds increased by 440 year on year.  Net subscriptions into Luxembourg UCITS were 112 billion during 2009. Michael Ferguson (text), Jules Julien (illustration)

EFAMA estimated total net assets in European investment funds at over 7.4 trillion at the end of March 2010, compared with 6 trillion at the end of March 2009. Net sales of UCITS over the 12 month period represented 150 billion – excluding money market funds, which saw substantial net redemptions, net subscriptions into UCITS reached 283 billion. In spite of this positive performance and lukewarm recovery of investor confidence, the asset management industry faces significant challenges going forward, on a number of fronts. Dealing with waves of regulatory reforms

The investment fund sector is grappling with both the opportunities and challenges of implementing various regulations including UCITS IV and gearing up for action as the Alternative Investment Fund Managers (AIFM) Directive crawls through the legal process. Each should have, over the near to medium term, a profound impact on both the European and the International investment fund industries. UCITS IV significantly enhances the harmonized European regime for investment funds. The AIFM Directive focuses on managers of products which are generally for professional investors, but may also be sold to retail investors. It covers the alternative sub-sectors such as hedge funds, real estate and private equity, but also traditional sectors where the funds are not registered as UCITS. We believe that both directives are firstly about strategy. With UCITS IV going live in July 2011, asset management groups are preparing to streamline and enhance their product ranges; boost cross-border distribution and optimize their operating models, reconsidering their service provider set-up. The AIFM Directive will drive similar restructuring in the non-UCITS space. The implementation of both directives will entail a substantial operational and compliance burden

even for those groups which do not take advantage of the opportunities offered by each directive. This is even larger if restructuring operations are envisaged. For example, the new standardized UCITS IV “key investor information” (KII) document needs to be supported by complete document management systems. UCITS master-feeder structures will be challenging to establish and run from operational and compliance perspectives. Then when one looks across at the AIFM Directive, it lays down requirements covering authorization, capital, functions and service providers, conduct of business, and transparency, the use of leverage and acquisition of controlling interests. The challenges for compliance teams do not stop here, however. The industry faces the challenge of complying with new requirements on remuneration, the utilization of ratings, future requirements on OTC derivatives and restrictions on short selling and enhancement of MiFID requirements to name a few. In the light of these new regulatory requirements, risk management is playing an ever more important role with the risk and compliance functions converging. The financial crisis highlighted that many risk management practices were severely wanting in account of pro-cyclical behavior, flawed incentive structures, weak and unchallenged assumptions, misunderstood correlations, “siloed” risk management and reporting structures and reliance on retrospective data models. The industry found itself overly reliant on ratings agencies, excessive leverage, and often overly complex products. Ernst & Young’s 2010 survey on risk management for asset management found that today there is much more focus on investment risk with risk function being embedded in the business, rather than as an “abstract” stand-alone function. The perception of the role of the risk function is changing from a risk monitoring function reactive to events towards a strategic enabler of the business.

We believe that the first challenge is to focus risk management on the material threats that can really damage the business and protecting and growing the business in a measureable way – risk management needs to operate at an enterprisewide level. Clarity of vision and purpose, and above all oversight of the risk function is critical. The second challenge is to set the risk appetite, which should be calibrated according to industry leading practices and the risk appetites of clients. The third challenge is to involve the risk function early in the product lifecycle to ensure that risk is priced appropriately. Meeting the future needs of investors

An enormous long-term challenge, but also opportunity, for investment funds lies in pensions. The issue of demographic ageing is well known and much discussed, but the financial crisis aggravated the pension problem by raising unemployment, lowering growth, increasing national debt and market volatility. In March 2010, EFAMA published a report outlining its recommendations to improve the provision of long-term savings in Europe. It suggests, for example, that governments should introduce long-term savings schemes, which are organized with employers, with automatic enrolment, and the best available tax benefits at national level to reduce opt-out by investors. It also suggests a simple personal retirement plan with consistent certification standards across Europe; insurers, banks or asset managers could be plan providers providing they meet the certification standards. The EFAMA paper will influence the debate launched in July 2010 by the European Commission on priorities for modernizing pension policy within the EU. The Commission’s paper focuses on pension adequacy and sustainability, a sustainable balance between work and retirement, removing obstacles to mobility in the EU and safer, more transparent pensions with better awareness and information. European households remain extremely conservative investors holding mainly in currency and

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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31 speakers

Michael Ferguson, EMEIA Regulated Funds and Luxembourg Asset Management Leader, Ernst & Young, Luxembourg

deposits. European households hold around 38% of their financial assets in currency and deposits compared with 17% in the US, and 11% in investment funds compared with 18% in the US and 35% in insurance and pension fund reserves compared with 40% in the US. Furthermore, European household savings ratios have remained stable or declined in recent years. One of the real challenges is, therefore, how investment funds, and UCITS in particular, may play a real role in “liability management” in order to meet the future pension needs of investors, and gain their trust as a long-term investment product. The second issue raised by EFAMA’s paper is the quality and transparency of activities at the point of sale. Suffering from higher regulatory requirements (and thus costs) compared to many other competing saving products, such as structured products, structured term deposits and unit-linked insurance products, the investment

fund industry has long been calling for a level playing field in terms of distribution standards which should apply across all retail investment product categories. The European Commission is currently working on legislative proposals on packaged retail investment products. The specific cost of distributing investment funds to investors – or more particularly, cost versus value-added – is becoming a key area of focus. While provisions of UCITS IV, and initiatives in certain countries such as RDR in the UK, attempt to tackle this, it is a fundamental issue which should be addressed in a much more pro-active manner at an EU level. Another issue which is crucial to the future of the investment fund industry is investor education. Much has been said, but more action is needed by the industry at national and at an EU level. Investor education (which should also cover those selling funds to investors) will ultimately

enable investors to make better informed decisions, avoid potential mis-selling, improve the quality of investment products offered and bridge the gaps in expectation between manufacturer, distributor and investor. Conclusion

Effective management teams are seeking to balance a range of complementary and competing goals as they navigate a new future for their companies. High performers are seeking to develop a broader and a deeper view of their current and future market opportunities, being more innovative in their strategy and structure than their competitors, pursuing and attaining greater speed in making and executing decisions to take advantage of their changing market, and broadening their understanding of risk in their market and from their actions, and tightening their execution and key support processes to mitigate that risk.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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32 speakers

Alexa Lam, Executive Director and Deputy Chief Executive Officer, Hong Kong Securities and Futures Commission

Investment Products

The new landscape in Hong Kong “As I write this, a number of weeks prior to the forum,  renminbi-related business is gaining momentum in Hong Kong...”

