The Newsletter | september 2012

Dossier East moving West the Chinese dimension It’s all in the name We few, we happy few, we band of brothers Japanese banks: worlds within worlds

KPMG The time is ripe for reform Brussels Confessions of a lobbyist Insurance Solvency II Music Rock me Amadeus The time is ripe for reform

LFF: International investors perceive Luxembourg has developed faster when it Luxembourg as a stable country. Has comes to specialised service providers, meet- it suffered a lot from the Eurozone’s ing every possible need of the industry. For- negative press? eign investors appreciate that they can buy a wide range of solutions that fit all their needs GB: The key success factor for us is the at competitive prices. following: can we, as a small country, still find a growing region in the world that is willing to do major business with us? If China is do- LFF: Why is Luxembourg competitive ing well it doesn’t mean much to juggernaut in this area? countries like the US and Germany; but if we GB: First of all, because we have a govern- can manage to attract business from China, ment that cares about the investment fund our economy prospers, even though the Euro­ industry and listens carefully to the needs of zone is in turmoil. By the way, Luxembourg its practitioners. Secondly, Luxembourg has is number one in Europe when it comes to achieved critical mass due, historically, to its attracting Chinese foreign investments. Un- first mover advantage in adopting the UCITS fortunately, if you travel to regions like Asia or Directives. Our success is certainly not due to Latin America, they see the whole Eurozone tax reasons, because a lot of European coun- Georges BOCK, as a catastrophe because of the bad news in ties don’t tax investment funds at all, while the press. We, as Europeans, can weigh up the Managing Partner, KPMG we have a minimal tax. Thirdly, we are a very debate around the future of the Eurozone and attractive competence centre for promoters measure its nuances, but from the outside, If Luxembourg wants to wishing to distribute investment funds glo- press coverage gives the impression that bally. If all the laws around the world on fund remain competitive, it has to every country wants to leave the Eurozone. distribution were to go up in smoke, one day, focus on high added value That is definitely not of help to Luxembourg. I believe that in Luxembourg we would be able service industries and pro- to reconstruct a good part of it because we LFF: Apart from its stability, what have people that are knowledgeable on every ceed to overdue structural are the particular assets that make aspect of that business around the world. Last reforms. This is the message Luxembourg attractive to foreign but not least, we have a regulator that has companies and investors? managed to preserve Luxembourg UCITS from of Georges Bock, who takes major turmoil, thus providing the Luxembourg over the helm as managing GB: There is no one size fits all answer to industry with a first class reputation around the question. Let’s take the fund industry and partner of KPMG Luxem- the globe, while remaining constantly open to the service sector that is linked to this indus- innovation and new developments. bourg on October 1st. He is try, such as the structuring of investments in private equity, real estate and hedge funds well aware of the country’s for example. Around the fund industry there LFF: You recently said in an interview traditional strengths, but is an entire, highly efficient service industry that Luxembourg was at a crossroads. he also sends a message to infrastructure, which includes domiciliation­ What challenges does the country face? companies, accountants, auditors, lawyers political decision makers to GB: A crisis is a catalyst for resolving long and all the other financial sector profession- standing structural problems in a society. undertake solid reform in als (PSF) that are needed in the framework The crisis started in 2008 and a lot of people order to prepare the country of reporting, communication of data, etc. thought that after a short rainy period the for coming generations.

KPMG | P. 2|3 sun would come out again. That was short LFF: Should Luxembourg join the small country like Luxembourg and that the sighted. The government hasn’t been able countries willing to sign a bilateral government will help its industry by clear- to convince the population of Luxembourg agreement with the US to exchange ing up, in bilateral negotiations, a number of that structural reforms in, for example, public FATCA information? complex issues that exist in a financial centre budget, pension and the social security sys- like ours that serves the world. tem need to be started to ensure that future GB: Qualified intermediary (Q.I.) was the generations still have the chance to be suc- first generation of FATCA. Right from the start, Luxembourg understood the key mes- LFF: In international media reports, cessful. One of the crucial questions to ask Luxembourg is, from time to time, is whether this country can be reformed. If sages of the Q.I. regime: the US was moving in the direction of making sure that it col- represented as a tax stealer. Where do you asked me the question right now, I would these clichés come from? be more likely to say no than yes. This crisis lected information about US taxpayers. If clearly shows that for the last twenty years we didn’t have these huge implementation GB: In the European Union and elsewhere Europe has lived beyond its means, because costs, FATCA would be close to a non-event. around the world there exists the principle of governments have spent more money than It is the industry, and to a certain degree the free establishment of business. It is clear they had. In the long run, our attitude in the non-US customers, that will have to pay that these rules, which are complicated, are Europe and in Luxembourg has to change in for US compliance. Though FATCA will not not easy for the average citizen to understand. order to prepare a sustainable future for our drive Luxembourg out of business, it is an It is easier to understand that if the state has children. Structural reforms are overdue. important issue for us because we have an huge budget deficits and a colossal public international financial centre. We cannot debt, then you need to find a scapegoat. It is afford to be a black spot on the FATCA map. always more popular to make somebody else LFF: So far, the 27 EU Member States An intergovernmental agreement could help responsible for your shortcomings than to have not reached an agreement on to make sure that Luxembourg is recognised admit one’s own mistakes, so that is where giving a mandate to the European for playing its role. the clichés on Luxembourg come from. Commission to open negotiations with so-called third countries on the taxa- The climate on international taxation be- tion on savings income. What would LFF: Is the government in charge of FATCA implementation, or the finance comes rougher at times when there are a an automatic exchange of information lot of governments with debt and deficits. mean for the Luxembourg financial industry? centre? GB: Both have to play their part. For the Luxembourg does nothing other than apply EU directives and that is, by the way, not optional GB: First of all the debate is mainly of rel- Government, the main question is whether as the European court of Justice constantly re- evance to the Private Banking industry, while Luxembourg should proceed to the signature minds certain EU Member States. Participation other banking activities and the fund industry of an intergovernmental agreement. If we exemptions, for instance, that are based on are not really concerned. It is also important can really be sure that implementation costs EU-directives, were not created to produce tax to point out that Luxembourg banks already will decrease by adopting such an agree- holidays but to avoid double taxation. Saying offer automatic exchange of information to ment, then the Luxembourg authorities will that we are stealing money maybe sells well, customers on request. Our three neighbour- sign a bilateral agreement with the US. I am but makes no sense. CW ing countries France, Belgium and Germany optimistic that there is something in it for a all apply a flat rate withholding tax system that gives their residents reasonable protec- tion against banks communicating personal data around. However, as soon as the same individuals cross the border, they would have to suffer automatic exchange. This is a far cry from equal treatment; it is discrimination by Georges Bock’s appointment as new Managing Partner of KPMG the system. As long as this situation persists, Luxembourg will be effective from 1 October, 2012. He started I do not feel comfortable with the automatic exchange of information, because the same with KPMG in 1991 as auditor and has been a Partner with the rules are not applied everywhere. As long as firm for 12 years. Mr Bock has led the tax department since 2009. we ensure a level playing field in the domestic He has been Global Chairman of the KPMG Funds Tax Network and cross border markets, I remain optimistic for the financial centre. since 2007. Confessions of a lobbyist

