Malta Special Supplement Cover_. 10/12/2010 15:54 Page 2

POSITIONING FUND ADMINISTRATION FOR NEW BUSINESS

MALTA: THE NEW FINANCIAL HUB

The global ambitions of Malta Stock Exchange

Assessing the benefits

to fund managers

The new private equity domicile

   

VLT1063 - Malta | info@financemalta.org | tel. +356 2122 4525 | fax. +356 2144 9212 MALTA’S COMPETITIVE EDGE            

        !!!!!!

Malta Special Supplement Cover_. 10/12/2010 15:54 Page 3 Malta Special Supplement_. 10/12/2010 15:44 Page 1

CONTENTS

FEATURES

THE NEW FINANCIAL HUB ...... Page 2 Kenneth Farrugia, chairman of Finance Malta, writes on Europe’s new financial gateway. Around 12% of the Maltese GDP is related to financial and administrative services, with the government hoping to raise this figure to a quarter of the nation’s GDP by 2015. Despite some internal stresses, the next years promise to be a challenging one with continued, robust growth.

MALTA’S FINANCIAL APPEAL ...... Page 4 London’s Global Financial Services Index (2010) has hailed Malta as one of the five financial centres to grow in importance over the coming years. In the light of impending regulation in Europe and the US, fund investors and managers are carefully evaluating the jurisdiction of their choice. Charles Azzopardi, managing director, HSBC Securities Services (Malta) Ltd outlines the opportunities this country can offer as a feasible alternative financial centre.

MALTA’S ONSHORE APPEAL TO FUND MANAGEMENT ...... Page 8 The real growth driver in Malta is, and will be in the forseeable future, the alternative investment fund area, says Dr David Griscti, head partner and founder of the law firm David Griscti & Associates. Although hedge funds have been the most popular, the country has also set up funds in a variety of alternative asset classes, including private equity, property, commodities, alternative energy and even art.

PUNCHING ABOBE ITS WEIGHT ...... Page 12 Since its accession to the European Union six years ago, and the adoption of the euro in 2008, Malta’s profile as an onshore jurisdiction has been firmly established. According to the latest 2010 Global Financial Centre Index, the island is one of the top three centres financial centres most likely to succeed, along with Dubai and Shanghai. Lynn Strongin Dodds explains how this small country is building up the financial muscle to be able to compete with the big boys.

MSE AIMS TO BE A GLOBAL PLAYER ...... Page 16 The Malta Stock Exchange (MSE) intends to capitalise on its position in league tables with the objective of internationalising and promoting itself to investors as well as insurers. Eileen Muscat, chief executive of the MSE, says: “We see ourselves as acting as a gateway for issuers from non-European countries to tap into a European investor base and vice versa.”

THE NEW PE DOMICILE ...... Page 19 The uncertainty created by the AIFM Directive together with the changes which are expected to occur to the European regulatory landscape have encouraged private equity funds to seek alternative onshore domiciles to what has traditionally been an offshore industry. Now Malta is setting out its stall as a natural home for the private equity segment. Steve Paris, head of Financial Services at Deloitte and Dr Andre Zerafa, partner, Ganado and Associates, Advocates outline the advantages.

MORE FOR MORE ...... Page 21 The evolution of financial markets and how specific regions react is one of the more interesting observations one can make today. What makes one location more appealing than the next? Why do new centres emerge and others fade and why are some enduring and what will happen in the future? The criteria that define these trends evolve in response to market conditions and also as reactions to successes and failures in the response to these drivers. By Mark Hedderman, chief operating officer, Custom House.

A SUPPLEMENT TO FTSE GLOBAL MARKETS • DECEMBER 2010 / JANUARY 2011 1 Malta Special Supplement_. 10/12/2010 15:44 Page 2 MALTAREPORT:

Finance and related administrative services account for around 12% of Malta’s GDP, with the government aiming to build this segment to around a quarter of GDP by 2015. The financial sector’s gross value added in nominal terms grew by a rather respectable 22% last year and net financial inflows have contributed substantially to the contraction in the country’s long standing current account deficit. Over the decade, Malta has distinguished itself as a cost effective, serious and




adaptable jurisdiction in the field of financial services, backed by The Investment Services Act, 1994 and a robust regulatory environment, overseen by the Malta Financial Services Authority (MFSA). EUROPE’S NEW FINANCIALGATEWAYNEW EUROPE’S 2011 promises to be a challenging year, though the jurisdiction expects continued robust growth,



despite some internal stresses. By Kenneth Farrugia, chairman, Finance Malta. THE NEW FINANCIAL HUB