Alexa Lam (text), Jules Julien (illustration)

Policy changes and accommodations have been announced recently which expand upon existing RMB trade settlement and clearing arrangements, lift certain restrictions on RMB payments and transfers outside the Mainland of China (“Mainland”), and provide for the use of offshore RMB funds by eligible institutions to invest in the Mainland’s interbank bond market upon approval by the People’s Bank of China. The steps being taken by the central government to internationalise the currency are still gradual, but I believe that these latest changes are significant for the investment products world. So far, RMB settlements under the trade settlement programme account for only a small proportion of total trade between the Mainland and Hong Kong, but the monthly figures show that the amount is increasing. RMB deposits in Hong Kong are growing quite quickly, and stood at approximately 90 billion RMB as of the end of June 2010.

As far as the investment products world is concerned, the recent changes open the door for a much wider range of RMB-linked and RMBdenominated securities and financial products. They now permit institutional clients – as well as individuals – to open general RMB deposit accounts in Hong Kong, and facilitate RMB transactions and settlements by removing restrictions on transfers of RMB between accounts in Hong Kong. Indeed, many issuers and product providers have been quick to capitalise on opportunities so far. We are already seeing increased RMB-related issuances, both in the capital markets and in the investment products arena. Issuers are seeking to tap into the increasing amount of RMB held in Hong Kong, and the demand for RMB financial assets among an expanded number of potential end-users and investors. And financial institutions and investment product providers in particular are eyeing with interest the potential for additional quotas to permit RMB investments in Mainland markets.

These initiatives are important on a number of fronts, and I will discuss the developments in some more detail during my address at the forum. However, these are not the only changes affecting investment products in Hong Kong. During the last few months, we have made some major changes to the regime for authorisation of investment products and offer documents for distribution to the public in Hong Kong. We revised our codes covering investment funds and investment-linked assurance schemes, and we published a brand new code setting out our requirements in respect of unlisted structured products. We also revisited some of the obligations imposed on intermediaries in their dealings with their clients, and these affect the way investment products may be distributed through intermediaries in Hong Kong. The measures we adopted were the result of a broad-based and detailed review, and the relevant proposals were the subject of a public consultation last year. Our primary focus in proposing many of these measures was investor protection, although our belief was, and remains, that the requirements should be reasonable and appropriate and should allow scope for the market to develop. During the review and consultation process, we also took the opportunity to modernise certain parts of our regulatory codes, to delete outdated provisions and to allow for greater flexibility and scope in some areas where we felt it was justified, particularly for funds. I will highlight some of the main changes for you during my address. Finally, I note that international developments – as well as local and regional ones – have implications for Hong Kong’s financial markets. Hong Kong has an externally-oriented economy and open securities and futures markets. It is also an international asset management centre. As you know, Hong Kong is home to a large contingent of professional asset managers, and a large proportion of the funds managed by these firms are not domiciled in Hong Kong. Initiatives in other parts of the world such as UCITS IV, the recent financial reform measures enacted in the United States and the proposed Alternative Investment Fund Managers Directive will affect participants in Hong Kong’s markets too. I therefore look forward to discussions about some of these matters during the forum.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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02/09/10 17:52 09.09.2010 11:47:30 Uhr

34 speakers

After Lehman and Madoff

Fund governance in a changing world In the wake of the crisis and recent financial scandals, governance has once again become a key issue  for the broader financial world and for the fund industry in particular.

John Parkhouse (text), Jules Julien (illustration)

The crisis placed significant stress on the overall fund framework requiring many boards to become very actively involved in day to day valuation and liquidity issues, with some moving from a quarterly to a daily board calendar. In addition, firstly Lehman, and then more significantly the Madoff scandal, sent a system shock throughout the European fund world where we saw UCITS, as the gold-brand of the fund industry, being laid bare to the abuses of a US manager. Interestingly, out of all of the funds to be affected by Madoff around the world, none were US 40 Act funds which raises some questions as to how the regulatory system governing 40 Act funds effectively deterred the attention of Mr Madoff. In conjunction, other developments in the governance world were starting to make themselves felt - in particular, the introduction of the 8th Directive which introduced a requirement for all listed companies to adopt a formal code of conduct and state adherence to this in their annual report. As such, there are three key trends/developments impacting or which will likely impact the way in which the boards of funds operate today: - A re-assessment of the general functioning of the Board and its delegates as a result of lessons learnt from the crisis and questions arising over the Madoff scandal. - The need to formally adopt and approve a code of conduct by the board of listed funds. - The Green Paper consultation, which starts to paint a picture as to where fund governance may evolve to in the coming years. Lessons learnt

Valuation and Liquidity – The old adage of “what doesn’t kill you makes you stronger” was certainly felt by certain boards as we started to emerge from the depths of the crisis, probably in conjunction with a collective sigh of relief. The crisis brought extreme strains onto the fund model, ranging from

the open-ended UCITS world through money market funds, to many fund of fund vehicles. All these types of vehicles suffered from a combined impact not only of highly uncertain asset values but also of significant issues of liquidity, on both the asset and liability sides. As the markets dried up, investors took flight and many fund managers and boards were left with the conundrum of preserving liquidity for investors wishing to leave vs. protecting the interests of long-term investors. In addition to the more publicised instances of fund suspensions, side-pocketing and asset guarantees which were provided, this also led certain boards to rethink how the fund was being priced and whether this was really in the interests of long-term investors. In various instances, significant liquidity discounts were applied to the fund’s NAV with certain boards introducing a two-stage process to firstly consider what is fair-value and secondly to consider what discount would be needed to sell the position in the coming days, and if liquidity needs of the fund (i.e. redemption requests) required it, to apply such a discount. This could well, and at certain times did, lead to the same asset being priced differently in different funds an uncomfortable position for boards and managers to be in. As we now seem to be emerging from the crisis, many boards have returned to business as usual but have placed an increased focus on various points of pain in this area, namely: - Increased scrutiny of the valuation process and documentation supporting value assertions, ensuring liquidity factors are appropriately taken into account. - Increased focus on ensuring the board under stands the basic strategy of the fund and the risks associated with it; certain boards now pro vide an extremely robust screening process for the fund manager’s launch process. - More general focus on liquidity and protecting the interests of long-term investors as seen by the continued flow of players looking at, and ultimately introducing swing-pricing. Through