Antoine Kremer is Head of the EU Repre- Antoine Kremer’s work can be divided into sentative Office of ABBL (The Luxembourg three parts. Working on different dossiers, he Bankers’ Association) and ALFI (Association of does the groundwork before a particular issue the Luxembourg Fund Industry) in Brussels. becomes relevant. "The first part is cultivat- Together with a colleague, he represents Lux- ing the social network and maintaining the embourg’s financial industry. "The European network to the European Commission, the Commission appreciates lobbying in its pure Parliament, the Council and to the authorities, form as very useful, because the Commission like EBA (European Banking Authority), ESMA has a limited number of employees who cannot (European Securities and Markets Authority), always know what’s happening on the ground. EBF (European Banking Federation) and EFAMA Thus, they are happy to have practitioners who (European Fund and Asset Management Asso- are doing this job every day and know what’s ciation). The second part is monitoring. What going on", explains Kremer. "Lobbying is not is happening and what are the next projects only reserved for industry – the private sector, the Commission is preparing or is planning consumer associations and NGOs – everybody to prepare in the near future? If a legislative does it." procedure has been initiated, we observe what is happening where. In which direction does Lobbyists have to subscribe to the EU trans- the dossier go? Are we on the right track or do parency register in order to get an access we have to become increasingly active on a Antoine Kremer, badge to the European Parliament. At the certain point? The third phase is pure lobbying. Head of the EU same time, they sign a code of conduct that We talk to the officials in the Commission and Representative Office, ABBL condemns bribery and aggressive methods. the delegates or collaborators of the European ABBL and ALFI were two of the first associa- Parliament and the Council." According to the definition tions to subscribe to the register, where the of the European Commission, amount of money invested in lobbying and fields of interest are listed, among other "Lobbying is not only reserved lobbying means interest things. Around 5,500 lobbyists have already for industry – the private representation, be it govern- subscribed. As non-profit organisations, ABBL and ALFI do not have substantial budgets at sector, consumer associations mental, economic, private or their disposal. Only one other Luxembourg and NGOs – everybody does it." unspecified interests. A lob- association is represented in Brussels. Fedil, byist has to be open-minded the Luxembourg Business Federation, lobbies for the interests of the industry and construc- In the Council, Kremer’s first contact is the and sociable, maintain good tion sectors and service providers to those Luxembourg government, but also the other contacts with people and companies. countries whose interests are structured have a feeling for politics similarly to Luxembourg’s. These are mainly small countries. However, the big member – surely the most crucial states are crucial too, because of their vot- quality for a man or woman ing power, which gives them incomparably working in this profession. more influence. In terms of voting weight, the Grand Duchy, for instance, has four votes in the Council while Germany, as the largest

BRUSSELs | P. 4|5 member state, has 29. Last but not least, the have a direct impact on Luxembourg, even Council’s presidency has to be contacted. more direct than the directives that have "As a small country with few voices, we try to been implemented in the past. Currently, our convince with arguments, because this is the financial industry works well in this environ- only possibility we have, to explain why what ment. However, you have to keep a close eye we propose is best." on how the environment changes and adapt quickly, before the whole thing is already old The working groups and committees of the news; that is why monitoring is so important. two associations act as mediators for the We always try to represent a position that takes needs of the Luxembourg financial centre. into account the interests of Luxembourg, but "My contact persons are colleagues in our that is justifiable on the European level as well. Luxembourg headquarters. They are in direct Up to now, we have managed this balancing contact with the association’s members." act quite well." Luxembourg is widely known as the country with short communication paths. Kremer can "The member states have fewer sometimes benefit from the Luxembourg business mentality: "If I need a decision within funds and less tax revenues. a day, because a dossier has just arrived in Everybody wants to get a bigger the European Parliament, I consult the mat- ter directly with the chairman of the related slice of the cake." committee. But these are exceptional cases". On the European level, this is of course more As a consequence of the current economic complicated, but Kremer reveals that quick situation, the tone between member states decisions can be taken here, too, if needed. has become harsher: "The member states have fewer funds and less tax revenues. Every- body wants to get a bigger slice of the cake." "As a small country with few Despite these circumstances, Antoine Kremer voices, we try to convince with is satisfied with what he has achieved so far. Though the atmosphere has changed, Kremer arguments, because this is the is not changing his style. "Aggressive lobbying only possibility we have, to is an absolute no-go and counterproductive. explain why what we propose We saw this with AIFMD. Aggressive lobbying was useless then. European parliamentarians, is best." who had always lent an ear to the lobbyists, became angry. Another no-go is bringing Currently, everyone’s primary concern is the certain issues to the press in order to push the set of regulatory measures taken to strength- process. We work with what we have; in this en the stability of European and worldwide regard, I am very pragmatic." EK markets. "There are pieces of legislation that