OR MALTA, THE recession has proved short and shallow, with a peak-to-trough decline in GDP of 3.4%, as against F5.3% in the euro area. While GDP contracted by 2.1% in 2009, it rebounded to a very positive 4% in the first half of 2010, which suggests, says the central bank, the outturn for the full year could top 3%, driven by brisk export activity and a strong accumulation of inventories. The country has been relatively inured to the vagaries of the global recession, for good reasons. The first is the government’s commitment to diversifying the economy towards high value services, which have proved resilient to the downturn impacting the rest of Europe. Two, the jurisdiction is emerging as a natural fund domicile. Figures released by the MFSA indicate a 13% growth in the Net Asset Value (NAV) of investment funds domiciled in Malta during the first six months of 2010, confirming a same trend seen in the second half of 2009. Total NAV at the Kenneth Farrugia, chairman, Finance Malta. Photograph kindly end of June stood at €7.93bn (up from €6bn at the height of the supplied by Finance Malta, November 2010. crisis in June 2009). The strongest expansion is in the Professional Investor Fund (PIF) segment, despite the restructuring that notches from the previous report. Moreover, Malta itself has has been taking place in this area to reflect changes in investor moved into 11th position in financial market development. appetite. All 51 funds licensed by the MFSA in the first six Admittedly not everything is rosy. A continued weakness months of 2010 were PIFs, bringing the total of PIFs in Malta is the slow growth in productivity and private consumption, to 331. UCITS funds in comparison stood still at 45, while the which has undermined economic performance in recent number of non-UCITS stood at 33, three down on December years. The public sector also remains relatively over-manned. 2009. Another 26 overseas funds are authorised to be retailed Additionally, too few people in Malta participate in the formal in Malta. Out of 104 Schemes into which the funds are grouped, labour market (55%), compared to the rest of Europe (65%),












72 are multi-fund structures, 20 are stand-alone funds and 12 with the activity rate among women and older workers













are Master/Feeder structures. Diversified funds were the largest particularly low.



asset category, accounting for almost 51% of all the locally Not all the issues are domestic. Given continued strains in based funds. Equity funds were the second most common the global economy Malta can only expect modest growth in














category with a share of 19% of the total number of funds export markets in the near term, particularly as the Eurozone












while derivative funds accounted for 12%. is expected to grow a mere 1.5% in 2011.














However, the government has acted fast. Aside from


Malta’s stable financial sector also remains a key strength,










albeit, as a banking centre Malta’s credentials are perforce introducing new work incentives, a restructuring of the pension















modest, with total banking assets as at the end of 2009 standing system is in hand, thereby boosting incomes in retirement, at a tip over €41bn. Substantially liquid, Malta’s banks have and encouraging private saving to close the saving/investment










however avoided the toxic shocks which have rocked the gap. While the continued repercussions of the financial crisis will




industry just about everywhere else; instead they have taken a continue its low level impact on the country’s domestic growth largely old-fashioned approach, preferring to act as intermediaries statistics, Malta’s stable appeal as a fund management centre between retail borrowers and depositors. According to the continues apace and the jurisdiction expects 2011 to provide a World Economic Forum’s Competitiveness Index 2010-2011, the new raft of funds utilising the jurisdictions robust regulatory











soundness of Maltese banks is now ranked 10th globally, up two environment, market flexibility and low cost services. I

2 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS

1 0 18:20 Malta Special Supplement_. 10/12/2010 15:44 Page 3

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Sparkasse Bank Malta plc is authorised to conduct Banking business and to conduct Investment Services business by the Malta Financial Services Authority (MFSA).