some studies made on PwC’s client base, the use of swing-pricing by larger cross-border play ers has almost tripled in the past 3 years. Custody of assets – what does it mean? – Lehman and then in particular Madoff brought the question of custody risk in the fund world into stark and highly publicised focus prompting a tirade of press commentary and inter-governmental spats. People familiar with the industry will be well aware of the ongoing debate which has emerged as a result of these events surrounding the role and commensurate liability of the funds custodian. Within the UCITS world, what this did was to focus the board’s collective attention on the role of their custodian and the limits or otherwise of their responsibility (and thus, on the flip side, the boards). For certain boards, this represented the first time ever where they had spent a significant amount of time engaging with the fund manager and the custodian on the basic fundamentals as to how different assets were safe-kept and supervised, how counterparty risk was being managed and what happened in the event of loss. Such discussions could become confrontational as custodians sought to explain the limits of what they did and could do to a board which had previously assumed their only risk in this area lay with the integrity of the custodian themselves (also a question asked by many boards). As the dust settles and we await the outcome of regulatory deliberations spearheaded by the AIFMD, there are a number of clear themes which can be observed in terms of board activity which are in any event to be welcomed: - As indicated previously, an open dialogue now exists between many boards and the custodian (as opposed to the administrator) whereby the risks inherent to the assets are explained and understood and the custodian’s role in managing those risks is explained. - In connection with the above, certain boards have asked for a detailed mapping of asset types indicating the safekeeping role undertaken by

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35 speakers

the custodian or (in the case of OTCs for example) the fund manager and how this is monitored and issues escalated. - In conjunction with the above, increased focus on other areas of custody risk such as securities lending and collateral management. Code of Conduct

In an effort to assist boards in meeting their obligations under the 8th Directive, ALFI issued a suggested code of conduct which could be used as a default for compliance. The ALFI code on first reading is fairly tame and seen by some as being too high-level and really just stating the obvious, “motherhood and apple-pie” is a phrase heard on various occasions. However, in performing the detailed mapping exercise which many boards have been asked to be done in readiness for required adherence, the code has highlighted some fairly fundamental questions around what the board actually does and what does it takes responsibility for and does signing up to the code actually increase their responsibility. Ultimately, many boards have now completed the mapping and required no fundamental changes as to how they operate or where they focus as a result – we already see certain funds start to formally adopt the code and state adherence in advance of the legal requirement which is still yet to be set. It has, however, been a valuable exercise to independently re-assess the proper functioning of the board and in certain instances fine-tune areas of focus. Whilst some critics remain, one would expect the majority of Luxembourg funds to adopt the ALFI code going forward. The Green Paper

Issued on June 2nd, the Commission has taken the first step in overhauling “Corporate Governance” within the financial services industry. The Green Paper introduces a core “spine” of five governance themes comprising supervisory authorities, boards, risk functions, shareholder

John Parkhouse, Partner, PwC Luxembourg

transparency and activism and, last but not least, the external auditor. In each of these areas, the Commission raises some premises and seeks consultation in order to better shape the future of governance in the Financial services area. One key challenge for the fund industry will be to ensure that the governance framework that is ultimately adopted reflects their unique nature as a highly regulated financial product with delegated functions to regulated institutions and is not, as was previously the case, simply a vague shoe-horning of corporate governance concepts and rules into the fund world. The fact that EFAMA has focused on governance as a key priority should be seen as a welcome step in the right direction of creating a true “Fund Governance” framework.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 17:44:42

36 speakers

Gerd Gebhard, Director, Pecoma International

Funding of retirement in Europe

Perspectives from 2010 to 2060 Analysis of the “Green Paper towards adequate, sustainable and safe European pension systems” recently published by the European Commission.

Gerd Gebhard (text), Jules Julien (illustration)

The European Commission has recently published its “Green Paper towards adequate, sustainable and safe European pension systems” (COM (2010) 365/3). This paper, in its own words, “launches a European debate… on the key challenges facing pension systems…” (p.3) – although it is in fact a necessary continuation of an ongoing debate. It is impossible to fully address the comprehensive analysis and the 14 questions raised by the Commission for public consultation (responses by interested parties are requested by 15 November 2010) here, but it is worth highlighting three issues arising from this paper, which have not been discussed widely before. Demographics – The paper reinforces the message that in the absence of changes in the pension system increasing longevity results either in lower pensions or higher contributions. The key measure, the old-age dependency ratio will double in the next fifty years from 2.5 to 1.25 workers per pensioner.

It further notes that an increase in the effective retirement age from 61 today (for the EU) to 67 by 2040 and to 70 by 2060 would keep the dependency ratio constant at about 2,5 workers per pensioner – provided that there are jobs for those older people! Fairness – Three important observations are made in the paper: - Many countries have already taken measures to improve the sustainability of the pension system, but more focus is now needed to ensure adequate income in retirement. - The economic and financial crisis puts further pressure on the public pension system through budgetary pressure. It also affects private pension provision through losses in the financial markets and expectation of lower returns in the future. - Current pensioners have been the least affected by the crisis, because their pensions, which are largely drawn from the public pension systems, have been protected. We would add that pensioners are benefitting from contributions currently being paid by the