"The European Commission appreciates lobbying in its pure form as very useful, because the Com- mission has a limited number of employees who cannot always know what’s happening on the ground. Thus, they are happy to have practitioners who are doing this job every day and know what’s going on." E aST mOVING West | the Chinese dimension

Dossier East moving West

the Chinese dimension Many Asian economies are growing, and there are huge opportunities LFF: What do you think about Asian fund markets in in the local financial markets. Not general? surprisingly, Asian asset managers : mF Asia is very diverse. You have the large, mature markets, domestically have plans to expand in their region focused, such as Japan and Australia. Then you have the outward- and beyond. In an interview with looking hubs such as Hong Kong and Singapore; lastly, there are the emerging giants of India and mainland China. If you look at the fact LFF, Michael Ferguson, Partner that these economies are growing significantly and there is obviously and Asset Management Leader at a growing middle class, you can see that there is going to be a need Ernst & Young Luxembourg, speaks to save for future pensions, health and education. We believe that the fund industry will be the basis for those future savings. about these plans, the role of Hong Kong and communication between LFF: International asset managers have different regulators. levels of engagement in Asia. How about the local asset managers? Do you think that they, too, are eager to expand in their own region? : mF Asian asset managers are aware of the huge potential in their local markets but they lack diversity of product and some sophisticated know-how. They have deep knowledge of the local Asian markets, but once you leave Asia, the depth and breadth of knowledge is somewhat more limited. As a result, we have seen several local Chinese, Indian and Singaporean asset managers set up products in places like Luxem- bourg, with the view of bringing their local Asian expertise to Europe and trying then to sell that product here in Europe and beyond – in Latin America and the Middle East.

Dossier East moving West | P. 6|7 LFF: What are the main factors driving the Chinese asset managers to expand abroad? LFF: Given of the challenges of increasing cross- : mF There are a few reasons. Diversification is one border sales in Asia Pacific, what distribution of them. If you are a Chinese asset manager strategies do you expect will emerge? you are only focused on Chinese asset classes and Chinese investors. There is a certain level : mF We see a number of different approaches. We see the banks continuing of pressure or guidance, call it what you will, to play a role; we also see the arrival of cross-border focused platforms, from a political point of view for you to diver- similar to the independent platforms you see here in Europe. When you sify. The other key driver is know-how. There is think about the cross-border challenges, you see what I call bilateral ar- an appetite to gain knowledge and know-how, rangements between individual countries more and more. For example, then to see how that can be used, either for Hong Kong allows Singapore funds and vice versa. We also see what further expansion in new markets, or to take I would describe as UCITS-type local regulation in Asia, meaning that that knowledge and know-how back to their they will take the best of the different UCITS platforms here in Europe local markets. and create something similar in Asia. An Asian UCITS would be desir- able for local Asian markets. However, given the fact that they are so diverse, it is going to take a very long time for that to become a reality. LFF: What role can Luxem- bourg and Europe play LFF: How do these asset managers develop their in order to attract access to the Chinese markets? Chinese investors and Chinese financial : mF At the moment, there is a focus on fixed-income with a lot of invest- ment in the so-called RMB bonds, which have experienced quite big institutions? growth over the last two years. The other areas that are growing in : mF We need to be conscious, when changing importance are exchange-traded funds (ETFs) and real estate; Chinese regulations around the fund industry, of what people, in particular, like to invest in real estate. There is obviously some the impact will be not only on the European concern around a potential bubble in that sector, but it is still attracting Union but also on regions like Asia. So there amazing amounts of money. The other area that is growing significantly needs to be greater communication with the is private equity. In many cases, they are joint ventures between local Asian regulators on some of the regulatory Chinese asset managers and European or American players. Asian asset changes that have occurred in the fund indus- managers are bringing the local connectivity and market knowledge; the try over recent years. But you will not be suc- foreign asset managers are bringing more technical know-how and the cessful by trying to do things from here. You infrastructure needed in order to reach this, broader and deeper market. have to be physically present in Asia, and not only once a year. If you look at the agenda of LFF: From an asset management perspective, what the Luxembourg Investment Fund Associa- role does Hong Kong play as a bridge between tion (ALFI), you will see that we have taken mainland China and the outside world? some steps in that respect with many, many road trips. We engaged with the regulators : mF In my experience, you don’t really see local Chinese asset managers and the main actors and we opened up an come directly from China to Europe to invest. It is more what I would office. We need to continue to focus on and call a "stepping-stone approach". First they go to Hong Kong, get regu- build on that relationship and enhance it. We lated with the SFC and begin operating there. They become familiar with also want to make sure that, given everything a more international, Western-focused world, build up a certain level that has happened since the beginning of the of know-how and then they use Hong Kong and their locally-regulated crisis in 2008, investor protection is at the entities to look outwards. First, they expand into the broader Asian forefront. We also need to be conscious about markets such as Singapore and Taiwan; and particularly, over the last cost. We can have regulatory changes, but few years, they have been using Hong Kong as their launching pad into we must make sure that they have some real Western Europe. That is the pattern that I have seen them adopt when added value – that it is not regulation for the they come to places like Luxembourg. sake of regulation. CW E aST mOVING West | It’s all in the name