18:20 Malta Special Supplement_. 10/12/2010 15:44 Page 4 MALTAREPORT:

Charles Azzopardi, managing director, THE MED’S HSBC Securities Services (Malta) Ltd. Photograph kindly supplied by HSBC ATTRACTIVE Malta, November 2010. AN EMERGING FINANCIALHUB EMERGING AN ALTERNATIVE

Malta has a new status in financial circles as it Central European Time (CET) zone—a somewhat emerges as a sought after and reputable underestimated yet quite important factor. international financial services centre. Hailed Favourable fiscal and tax considerations including by the City of London’s Global Financial exemptions from tax and stamp duties at both fund and Services Index (2010) as one of the five investor levels, together with potential benefits from Malta’s extensive tax treaty network with over 50 countries, add to financial centres to grow in importance over the jurisdiction’s appeal. Equally, it offers other no less the coming years, the island is carving a niche important benefits, such as a unique culture, rich in historical for itself in the global funds industry. In the treasures, an enviable Mediterranean climate and a socially light of impending regulation in both Europe enjoyable and secure environment. and the US, fund investors and managers are This compelling package is increasingly attracting the evaluating ever more carefully the jurisdiction attention of fund investors and managers, particularly at a time of their choice. In the emerging new financial when the pressure for a higher level of supervision, order, Malta is regarded as a feasible transparency, reporting and organisational requirements is alternative financial centre. Charles Azzopardi, increasing. On the banking front some 25 licensed credit managing director, HSBC Securities Services institutions have already established operations in Malta of (Malta) Limited outlines the opportunities. which 20 are EU-country based. An October 2010 survey The future of manager migration, HAT MAKES MALTA so attractive? Malta, as a fund servicing and domiciliation in the Mediterranean: The jurisdiction, has been firmly placed on the map of alternative to Ireland & Luxembourg? carried out by the Wfinancial centres within the European Union. It London-based International Fund Investment Limited, has a number of attractions which include a robust yet underscores Malta’s growing appeal and a salient trend for dynamic legal and regulatory environment with an funds to re-domicile to onshore jurisdictions with independent judiciary, where innovation is encouraged. It comprehensive yet flexible legislation. Some 76% of also has the benefit of a single regulator, the Malta Financial participants interviewed in the survey acknowledge that Services Authority (MFSA), which is very approachable and Malta offers significant potential as a base for their funds or committed to providing an expeditious and prompt service to open an office, while the majority of investors (83%) are to new fund applications. aware that Malta is becoming a sought after alternative to The island also offers political and economic stability. Malta Ireland and Luxembourg. When asked if they would consider joined the EU in 2004 and adopted the euro as its national relocating funds to Malta or Gibraltar as an alternative to currency in 2008. It has emerged from the financial crisis Luxembourg or Ireland, 18% said they are looking at moving virtually unscathed and, in spite of the economic downturn, funds to Malta or Gibraltar while a further 26% are open to was one of the best performing EU countries with above plan the idea, particularly if these locations continue to offer GDP growth; in fact, Malta was one of two EU countries that fund servicing on the same level as Ireland or Luxembourg managed to reduce its deficit in 2009. Despite the global but at lower costs. recession, the financial services industry in Malta grew by 22% When questioned about their views on the regulatory last year, and employment in the sector rose to almost 7,000. environment in the Mediterranean domiciles, all those Malta offers a well developed infrastructure, a skilled and respondents who visited the Malta Financial Services Authority sophisticated work pool and service providers with excellent had positive comments to make about the proactive approach language skills. Moreover, its infrastructure and work pool are that the Maltese regulator has taken. One manager said that also competitively priced. Skilled labour, professional fees this was “Malta’s biggest selling point”. When asked if investors and excellent office space with relatively low rents, are cost have any views on the quality of fund service provision in competitive, especially when compared to other EU the Mediterranean domiciles, one interviewee said that he was jurisdictions. Malta provides good telecommunications and aware of the fact that several international fund administrators air/sea transportation links with a high usage of Information had recently launched offices in Malta and regarded this as Communication Technology (ICT). Malta is also within the a positive step for the country.

4 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS

1 2 10:46:21 Malta Special Supplement_. 10/12/2010 15:45 Page 5

Step ahead.

What is the significance of Deloitte becoming the world’s largest professional services firm? In all honesty, we believe very little. Our focus is on helping our clients establish, define and achieve their vision so that they can step ahead with confidence in all aspects of their business. And our aim has always been, and will always be, to put our clients first.