post war baby-boom generation. These observations point to the next big debate in pensions: The issue of a “fair” sharing of resources between pensioners and workers. There needs to be a basic understanding in society whether pensions are intended to provide a minimum income for the retired, a reward for contributions paid to former generations or a statutory/contractual entitlement. It affects pay-as-you-go pensions systems directly, as they need to balance contributions and benefits in each period. It also affects funded pensions, albeit indirectly, because they are based on income from financial assets, which must be generated by the active population somewhere. Therefore the question is not only one of intergenerational fairness, but it moves straight into the thorny issue of intra-generational distribution of assets, i.e. the balance between wages, profits and taxation, as well as the question of funding other age-related costs, such as health care and long-term care. Private pension provision – The Green Paper is curiously unbalanced in the treatment of pension issues, probably reflecting the current state of the overall pension system in the EU, where retirement provision is essentially a matter for member states. Four questions relate to the macro issues of the structure of pensions overall, but ten questions then address very specific issues of longstanding EU initiatives on occupational and private pensions, including the usual suspects of portability, mobile workers, scope of the pension fund directive (directive on institutions for occupational retirement provision – IORP) and solvency of pension funds as well as new topics such as the introduction of pension tracking and statistical reporting at the EU level. The need for private retirement saving is underlined in the Green Paper and because these schemes are largely voluntary, the right balance between regulation and encouragement to save must be struck in this area. Particularly the subject of a better design for defi­ ned contribution plans (it is suggested that consideration be given moving from individual investment accounts to collective “hybrid” plans in the future) should provide an interesting debate in the aftermath of the financial and economic crisis.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 17:48:42












FOR US, IT’S CHILD’S PLAY Serving high-end institutional and private client investors in international real estate and private equity markets



Corporate Administration, Domiciliation,

Central Administration services for

Corporate Directorships, Accounting,

Luxembourg regulated risk capital

Consolidation and IFRS services for

(SICAR) and specialised investment

Luxembourg financial holding companies.

(SIF) vehicles.

1PPJ.indd 1

09.09.2010 12:43:43 Uhr

38 speakers


New compliance obligations for the Luxembourg fund industry In their quest to prevent tax evasion, the United States have enacted a new law which will require non-US financial institutions to disclose information regarding their US customers. The provisions of the new law are so broad that they will impact not only banks but also investment funds, brokerages, insurance companies and certain non-financial institutions.

Georges Bock (text), Jules Julien (illustration)

FATCA stands for “Foreign Account Tax Compliance Act” and refers to a major revamp of the US withholding tax system that imposes a new 30% withholding tax on certain US source payments made to the so-called Foreign Financial Institutions (FFIs) as well as to certain non-financial foreign entities. The law, which became effective on March 18, 2010, is the latest attempt by the US to crack down on tax evasion, which allegedly costs the American economy billions of dollars in unpaid revenues (it has been estimated that the provisions of the new law would prevent US individuals from evading $8.5 billion in US tax over the next ten years). Under FATCA, an FFI will need to enter into an agreement with the US Treasury to provide, on an annual basis, information about its US account holders. FFIs that refuse to enter into the agreement will suffer a 30% withholding tax on US source payments made by a US withholding agent. These payments would include US source dividends, interest, rents, salaries and also gross proceeds from the sale of any property that can produce US source interest or dividends. New obligations for financial institutions

Under this rather unilateralist approach to information reporting, FFIs that elect to enter into the program must adhere to the following obligations: - obtain information from each account holder to determine if such account is a US account - comply with the due diligence procedures in relation to US accounts - provide an annual report to the Treasury on any US account (containing the name, address, tax identification number, account number, account balance, etc.) - deduct and withhold 30% from certain payments made to the so-called recalcitrant US account

holders (i.e. those accounts for which the holder is not willing to provide sufficient information) - comply with information requests with respect to any US account - obtain a waiver of any foreign law that prevents disclosure of information with respect to account holders or close the account if the waiver is not obtained in a timely manner. Impacts on the fund industry

The scope of the new law is considered by many as extremely wide. Indeed, all kinds of funds (such as mutual funds, funds of funds, ETFs, hedge funds, private equity and venture capital funds, other managed funds, commodity pools and other investment vehicles) are to be treated as “financial institutions” and are thus covered by the new law. Investments in these funds are deemed to be “accounts” for purposes of the new law. In other words, a US investor investing in a Luxembourg fund is deemed to have a “US account” with an “FFI”. Funds that opt to enter into the FFI agreement would need to collect and report information for each US investor having an ownership interest in the fund, no matter how small that ownership interest is. Funds that opt not to enter the agreement will have to face a 30% withholding tax on US source income paid to the investment fund. Needless to say, the disclose-or-pay rule has the potential to give rise to a significant administrative burden for Luxembourg funds. But besides the administrative burden and the associated costs, it is questionable whether the new provisions are workable at all. One area of concern pointed out by the industry representatives relates to the practical difficulties funds will have to face in seeking to comply with the law especially given the usual distribution models for such funds. Indeed, in the vast majority of cases, funds are sold through various intermediaries who may themselves enter into further arrangements with

downstream distributors. In such a distribution chain, the identity of all ultimate beneficiaries is rarely known at the level of the fund. It is difficult to imagine how a fund whose units are simultaneously sold by a broker, several banks and insurance companies is going to collect information about each single investor in order to determine whether that investor is a US person or not. Another layer of difficulty is added for widelyheld investment funds whose investor base, which can comprise thousands of different investors, changes on a daily basis. A fund willing to comply with FATCA would thus need to keep track of all ownership changes. Ironing out the kinks

Although the law has already been enacted, it is important to note that the Treasury still has significant discretion on how it is going to be implemented. In this respect, the recently released IRS Notice 2010-60, which sets forth the general framework for implementing the law provides for a certain number of carve-outs. Specifically, the Notice suggests that certain investment vehicles may be excluded from FATCA if the investor base is considered as presenting low risk of evasion from US taxes (e.g. pension funds, sovereign wealth funds, etc.). Additionally, the Notice indicates that the Treasury and the IRS are currently considering exempting funds whose prospectuses contain restrictions on access to investment in such funds by US persons. Such selling restrictions already exist today for US regulatory purposes in certain investment funds. It is worth noting that the definition of “US person” for US regulatory purposes differs significantly from the definition foreseen in the US tax code and that steps should be undertaken in order to achieve harmonization in that respect. The Treasury and the IRS are also considering whether the investment funds that have a small number of individual investors should be excluded