"Recalling the events of the early 1970s, Luxembourg was rapidly growing as a financial centre. The Soviet Union, in turn, was develop- ing its banking presence in Europe and was represented in almost all major European cities, with the exception of the Benelux countries. Hence, opening a bank in Luxembourg was an obvious decision." Sergey Ladygin, Head of Customer Desk at EWUB explains.

Dossier East moving West

It’s all in the name East West United Bank S.A. - also known by its acronym EWUB - is EWUB has the status of a Luxembourg bank with a full banking licence. the only bank with Russian capi- Nowadays the major shareholder of the bank is JSFC "Sistema", Russia’s larg- tal out of 142 banks domiciled in est diversified financial corporation. EWUB is part of Sistema’s banking group together with JSC "MTS bank", one of the largest private banks in Russia. Luxembourg. It was founded in the Grand Duchy in 1974 and, since Strategic decisions for the Luxembourg bank are not necessarily taken in Russia. then, has become an indispensable Members of the Board of Directors are located in both Moscow and Luxem- bourg. "The place where board meetings are held itself is not decisive in this case. part of the Luxembourg banking It is important that all the decisions are collegial, and comply with the general community. business development strategy."

A different model While many banks in Russia are focused on offering services for the retail sec- tor, EWUB has focused its efforts on the development of private banking and corporate banking services as a "boutique bank". "Our target groups are high- net-worth individuals and corporate clients from Russia and CIS (the Common- wealth of Independent States) countries. Russian customers can use Luxembourg products and services, which are difficult to access directly from Russia. We also work with a network of legal and tax advisors who can help our clients to structure investments and assist in opening and administrating their companies. Another important factor for Russian clients is the professional secrecy law in Luxembourg. At the same time, due to the globalisation of business, the bank can offer its services to European companies interested in entering the Russian market", says Ladygin.

Dossier East moving West | P. 8|9 All EWUB employees are multilingual, as it is important to speak the language of the clients. "We have highly-qualified Russian-speaking specialists in different departments. At the same time, our staff speaks all the major European languag- es and is able to assist our European clients who are establishing economic rela- "The place where board meetings tions with Russia. The name of the bank truly represents the meaning of its activity are held itself is not decisive in this – we act as a "bridge" between the East and the West, and will continue to work case. It is important that all the in this direction. However, finding good specialists in the Grand Duchy is not easy as there are many financial institutions in Luxembourg constantly recruiting highly decisions are collegial, and comply qualified professionals, and, in addition, there are few candidates specialised in with the general business develop- our services as a boutique bank", reveals Ladygin. ment strategy." "Another important factor for Russian clients is the professional secrecy law in Luxembourg. At the same "For example, in the morning you time, due to the globalisation of business, the bank can meet a client in Luxembourg can offer its services to European companies interested and then have another meeting in entering the Russian market." in Brussels or Paris in the afternoon. It would be impossible to even Given the large difference in size between the two countries, working in Lux- think about having such a schedule embourg has advantages that are unimaginable in Russia: "For example, in the morning you can meet a client in Luxembourg and then have another meeting say, in Moscow." in Brussels or Paris in the afternoon. It would be impossible to even think about having such a schedule in, say, Moscow."

The place to be Despite the economic crisis, Luxembourg has a very positive image in Russia as a place to do business. "Decades of expertise in the area of private banking and corporate finance have had a positive impact on the speed and the quality of services provided", Ladygin explains. "Due to the special legislative system and the possibility of structuring various favourable tax regimes, Luxembourg is considered a unique place to do business."

"Decades of expertise in the area of private banking and corporate finance have had a positive impact on the speed and the quality of services provided."

However, the perception of the economic situation in the European Union by Russian citizens is slightly uncertain. "There is too much misleading information from different media sources. The uncertainty makes people nervous and forces them to make hasty and often incorrect decisions, especially when it comes to personal savings management. Traditionally, Russian people prefer to keep a significant amount of their personal assets in foreign currency, and the choice between the dollar and the euro is usually a difficult one." Ladygin is convinced that the combined efforts of the European Central Bank and national govern- ments will soon bear fruit and as a consequence Russian investors will have more confidence in the euro again. EK E aST mOVING West | We few, we happy few, we band of brothers