At Deloitte we have a dedicated team of individuals specialised in providing assurance, advisory and tax services to companies operating in the investment services sector. For more information on how we can help, please contact Steve Paris at [email protected] or Andrew Manduca at [email protected] or visit ww.deloitte.com/mt

© 2010 Deloitte

Malta Special Supplement_. 10/12/2010 15:45 Page 6 MALTAREPORT:

To reinforce the point: Malta is now ranked 50th among 139 strategy can be accommodated within this structure). The

economies in a World Competitiveness Report issued by the UCITS brand will undoubtedly enhance the marketing reach

World Economic Forum for 2010-2011. The same report ranks of the fund as it is a brand that affords higher significant

the soundness of Maltese banks in 10th place. investor protection and transparency.

The Vision 2015 strategy Reporting and regulation The government of Malta has set an ambitious target to The requirements set out by the Malta Financial Services AN EMERGING FINANCIALHUB EMERGING AN double the financial sector’s contribution to the island’s GDP Authority to enable the re-domiciliation of funds to Malta are to 25% over the next five years as part of its Vision 2015 comprehensive and include the following requirements: strategy. So far, so good: over the first six months of the year G The existing fund has to be incorporated under the laws of the financial services sector’s gross value-added increased an approved jurisdiction (including EU, EEA, OECD) as by a significant 75%, suggesting that Malta is on the right well as most offshore centres such as Cayman Islands, track. No surprise then that that the number of funds registered British Virgin Islands, etc;

in Malta rose by 26% in 2008 and 27% in 2009. G The legal vehicle has to be similar in nature to a company;

G Re-domiciliation is possible under the laws of the jurisdiction

Redomiciliation of Funds where the fund is currently domiciled;

G Since 2002, Malta has set up a statutory framework that Re-domiciliation is permitted in the fund’s Memorandum allows the re-domiciliation of companies in and out of the and Articles of Association; and island in a seamless manner. The utilisation of these rules G Re-domiciliation is approved by way of an extraordinary for re-domiciliation of a fund to Malta has a number of resolution. advantages. For one, the corporate existence of the fund Naturally, once the fund is re-domiciled to Malta, the remains undisturbed and it is therefore not necessary to wind licensing requirements that would apply to a new fund will up the existing fund and set up a new structure in Malta. As have to be met as well. a consequence of this continuity the investor’s capital Malta has also taken a balanced approach towards the gains/losses are not crystallised and therefore there should hedge fund segment. Hedge funds have been regulated in the not be any tax consequences to investors. Investors can also jurisdiction since the introduction of the Investment Services continue to measure the performance of the fund by reference Act, which came into law in the mid-1990s. The approach to to their original investment. Equally, the fund can maintain hedge funds by the local regulator has been flexible and its same service providers (fund administrators, custodians, while stringent due diligence procedures are obligatory both prime brokers etc) and existing agreements can remain in the licensing procedures and reporting regimes, different unchanged. Additionally, investors in the fund are not impacted categories of alternative investment funds have been and their holding in the fund will not change in any way. recognised and regulations in the jurisdiction are tailored to Likewise, the portfolio of the fund can continue to be managed meet the needs of different types of investors. in the usual manner without any liquidations or transfers. Malta is also cognisant of the globalisation of the funds Moreover, funds that are already listed outside Malta can industry and funds are allowed to have external administrators continue to retain their existing listing (subject to approval and custodians in recognised jurisdictions. of the exchange where the fund is listed). Both the regulator and local service institutions are geared Malta adopts international financial reporting and auditing to interface with the emerging regulatory structure in the standards and because of that no major financial reporting European Union and will be sufficiently equipped to deliver changes may be required post re-domiciliation. Fund managers effective services to the financial sector as Malta grows in also have the opportunity to change the regulatory status of stature and confidence as a new global financial market their fund to a UCITS scheme (provided the fund’s investment structure starts to take new form and shape. I HSBC at the financial heart of Malta S MALTA’S LEADING and which has the people and the Malta has not only found Malta to be a international bank, HSBC Bank technology necessary to provide an good country in which to do business, but Malta p.l.c. provides global exceptional client service to investment also a country where the potential exists A custody services to investment funds, funds seeking re-domiciliation to Malta. to expand operations and to diversify into whilst HSBC Securities Services (Malta) HSBC Malta is connected to the new areas. Malta offers a compelling Limited provides a full range of services Group’s global network to tap best of package and we are convinced that Malta including fund accounting and transfer class products, systems and customer has a very bright future. agency. Both these companies form part service, and is committed to playing a of the HSBC Group which has one of the pivotal role in the development of the strongest balance sheets in the industry Maltese financial services sector. HSBC