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8/09/10 19:11:59

39 speakers

from FATCA, as the administrative burden for “small” FFIs may be disproportionate to the volume of US investments made by such FFIs. Notice 2010-60 further suggests that funds that have signed the FFI agreement and that are exclusively distributed through intermediaries that are themselves FFI compliant may not be required to report information to the Treasury. Indeed, in order to avoid duplicative reporting, only the FFI with the more direct relationship with the investor could be held responsible for information reporting. Finally, given the distribution models for funds in Europe and the technical difficulties to maintain investor documentation, it may not be excluded that the US Treasury will loosen the requirements for funds that cannot be exempted from FATCA, for instance by allowing funds to use the information already at their disposal under the applicable KYC rules. Additional regulations to be issued until the date of enactment of the law (January 1, 2013) will give further guidance on carve-outs and exemptions. Timing

FATCA rules will be generally effective for payments made on or after January 1, 2013. This will leave the US Treasury enough time to issue detailed guidance and regulations (planned as from next year). The timing seems, however, very ambitious when it comes to implementing the changes at the level of FFIs, as it is likely that significant modifications of IT systems will be required. Besides, it is questionable whether the US Treasury will have sufficient time to enter into withholding agreements with the FFIs. It has been estimated that in Europe alone, 75,000 potential FFIs could be impacted by FATCA. The figure is to be compared to approximately 5,500 financial institutions worldwide that initially entered the Qualified Intermediary Program (a similar, but somewhat less burdensome, reporting and tax

Georges Bock, Head of Tax, KPMG Luxembourg

withholding regime mainly applicable to non-US banks). When the QI regime entered into force back in 2001, the Internal Revenue Service faced a significant backlog in reviewing and approving various countries’ KYC regimes and entering into QI agreements with non-US financial institutions. Conclusion

FATCA will be a major challenge for the Luxembourg financial sector, and in particular for the investment management industry. Under FATCA, funds will have three basic choices: entering into the FFI agreement and disclosing information, refusing to enter into the agreement and suffering withholding tax or ending all investments that generate US source income. Whatever option is ultimately taken, funds will need to act quickly as the new regulations apply to payments made on or after January 1, 2013. It is therefore crucial that all interested parties, including fund promoters, transfer agents and distributors continue to monitor the changes and actively participate in the ongoing debate.

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 19:13:25


40 speakers

T2S / LuxCSD

Why securities settlement plumbing matters T2S has far reaching implications for the financial services industry in Luxembourg. All market players should take some time now to analyse its implications for their businesses and define a clear strategy for the future.

Olivier Maréchal (text), Jules Julien (illustration)

Of all domains of the financial services industry, the world of securities settlement is certainly one of the least glamorous as well as one of the least well known by the general public. Yet its importance should not be underestimated as it may well be a critical factor for the attractiveness of an economic area. Securities settlement infrastructure: so boring yet so important

Securities settlement is now at the epicenter of one of the largest infrastructure projects ever launched in the eurozone. By 2014 the European Central Bank will be operating a new central bank money securities settlement system named Target 2 Securities, closely interconnected with the existing cash settlement system Target 2. Why build a new infrastructure?

A simple look at a graphical representation of financial market infrastructures in Europe should suffice for anyone to understand the issue. Markets were built separately in each country with the objective to cater to the needs of domestic investors. Different systems were built, different market practices were adopted and international investors and asset servicing operators had to adjust to this patchwork European landscape. Despite the introduction of the Euro as a single currency for a number of EU countries, post-trade activities remained as they were before: fragmented along national lines. Cross border clearing and settlement is still more complicated and costly than domestic settlement (in a ratio of 10 to 1). From an EU standpoint, it was clearly an obstacle on the path to achieving the objectives of the Lisbon agenda. In order to solve the problem and remove some of what we have now come to call the “Giovanini barriers”, the European Central Bank decided to launch a project aimed at building a central bank money settlement public infrastructure. The objec-

tives are to harmonise Europe’s post-trade environment, reduce settlement costs and increase competition between the actors of the post-trade market. In the post T2S world, it should be possible to settle transactions executed on any Eurozone market through one account held with one CSD in one country, thereby generating significant cost savings for investors. T2S in a nutshell

T2S will not replace Central Securities Depositories (CSDs) as such. CSDs will outsource their settlement functions to T2S. It is only the exchange of ownership among investors that will happen on the T2S platform. Other important functions of the securities world such as custody, asset servicing and banking functions will not be covered by T2S. In a first phase, settlement on T2S will be limited to EUR denominated securities. Discussions are underway with other countries to allow settlement in other currencies (Swiss francs…). Securities eligible for T2S settlement should have the following characteristics: have an ISIN code as identifier, be fungible, and be held with a T2S connected CSD in book entry form. The benefits of the new platform include: - risk limitation through the use of central bank money (as opposed to traditional commercial bank money settlement), - autocollateralisation features (minimising the need for cash balances), - real time integration with Target 2, enabling better liquidity management. It is planned that some market participants will be allowed to connect directly to T2S. This will only be possible for very large international players. Already 28 CSDs from 26 European countries have signed a memorandum of understanding with the Eurosystem to participate in T2S. “Go live” is now planned for 2014. Tariffs for T2S services to CSDs are still being debated. Initially the ECB had announced that the target price for settlement would be 0.15 per transaction. Pricing will in fact depend on 2 fac-

tors: total project costs and volume of transactions. T2S is not for profit. Given the uncertainty around future settlement volumes, it is clearly difficult at this stage to predict what the actual price will eventually be. The objective of the initial announcement was certainly to put some pressure on settlement service providers by suggesting T2S would generate significant savings for investors. And for Luxembourg?

Access to T2S requires the existence of a national CSD. Luxembourg, although home to Clearstream, had no such institution. For our market, not having a gateway to this new infrastructure raised the spectre of seeing securities related activities be transferred to other locations. Given the amount of collateral pledged out of Luxembourg for central bank refinancing operations, it was not an option. After consultation with the financial services community, the Banque Centrale du Luxembourg (BCL) and Clearstream decided to set up a national CSD: “LuxCSD”, operated by Clearstream, that will go live in 2011. Ownership will be split equally between Cleastream and BCL. It will be possible, at a later stage, for users of LuxCSD to become shareholders also. Business as usual or a major change for the industry?