Dossier East moving West

We few, we happy few, we band of brothers In his leisure time, he writes books about Shakespeare and theatre Diplomatic ties between Luxembourg and Japan have existed since 1927. The reviews. One of the first things he close relationship between the Grand Ducal family of Luxembourg and the did on arriving in Luxembourg was Japanese Emperor’s family is the foundation of this relationship. Before the establishment of the Japanese embassy in Luxembourg, in 1996, the Japanese to visit René Weis, Professor at the ambassador to Belgium was delegated to the Grand Duchy. In terms of eco- University College of London (UCL), nomic ties, Mr Nishigahiro believes that there are further efforts to be made. "200 million US dollars’ worth of goods are currently exported from Luxembourg renowned author of a Shakespeare to Japan. On the other hand, about 60 million US dollars’ worth of goods are biography, and... a native of Luxem- imported. We are mostly exporting electronic equipment and the main item bourg. I am referring, of course, to imported from Luxembourg is unwoven fabrics." H.E. Wataru Nishigahiro, Japanese ambassador to Luxembourg. After an "Japanese are coming here as individuals, but they tend eventful year in 2011, when he had to live close to each other. Since most workplaces are in to be flown out of Libya, his former Luxembourg City, about 95% are living in the city and its official residence, and the earth- surroundings." quake in his home country of Japan, About 470 Japanese nationals currently live in Luxembourg. At first sight, this Mr Nishigahiro took up his duties in number may not seem very high, but compared to much larger countries like Luxembourg in June 2012. Having India, where only 1,200 Japanese citizens live, it is quite impressive. "Japanese worked for the Japanese Ministry of are very much addicted to the preservation of nature, that’s what they appreciate here. We like the surrounding of hills and green landscapes in Luxembourg. Also, Foreign Affairs since 1974, he is an the location of the country in the heart of Europe is very favourable. Everything is expert in the diplomatic field. within two hours’ driving distance; if you take a flight, it’s only one hour."

Dossier East moving West | P. 10|11 The Japanese community in Luxembourg is not yet very organised. Besides the annual International Bazaar, where Japanese residents have a booth to represent their country, Japanese women recently founded a ladies’ association in Luxem- bourg. "The Japanese come here as individuals, but they tend to live close to each other. Since most workplaces are in Luxembourg City, about 95% live in the city and its surrounding area", continues the Ambassador. The majority of Japanese expatriates work for one of the five major Japanese banks represented in Lux- embourg. Their children attend the International School, where they can take lessons in English. In 1991, a Japanese supplementary school was established in Luxembourg, where kids can attend two weekly classes to study in their mother H.E. Wataru Nisgh hi a iro, tongue. Japanese Ambassador to Luxembourg

"Japanese are very much addicted to the preservation "200 million US dollars’ of nature, that’s what they appreciate it here. We like worth of goods are currently the surrounding of hills and green landscapes in Luxem- exported from Luxembourg bourg. Also, the location of the country in the heart of to Japan. On the other hand, Europe is very favourable. Everything is within two hours’ about 60 million US dollars’ driving distance; if you take a flight, it’s only one hour." worth of goods are impor- ted. We are mostly exporting "The biggest challenge here, of course, is the language", the Ambassador admits. electronic equipment and "In our country, everything is done in Japanese and for many Japanese it is already a burden to speak English. In Luxembourg, everybody has to understand French the main item imported from and the newspapers are either in German or in French." This mixture of languages Luxembourg is unwoven somehow discourages Japanese expatriates from working in the manufacturing fabrics." sector, where English is less common.

"In our country, everything is done in Japanese and for many Japanese it is already a burden to speak English. In Luxembourg, everybody has to understand French and the newspapers are either in German or in French."

When ambassador Nishigahiro’s term in Luxembourg ends, in three years, and he packs his bags once again to move to another city, it will be his 18th relocation. As a man of culture and taste, he will probably miss the quality of food available in Luxembourg. As he says, "even in a small village, you can find a superb restau- rant – it’s surprising. The variety and quality of food that you find in supermarkets is quite impressive. Supermarkets are much better stocked than some of the ones in New York or in London". Yet another area, it seems, in which Luxembourg can keep up with bigger cities. EK E aST mOVING West | Japanese banks: worlds within worlds

Dossier East moving West

Japanese banks: worlds within worlds The Luxembourg financial centre is already a fairly tight-knit com- Five of the largest Japanese global banks are present in Luxembourg and they munity: physical juxtaposition in a have a large footprint: both Mitsubishi UFJ Global Custody and Mizuho Trust & Banking employ over one hundred staff and Nomura Bank just under 300. small city, combined with dozens SMBC Nikko Bank employs 78 and only Sumitomo Mitsui Trust Bank is smaller, of professional associations and at around 20. Furthermore, they have been around for a long time. working groups, mean that it is a world in which everybody knows In Luxembourg, all five banks do fund administration and fund custody. The dif- ference lies in the focus of their client base, some, like Nikko, servicing a large everybody else. So it would surprise in-house asset management business and others offering what is principally a many people to know that there is third party service. This can be limited to custody work (like Sumitomo) or it a world within this world: the com- can be the full value chain from asset management to distribution (like Nikko). munity of Japanese bankers. Nomura has developed an integrated service for third party fund promoters, taking care of all that lies between the asset manager and distribution. As part of a network that reports to the European headquarters in London, Nomura Luxembourg also does securities lending, treasury services and forex dealing alongside corporate custody, clearing and security agency services.

Mitsubishi belongs to one of Japan’s largest trust banks. The company has a network of correspondent banks in 90 countries, including many of its own branches and subsidiaries. The Luxembourg office is one of three global cus- tody centres (along with Tokyo, New York and London) that, like Nomura, offer securities lending and forex.

Dossier East moving West | P. 12|13 Founded in 2000, Mizuho is the youngest of the five but is in fact the result of a merger between four former (Japanese) entities with a network covering 50 markets. In addition to third party fund custody and administration, the bank offers security agency services and is the first Japanese institution appointed by Euroclear and Clearstream as their Common Depositary.

Nikko, which focuses on the core services of fund custody and fund admin- istration, stands out for the size of its in-house customers. The company has a thriving asset management business and the Luxembourg bank enjoyed growth of 24% in assets under administration in the year to 31 March 2011. The company attributes this to "high levels of subscriptions" in six new invest- ment funds launched that year, remarking on a "growing demand by Japanese investors for diversified investment possibilities". The contrast with Europe in 2010 is startling.

The companies are not loquacious on the advantages or disadvantages of Luxembourg. However, combining a word here and a phrase there, there is a consensus that "(skill in) languages including Japanese" (Mizuho), and "world- class expertise" (Mitsubishi) at international custody and portfolio adminis- tration work are important factors. All this adds up to "a favourable business environment" (Nikko).

It is even harder to learn whether Japanese staff enjoy living and working in Luxembourg. Like many other communities, Japanese staff employed at the five banks see a lot of each other socially. Professionally, four of the five banks are members of at least one industry working group and most are members of several. The Japanese banks have a reputation for rigorous attendance "but their members are very discreet", comments a fellow member. Like everybody else, the Japanese banks also employ a great many local residents and cross-border com- muters from the neighbouring markets of Belgium, Germany and France. ER

Established in Luxembourg Mitsubishi UFJ Global Custody SA 1974

SMBC Nikko Bank (Luxembourg) SA 1974

Sumitomo Mitsui Trust Bank 1985 (Luxembourg) SA Nomura Bank (Luxembourg) SA 1990

Mizuho Trust & Banking 2000 (Luxembourg) SA Solvency II

The Solvency II Directive (2009/138/EC) Pillar I sets qualitative and quantitative has been around since 2009 and will not be requirements for calculation of technical pro- implemented until 1 January 2014. With visions and Solvency Capital Requirements 15 months still to go, the directive with a (SCR). Henceforward, technical provisions will name like a scary movie continues to gener- represent the current amount that the(re) ate heated discussion. What are the issues? insurance company would have to pay for an immediate transfer of its obligations to a The europa.eu website is a good place to third party. The SCR requires the (re)insurer start, where 44 Frequently Asked Questions to hold enough capital to meet all its liabili- await the interested reader. It all make perfect ties even in the event of a financial calamity sense on paper. At risk of over-simplifying a that has only a 0.5% chance of occurring in complex evolutionary process, the story runs any year. as follows. At the same time, tougher stress tests on In the 1990s, when the third generation asset valuation ("value at risk" models) will of insurance directives established an "EU force many companies to rethink their asset passport", many Member States took the allocation model. Given the higher capital view that the rules were too light and set charge of "risky" investments, insurance standards of their own, thus undermining the companies will have to weigh up whether principle of the single market. In response to the higher returns on any given investment this, Solvency I (2002) laid down a common remain attractive after the capital charge. risk management system. However, a number Equities are likely to become unpopular, of key risks were not captured, including mar- especially where expected returns do not ket risk, credit risk and operational risk. justify the higher risk. However, a full retreat A brief look at the new to sovereign bond issues could mean that Solvency II reflects new risk management regulatory regime for EU insurance companies find themselves with a practices that have evolved in the industry. funding gap. Asset classes likely to become insurance companies It forces insurers to hold capital in proportion popular include fixed income and real assets. to the riskiness of their investments and to Real estate debt is an example: if the loan to be more transparent on what those invest- value ratio is less than 65%, insurers will be ments are. able to treat it as risk free: that is, there will The Solvency II framework has three "pillars": be no capital charge. As a consequence, asset quantitative requirements, governance & risk management mandates may start to focus on management requirements and disclosure & absolute returns, allowing fund managers the transparency rules. freedom they need to avoid certain sectors.

As always, the devil is in the detail. All three Pillars II and III are equally challenging. pillars have been challenged for different Christian Eilert, member of the Executive reasons by different sectors of the industry. Committee of ACA, the Luxembourg insur- ance company association, comments that the Luxembourg Insurance industry shares the original goals of the Directive. "However we have noted the overwhelming number of

insurance | P. 14|15 "However we have noted the overwhelming number of quantitative and qualitative requirements. As a result, compliance will become even more burdensome, especially for small to mid-sized com- panies which, on top, often lack the necessary highly skilled em- ployees such as specially trained actuaries."

The objectives of Solvency II "This will lead to additional To reduce the risk that an insurer will not meet its claims overhead investment. To reduce policyholder losses in the case of insolvency Compliance has a cost and, To provide an early warning system for supervisors ultimately, it will have to be To promote confidence in the financial stability of the borne by someone." insurance sector

quantitative and qualitative requirements. As the Taxation of Savings’ Directive, PRIPS, IMD2, a result, compliance will become even more and FATCA* - to name but a few," continues burdensome, especially for small to mid- Mr Eilert. "This will lead to additional overhead sized companies which, on top, often lack the investment. Compliance has a cost and, ulti- necessary highly skilled employees such as mately, it will have to be borne by someone." specially trained actuaries." The combined effect of all this is that insur- "This is all the more important ance savings plans are likely to cost more and yield less and some guaranteed products may because the sector will shortly present a funding problem. Annuity plans, be compelled to comply with popular in the UK, will pay out lower incomes at a time when the shift towards defined a number of other challenging contribution occupational pension plans European and international ini- makes annuities more necessary. Faced with tiatives, such as the Taxation of lower incomes, there is a risk that retirees will start taking greater risks with their retirement Savings’ Directive, Prips/IMD2, income, or that there will be widespread and FATCA - to name but a few." poverty.