One may think that a system covering only a limited portion of the overall value chain in the securities business would only have limited impact. However counterintuitive this may sound, many are of the opposite opinion. Undeniably the competitive landscape will change. Let’s take CSDs and ICSDs (International Central Securities Depositories) first. These institutions that were operating in a situation of quasi monopoly will be impacted on multiple aspects of their business. They will have to invest in a connection to T2S and outsource part of their settlement engines to the new infrastructure. Their

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 19:15:44

41 speakers

margins will be under pressure as they will be constrained in their pricing policy by the official price list published by the ECB for settlement services. They will also face competition. As it will be possible to settle almost all EUR securities transactions through one CSD account in the T2S zone, international banks will have the opportunity to rationalise their network of relationships. We may see movements previously unknown in the CSD world: mergers and acquisitions to achieve better economies of scale or development of new service offerings to offset a potential revenue decrease. We could even see CSDs start competing with some of their clients. Impact assessment

Banks will also have to analyse available options to deal with changes induced by T2S. Doing nothing is always an option. Ultimately, settlement prices will decrease and banks should benefit from lower costs even without taking specific initiatives. However, it is highly likely that banks will rationalise their networks of subcustodians. Accessing the entire European market through one service provider should not be out of reach. There could also be an opportunity to centralise securities related operations in a limited number of locations. This aspect should not be overlooked, particularly for Luxembourg. It is both a threat and an opportunity for the financial market-place. T2S for funds?

Depending on the pace at which CSDs develop asset servicing capabilities, banks may also connect directly to a CSD instead of a custodian. At the other end of the spectrum, the larger players will certainly consider connecting directly to T2S to benefit directly from enhanced reporting functions. In any case, the opportunity for banks to reduce costs will be there, be it in custody, settlement, reconciliation or messaging. The impact on the fund industry is certainly more complex to assess. Although T2S was not

Olivier Maréchal, Partner-Banking Industry Leader, Deloitte, and member, ABBL securities committee

initially designed and set up for funds, fund shares/units will indeed be eligible for T2S. There could be a significant opportunity to reduce settlement costs associated with subscriptions and redemptions. Cross border distributions may become much easier, allowing transactions on multiple markets to be settled through one account with the result of reducing the number of required intermediaries. There are still a lot of uncertainties regarding for example the level of transparency that will result on fund shareholding or the implications of such an infrastructure for investor eligibility checks. Transfer agents certainly need to evaluate thoroughly the impact T2S will have on their business model. As we have seen T2S, although a pure infrastructure project, has far reaching implications for the financial services industry in Luxembourg. All market players should take some time now to analyse the implications of T2S for their businesses and define a clear strategy for the future. Three years to go before 2014 may not be as long as it looks...

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 19:17:08

42 speakers

Why regulate investment funds?

A few thoughts about “good” fund regulation On the occasion of this year’s ALFI–NICSA fall seminar we have been asked to give some thought to the question “why regulate investment funds?”*

Freddy Brausch (text), Jules Julien (illustration)

Hereafter a few modest thoughts on the subject. These are nothing but very general considerations on a subject that would certainly deserve more time and thought than just summary considerations. The subprime debacle, the Lehman breakdown and the Madoff disaster, together with a series of other unprecedented events – be it only by their magnitude – have been the starting point for an overall run towards more and “better” regulation. The G20 summit in spring 2009 confirmed what some – not so many actually – had been claiming: “We need more – and better – regulation of the financial markets.” A lot of ink has been spilled on the subject on both sides of the Atlantic. Legislative initiatives of quite some magnitude (see the AIFMD initiative in Europe, see the Volker rules, Dodd-Frank etc. in the US) are on their way, respectively under consideration. It all offers the opportunity to ask ourselves: What is actually the use of investment fund regulation? What is “good” fund regulation? What is the right balance between added cost and enhanced regulation? What is the right answer to the apparent tension between investor protection and the freedom of the professional to design a product and to place it with the investor? Under legal texts an investment fund is, roughly, defined as “a vehicle that collectively invests monies collected from the public on the basis of risk spreading and that allocates the benefits from such investments to the investor”. The legal definition does not say “a regulated vehicle”. Is product regulation a necessary feature? Is it an unavoidable feature?(1) It probably is. What is it that makes up the quality of a “good” investment fund? There is probably no single answer to this question. The quality and safety of an investment fund is the result of a series of elements, some more visible, some less visible at first sight. Regulation – there is no doubt about this – plays an essential role. In order to answer some of the questions raised above (i.e. “raison d’être” of fund regulation, proportionality, cost of regula-

tion), why not have a look at the value chain, particularly so at the front end (the fund set-up) and at the back end (the fund sale) of the chain. It all starts with the fund set-up. Often, a fund will be the result of the (it is hoped) bright investment idea of somebody who wishes to make available his idea and his management skills to investors in general, or to a targeted group of investors in particular. However brilliant an investment idea, whatever proven the skills, in order to allow the investment by a collectivity of individuals – hence, collective investment – one must wrap the investment idea and strategy into a form investors are prepared and able to apprehend (and we will not discuss the, sometimes uneven, level playing field among the several types of competing investment wrappers – i.e. certificates, insurance-linked – limiting ourselves for this purpose to the fund wrapper). One will have to opt from amongst a variety of available structures with features that are able to cope with the different investment needs the targeted investor(s) will have and with the taxation of the investor, notably. The fund will further have to be able to cope with the targeted eligible assets and their management, with investment limitations and risk management requirements. In one or another way, and in every respect, the rules and constraints applying to the fund will result from, and will have to be in line with, the applicable regulation that on one hand, defines the global playground, and on the other hand, provides the tools for asset managers to manage the collected monies. At the back-end of the value chain – which does not mean he comes last – comes the investor, the customer, the beneficiary for whom the fund is set up and who is supposed to benefit from the investment. The crucial word has been said: the customer. An investor entrusts his money to a third person whom he does not know necessarily, and who will acquire and dispose of financial assets using the investor’s money without asking for investor consent (save in specific situations). To be prepared to entrust his money to that person – instead of