ACA hopes that the principle of proportional- With so much at stake, commercially and ity will be taken into account by those cur- socially, the debate has been heated. When rently drafting the Solvency 2 implementa- the time comes, however, it is likely that tion measures. "This is all the more important the effect of true cross-border competition because the sector will shortly be compelled will stimulate financial services companies to comply with a number of other challenging to make the best of it. As they have always European and international initiatives, such as done before. ER

* PRIPS: UK regulation on Packaged Retail Investment Products; IMD2: the second Insurance Mediation Directive; FATCA: the US Foreign Account Tax compliance Act. Rock me Amadeus

The Philharmonie was opened in 2005 on Den Atelier was a dream come true for its Of the various cultural the Kirchberg plateau, among the European creators, the two Luxembourger music lovers Institutions and close to the banking centre, Laurent Loschetter and Petz Bartz. Located in branches in Luxembourg, and soon became the most renowned con- the pulsating station quarter of Luxembourg the music scene is the most cert hall of its type in the Greater Region and City, it is known as the "venue with the stage far beyond. As a public institution, it partly in the corner". Since 1995, Loschetter and vibrant. With the two major benefits from public support. Its impressive Bartz were already organising parties and a concert halls, the "Philhar- appearance was designed by the French ar­ few concerts in the venue. Over time, they monie" and "den Atelier", chitect Christian de Portzamparc, who has professionalised their passion by opening a also left his footprints in New York, Paris and concert hall. Since then, crowd pullers as well there is something for every Berlin. Residence of the Luxembourg Philhar- as newcomers have passed the mic to each taste. Famous artists like monic Orchestra, it has the perfect condi- other. Roughly 40% of visitors of den Atelier, the Chinese pianist Lang tions for high-quality entertainment. and around 25% of the visitors of the Philhar- monie originate from the Greater Region. Lang have performed at the Philharmonie, while at den Atelier, bands like Depeche Mode or Placebo come and go. Two completely different venues, with vastly differ- ent programmes ranging from classical to rock music, they share the same ulti- mate goal: to offer visitors a musical experience they will never forget.

MUSIC | P. 16|17 is much more interesting to engage a popu- lar artist and to sell tickets and make people happy here in Luxembourg, than to offer some- thing for an elite group of only 100 people."

Naske agrees that a concert hall thrives on its relation to its audience and thus responds to its wishes. "But it is not a musical juke box either; it’s more subtle than that. We evalu- ate every event and draw conclusions on the programming, but always on the premise of outstanding artistic quality."

Right VENUE, right place For both venues, competition within Lux- embourg is limited. For Naske, the main challenge is the preconception by people that they have nothing to do with music or concerts. "Everybody who has been lucky enough to experience a successful concert, of whatever genre, will experience incomparable quality. The direct and focused exchange with (live) music is an adventure that addresses all the senses and brings happiness and deep

© Dan Thuy Dan © emotions into life. Musicality and knowledge about music can be helpful, but the conditions for an exhilarating experience at a concert are openness and active percipience of what is happening." Insight the scene Michel Welter, responsible for programming at den Atelier, provides an insight into his Since its foundation, both the Philharmonie work: "The music scene is much smaller than "It is important that the artist and den Atelier have managed to build up an one would expect. We are in touch with music is happy when he leaves and impressive network of renowned artists. "It agents, and of these, there aren’t many. World- is a range of factors that affect the destiny of wide, there are perhaps 100 to 150 agents that that he has the impression: "this a cultural institution", Matthias Naske, Director represent the big artists. We managed to build concert was awesome!" We love General of the Philharmonie explains. "But up our network with the consistency and reli- our work and do it with passion without any doubt, strong dedication by locals ability that characterise our work. We welcome to culture, and the cultural events on offer, every artist with passion and joy. It is important and, of course, this is reflected form the basis of further success. The quality of that the artist is happy when he leaves and in the implementation." the architecture and acoustics is of importance that he has the impression: "this concert was as well. After these criteria, the quality of artistic awesome!" We love our work and do it with planning, service and communication then passion and, of course, this is reflected in the For den Atelier, the opening of another, big- come into play as major factors." implementation." ger, concert hall in the South of Luxembourg in 2005, the Rockhal, actually had a posi- Asked about the choice and the quality of tive effect on programming. "All of a sudden artists performing in den Atelier, Welter we could engage artists that for production "It is a range of factors that answers: "We don’t like talking about the reasons or from their commercial potential affect the destiny of a cultural quality of artists, but of their potential to fill couldn’t perform at den Atelier. Our venue institution." the hall. Quality is completely subjective. Of is just too small for the stage shows of some course, we have our opinion and sometimes we artists, but now we can book the big hall of the choose based on our own preferences. But it Rockhal in order to organise concerts there." DIARY

UPCOMING LFF events

Economic and Financial Mission Despite the difficult economic situation for to Latin America cultural institutions, Naske is convinced that quality will always succeed. Partnerships > 15 - 19 OCTober 2012 | Latin America with the financial sector, for instance, help to sustain a high-quality programme. "Our The mission will be led by H.E. Luc Frieden, Minister of Finance. partnerships are characterised by substan- LFF is organising financial seminars in Mexico City, Sao Paulo tial contributions to the funding of single and Rio de Janeiro. In Mexico, the seminar is organised with artistically outstanding concerts and primarily the kind support of ProMexico. The seminars will showcase serve the occurrence of the event and not the the wealth management and investment fund industries in distribution of tickets." Luxembourg.

"Our partnerships are characterised by substantial contributions to the funding of single artistically Financial Seminar in Paris outstanding concerts and primarily serve the > vb14 No em er 2012 | Paris occurrence of the event and not the distribution In the presence of H.E. Luc Frieden, Minister of Finance. This of tickets." conference is organised by Luxembourg for Finance in coopera- tion with Paris EUROPLACE. This event will be held at Salons As a private institution, den Atelier relies on Hoche. A roundtable discussion will be held in the morning, at structural partners that support the venue on which experts will debate the current situation in Europe. In a long-term basis. However, they live on ticket the afternoon, workshops will be held on Insurance, Investment sales. "Luxembourg is a bit special. Recently, the Funds and Support PSF. increase in ticket prices exceeded inflation. We were forced to recognise that cheaper tickets sell better. We pay attention to that. However this year, there is no longer a profit margin on Financial Seminar in Milan ticket prices." > b5 DECEm er 2012 | Milan Though music is a tough business, it is pas- sionate people like Michel Welter and the Luxembourg for Finance will hold seminars on the wealth team at den Atelier that make Luxembourg management and investment fund industries. This event is taking and the Greater Region benefit from its cul- place at the Hotel Principe di Savoia. Further details to follow. tural institutions and contribute to the high quality of local life. Matthias Naske from the Philharmonie would agree: "Luxembourg is a wonderful place for music". EK > For further information, visit our website: www.luxembourgforfinance.lu

MUSIC | P. 18|19 Luxembourg. We’re fluent in finance... and we speak your language.

Economic and Financial Mission to Latin America > 15 - 19 October 2012 | Latin America

The mission will be led by H.E. Luc Frieden, Minister of Finance. LFF is organising financial seminars in Mexico City, Sao Paulo and Rio de Janeiro. In Mexico, the seminar is organised with the kind support of ProMexico. The seminars will showcase the wealth management and investment fund industries in Luxembourg.

Financial Seminar in Paris > 14 November 2012 | Paris

In the presence of H.E. Luc Frieden, Minister of Finance. This conference is organised by Luxembourg for Finance in coopera- tion with Paris EUROPLACE. This event will be held at Salons Hoche. A roundtable discussion will be held in the morning, at which experts will debate the current situation in Europe. In the afternoon, workshops will be held on Insurance, Investment Funds and Support PSF. The multilingual, multi-skilled executives in Luxembourg’s finance sector are ready to greet you. Over 75% of finance workers are foreign residents or cross-border commuters, Financial Seminar in Milan so new arrivals quickly feel at home. Both stable and > 5 December 2012 | Milan dynamic, Luxembourg is open for business. Luxembourg for Finance will hold seminars on the wealth management and investment fund industries. This event is taking place at the Hotel Principe di Savoia. Further details to follow.

> For further information, visit our website: www.luxembourgforfinance.lu Agency for the Development of the Financial Centre 12 Rue Erasme, P.O. Box 904, L-2019 Luxembourg www.luxembourgforfinance.lu Tel: (+352) 27 20 21 1 Fax (+352) 27 20 21 399 Email l‰@l‰.lu LIFESTYLE

Sonny Rollins > 08 november Deep > 08 november & Band Purple > Philharmonie > Den Atelier In November 2012 you will have the rare Deep Purple operates on fresh cycles of opportunity to experience one of the true jazz adrenalin. Purple has moved progressively legends live. Born in Harlem in 1930, the mu- into new areas, piquing the interest of fans sical partner of Thelonious Monk, Miles Davis, who were not even born when the mighty John Coltrane, Clifford Brown, Max Roach and Purple machine ruled the music world. Over many other jazz greats, Sonny Rollins will be the years, Deep Purple has been more than in coming with his quintet to the Philharmonie. synch with fans’ tastes to remain a powerful drawing force since their formation in 1968. www.philharmonie.lu Purple, version 2012, is intense, full of fire, wit, and passion… and marked by serious virtuosity, but never a slave to it. www.atelier.lu

Bach > 18 november meets Fats Waller > Philharmonie with The eternal enfant terrible of the violin returns with "Bach meets Waller", building Nigel Kennedy a daring bridge between baroque and jazz – a technical and artistic challenge which promises "a truly memorable night" (London Jazz).

www.philharmonie.lu

Night of > 29 november Atelier > 13 OCT. 2012 - 24 FEB. 2013 the Proms Luxembourg > d’Coque > MUDAM For its 2012 tour, Night of the Proms is proud The Venice With Atelier Luxembourg, five musical institu- to confirm the participation of Mick Hucknall biennale tions of Luxembourg join forces during the from Simply Red, Anastacia, Jupiter Jones and 2012-2013 season to provide an overview of Naturally 7! These internationally-renowned projects artistic creation in Luxembourg from 1945 artists are accompanied by the Il Novecento 1988-2011 until now. This wide panorama relives the orchestra, conducted by Robert Groslot, the struggles of newcomers living in a country for Electric Band and John Miles, true spearheads a long time, situated in the margins of domi- and columns of the "Night of the Proms" con- nating artists, but whom since the nineties, cept, which combines classical music with pop. have found their place in the European artistic development. The exposition Atelier Luxem- www.coque.lu bourg - The Venice Biennial Projects 1988-2011 takes a retrospective look at projects realised since 1988 for the Luxembourg pavilion at the Venice Biennale. Also, it reflects in depth the considerable development of the Luxembourg artistic scene in the last 25 years. www.mudam.lu

Impressum Editor: Luxembourg for Finance • 12, rue Erasme • B.P. 904 • L-2019 Luxembourg • Tel. (+352) 27 20 21 1 • Fax (+352) 27 20 21 399 • Email [email protected] Responsible for publication: Jean-Jacques Picard. Editorial Team: Elisabeth Kugel (EK), Eleanor de Rosmorduc (ER), Christian Welter (CW). Circulation: 6,500 – quarterly. Photos: all rights reserved