keeping it in the cookie jar – the investor will have a certain number of expectations (i.e. yield enhancement, capital preservation) and require, respectively, to be entitled to a certain number of protections. The investor will wish to be in the (good) hands of a skilled professional. Regulation and the related supervision of the professional, though not a guarantee, should provide such comfort.(2) Investor expectations and the required level of protection will, at varying degrees, translate into several requirements, including beyond regulatory approval of the structure, somebody being prepared to take responsibility for the different parts of the puzzle and ongoing compliance with a complex set of rules. A basic but probably the most crucial condition to investor trust is that funds observe a set of pre-determined and comprehensive rules that exist within a legal framework that is binding, that is enforceable, that investors can rely on and that allows them to feel comfortable. As was the focus of the last ALFI conference in spring: it is all about the investor, investor protection and investor confidence. Funds don’t exist for the amusement of asset managers. The general cry for more and better regulation only mirrors what the investor community collectively expects, respectively deserves. Investors, to some extent, lost confidence in the financial markets and in certain actors on such markets. They are prepared to get back into the market if their expectations are met, only if they feel and are properly protected. Hence the call for better regulation – hence the call for better protection of the investor. Moving on, on to our value chain, how can the investor have comfort that he is being offered a well-conceived product that suits his needs? Here fund distribution comes in. Proper distribution (and proper advice that goes with it) is crucial to the investment funds market, as it is to regain investor trust. It is a sensitive issue. Investors expect proper information about a product, explanations on the features that

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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8/09/10 19:18:27

43 speakers

Freddy Brausch, Partner, Investment Management Group, Linklaters LLP, Luxembourg


Right from the beginning (i.e. the first fundspecific laws of 1983) Luxembourg made the choice to regulate each vehicle that bears the word and that operates as a “fund”. The 1985 UCITS Directive also regulates the product (as an exception to the overall legislative trend towards regulating the provider rather than the financial product). After the UCITS II failure, heated discussions took place on whether the product should actually continue to be regulated or whether the provider (i.e. the management company) should be? UCITS III opted for a continued regulation of the product while, at the same time, regulating the provider. AIFMD, in its present form, and though meant to regulate the provider,

are important to him, without getting lost in detail, though. The distributor is expected to know and understand his client’s needs and to assess properly what is a suitable, a good investment for him. That is all MiFID is about. No easy task. High quality distribution is of utmost importance. It is for the investor, for the distributor itself (in terms of professional liability) and for the investment fund product and market. Only an investor who understands the fund can be happy with his investment (beyond and in addition to performance). Hence the need to focus on distribution and common and clear criteria on investment advice and distribution. Again we’re back to the benefit of regulation. We have seen both ends of the value chain, namely the fund set-up and how to bring a fund to the investor. There is no need, for the purpose of this paper, to stress any further the importance of regulation at both ends of the value chain. Fund regulation is of course more than preapproval and distribution. It is also about the need to make sure, throughout the lifetime of a fund, that an agreed set of rules exists and is complied with. This is why fund regulation does not just regulate the fund, but why it imposes quality, organisational, infrastructural requirements on all the providers of services to the fund, on its manage-

ment company, its asset manager, its administrator, its custodian, and its auditors. All these requirements have one single purpose: to ensure that the service providers each perform their specific role and that investors can feel at ease, that they are protected and do not need to unnecessarily worry. Fund regulation is of course also about checks and balances. Every actor has its role to play in that respect. Finally, at the heart of the system there is the regulator. He will ensure that the legal framework is applied, that infringements are sanctioned and that investor trust is maintained. To come back to our initial question. Do we need fund regulation? Yes we do! What is good fund regulation? It is a multitude of different elements that make up a whole and that all interface. The chain will just be as strong as its weakest element – and actually the “fund chain” is a pretty long and pretty complex one. A last question then. What is it Luxembourg has to do to keep its prominent position in the global funds market? Luxembourg has to make sure all the elements of the chain are healthy, that they properly fit together and that the balance – in an increasingly complex environment – is right. Quite a challenge actually. As ever, a fascinating one, though.

has some non-negligible product regulation features in it. (2)

This is the topic of regulating and supervising asset managers and beyond them, typically as in Luxembourg, all the several service providers servicing a fund in one or another capacity (see the debates on the need to regulate all or only some kinds of asset managers: see the debate on the need to regulate and supervise all those whom form part of the value chain).

*This text was co-written with Silke Bernard, Managing Associate (Investment Management Group Linklaters LLP, Luxembourg)

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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44 picture report – flashback 2009

Jamie Hammond (Franklin Templeton Investment Management, Londres)

Gary Marshall (Aberdeen Asset Management, Londres)

Martin Walker (United Press International)

Martin Gilbert (Aberdeen Asset Management, Londres)

Britta Borneff (MDO Services)

Johan Lindberg (RBC Dexia Investor Services Bank)

Maik Alsleben (Stoxx)

Vincent Gouverneur (Deloitte)

Arnaud Wilmouth (BNP Paribas Securities Services)

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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45 picture report – flashback 2009

Ross Whitehill (BNY Mellon Asset Servicing, Londres)

Yves Lejeune (Société Générale)

Charles Muller (Alfi)


Flashback The previous ALFI/NICSA conference took place on 22 and 23 September 2009 in the Centre de Conférences in Luxembourg-Kirchberg. Etienne Delorme (photos) Retrouvez toutes les photos sur

Ayyaz Ahmad (Funds Partnership)

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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46 picture report – flashback 2009

Michael Ferguson (Ernst & Young)

Charles Beazley (Nikko Asset Management Europe, Londres)

Dominique Valschaerts (Finesti)

Jean-François Marlière (Korn/Ferry International)

KK Tse (State Street, Hong Kong)

Valérie Tixier (PricewaterhouseCoopers)

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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48 picture report – flashback 2009

Marcel Guilbout ( JPMorgan)

Martin Dobbins (State Street Bank, Luxembourg)

Saverio Fiorino (HSBC Securities Services Luxembourg)

Eammon Lennon (State Street Bank & Trust Company)

Phil Boland (B2 Hub)

Pascal Berichel (Société Générale Securities Services)

Nathalie Meyers (KPMG)

paperjam  | September-October 2010 | Special Alfi & nicsa Forum

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Inside Cover

Jules Julien This publication is a special supplement to the September-October 2010 edition of paperJam Director of publication Mike Koedinger

Editorial staff Editor in chief Jean-Michel Gaudron Coordination Jean-Michel Gaudron Copy editors Cynthia Schreiber, Pierre Sorlut, Helen Horder and Frédérique Moser Illustrations Jules Julien Layout

Advertising Phone (+352) 27 17 27 27 Fax (+352) 26 29 66 20 E-mail Web Key account manager Aurélio Angius Key account manager Francis Gasparotto Advertising account managers Simon Beot, Marilyn Baratto

Personalities cited A

Ahmad Ayyaz Alsleben Maik

44 44


Beazley Charles Berichel Pascal Bernard Silke Bock Georges Boland Phil Borneff Britta Brausch Freddy

44 44 42 38 44 44 42


Dobbins Martin



Ferguson Michael 30, 44 Fiorino Saverio 44 Frieden Luc 6



Hamacher Theresa Hammond Jamie


Kremer Claude


Lam Alexa Lejeune Yves Lennon Eammon Lindberg Johan


Maréchal Olivier Marlière Jean-François Marshall Gary Meyers Nathalie Muller Charles

Parkhouse John 36 44 44 44



Thommes Camille Tixier Valérie Tse KK

6 44 44


Valschaerts Dominique 44


Gebhard Gerd Gilbert Martin Gouverneur Vincent Guilbout Marcel

26 44


Seale Thomas

32 44 44 44

40 44 44 44 44


Walker Martin Whitehill Ross Wilmouth Arnaud


Yng Choi Ching


Zigrand Jean-Pierre

44 44 44





Publisher Phone (+352) 29 66 18 Fax (+352) 29 66 19 E-mail Web Postal address P.O. Box 728, L-2017 Luxembourg Office 10 rue des Gaulois, Luxembourg-Bonnevoie

© Editions Mike Koedinger S.A. (Luxembourg) All rights reserved. Any reproduction or ­translation, in whole or in part, without prior written permission by the editor is strictly prohibited.

Organisations cited A

ABBL 40 Aberdeen Asset Management, Londres 44 ALFI 3, 6, 34, 44


Jules Julien, 35, lives in Paris where he contributes to magazines (WAD, SOON, PREF, GRAZIA). After his first solo show at Tokyo’s Diesel Denim Gallery, he exposed again at the French embassy for the No Man’s Land exhibition and takes part in many international collective shows.

B2 Hub Bank of China Banque Centrale du Luxembourg BNP Paribas Securities Services BNY Mellon Asset Servicing, Londres


Clearstream CSSF




44 32 40


Finesti 44 Franklin Templeton Investment Management, Londres 44 Funds Partnership 44


Hong Kong Securities and Futures Commission 32 HSBC Securities Services Luxembourg 44

44 44

40 6

40, 44

EFAMA 6, 30, 34 Ernst & Young 44 Ernst & Young, Luxembourg 30 European Central Bank 40 European Commission 34, 36 European Fund Administration 3


Investment Company Institute


JP Morgan




Korn/Ferry International 44 KPMG 38, 44


Linklaters LLP, Luxembourg London School of Economics LuxCSD Luxflag

42 28 40 6


MDO Services



NICSA 26 Nikko Asset Management Europe, Londres 44


Pecoma International PricewaterhouseCoopers PwC Luxembourg

36 44 34


RBC Dexia Investor Services Bank


SEC Société Générale Société Générale Securities Services State Street Bank & Trust Company State Street Bank, Luxembourg State Street, Hong Kong Stoxx


26 44 44 44 44 44 44


United Press International


paperjam  | September-October 2010 | special Alfi & nicsa forum

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© 2010 KPMG S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Printed in Luxembourg.

It’s not about doing different things …

... it’s about doing things differently Transformation: The Future of Alternative Investments



Main contacts Audit Nathalie Dogniez Tel : +352 22 51 51 62 53

2009 up



Luxembourg Investment Funds

The Future of Alternative Investments FINANCIAL SERVICES

Withholding Tax Study 2009


Fill the glass to the brim Analysis of the tax implications of UCITS IV and the impact for funds operating cross-border

Georges Bock Tel : +352 22 51 51 55 22 Claude Poncelet Tel : +352 22 51 51 55 67

Feeling the heat? Alternative Investment Fund Managers Directive – Asset Managers Global Survey Februar y 2010


Luxembourg Investment Funds: Withholding Tax Study


Fill the glass to the brim UCITS IV tax implications

Gérard Laures Tel : +352 22 51 51 55 49 Advisory Vincent Heymans Tel : +352 22 51 51 79 17

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Corporate Finance services, including Financing, Debt Advisory and Valuation Services, are not performed by all KPMG member firms and are not offered by member firms in certain jurisdictions due to legal or regulatory constraints.

Feeling the heat: AIFMD Asset Managers Global Survey

© 2009 KPMG S.à r.l., a Luxembourg private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Luxembourg. KPMG and the KPMG logo are registered trademarks of KPMG International.

Investment Funds - Luxembourg GAAP compared to IFRS: An overview


Updated as

Investment funds financial statements


KPMG Executive Briefing UCITS in Luxembourg

KPMG contacts for UCITS in Luxembourg

Luxembourg GAAP compared to IFRS: An overview

John Li Partner, Chairman of the Supervisory Board Tel +352 22 51 51 6200

Nathalie Dogniez Partner Tel +352 22 51 51 6353

Ravi Beegun Partner Tel +352 22 51 51 6248

Georges Bock February 2010 Partner Tel +352 22 51 51 5522

Vincent Heymans Partner Tel +352 22 51 51 7917

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Claude Poncelet Partner Tel +352 22 51 51 5567

Jörg Roth Partner Tel +352 22 51 51 6344

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2009 KPMG S.à r.l., a Luxembourg private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Luxembourg. KPMG and the KPMG logo are registered trademarks of KPMG International.

An overview of the regulatory requirements


Updated as at 1 March 2010

KPMG Executive Briefing UCITS in Luxembourg Luxembourg Regulated Investment Vehicles (March 2010)

KPMG Executive Briefing - UCITS in Luxembourg

Karin Riehl Managing Partner Tel +352 22 51 51 6210

at 1 March 2010

Luxembourg Regulated Investment Vehicles

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UCITS IV - Which business model for tomorrow ?

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