6 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS

15:36:06 Malta Special Supplement_. 10/12/2010 15:45 Page 7

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Malta Special Supplement_. 10/12/2010 15:45 Page 8 MALTAREPORT: MALTA’S ONSHORE APPEAL TO FUND MANAGEMENT AN INCREASINGLYDOMICILE AN FUND DIVERSIFIED The real driver of growth in Malta is, and will be for the foreseeable future, the alternative investment fund area, according to Dr David Griscti, head partner and founder of law firm David Griscti & Associates. Although hedge funds have been the most popular, he says the country has also worked on setting up funds in a variety of other alternative asset classes, including private equity, property, commodities, alternative energy and even art. Market participants also expect to see further growth from re-domiciliation. There has been a move from offshore to onshore jurisdictions over the past two years, says Anthony O’Driscoll, managing director of Apex Malta, because investors want to see greater transparency and reporting processes as well as the internal controls and risk management systems of their fund managers. “In many cases, what we are seeing is not so much pure re-domiciling but instead fund managers setting up onshore funds in Malta while keeping their offshore fund in the Caymans or Bermuda.” Lynn Strongin Dodds reports.

T WAS NOT too long ago that Malta did not appear on “One of the main attractions of Malta is that it is a low- the radar screens of fund service providers. They were cost jurisdiction that offers a favourable taxation system for Imore interested in setting up shop in the larger domiciles investor funds. This is not only due to the exemption of of Luxembourg and Ireland. Today, Malta is a firm feature income tax and capital gains tax at the fund and non-resident on the map thanks to a thriving fund industry and a relatively investor level but the country also has about 50 double healthy economy. Hedge funds are the main focus but other taxation treaties in place.” funds are expected to be included as the country expands Joseph Camilleri, head of Valletta Fund Services Business its product and geographical reach. Development Unit, adds: “The financial crisis has been a major Brendan Conlon, business development director at SGGG catalyst for fund managers who have had to rethink their Fexco Fund Services, Malta, says: “At the moment fund servicing strategies in relation to the domicile of their investment vehicles. mainly caters to the hedge fund industry but I expect that will Investors are placing more emphasis on risk and as a result change with UCITS IV and the Alternative Investment Fund fund managers are looking for well-regulated jurisdictions Managers (AIFM) directive. They both will help to broaden with a strong reputation for high quality people and professional the fund set and investor base and in the future I think we support. To date, the most popular types of funds have been will see both hedge fund and long only managers setting up PIFs set up by mainly Europe-based fund managers, but we funds in Malta because of the lower cost of doing business are now seeing other fund managers set up UCITS schemes.” here and the strong regulatory framework. “ According to recent research conducted by research and Dr David Griscti, head partner and founder of law firm publishing group International Fund Investment, regulation David Griscti & Associates, says: “The real driver of growth is a driving force behind the move onshore. Its latest study in Malta is, and will be for now, the alternative investment fund found that 62% of alternative fund managers canvassed area. Although hedge funds have been the most popular, we in the US and Europe either have—or are planning to—re- have also worked on setting up funds in a variety of other domicile their funds or launch mirror funds in the European alternative asset classes such as private equity, property, Union (EU). Breaking it down, 18% have already re- commodities, alternative energy and even art. Professional domiciled their funds or are planning to, while 44% have investment fund (PIF) regulation is flexible enough to launched EU-domiciled “mirror” funds or expecting to. In accommodate different structures.” terms of the domicile, Ireland emerged as the most popular Market participants also expect to see further growth from choice by half of respondents, followed by Luxembourg re-domiciliation. As Anthony O’Driscoll, managing director (27%) and Malta (20%). of Apex Fund Services, Malta, notes: “There has been a move However, many are considering Malta as well as Gibraltar from offshore to onshore jurisdictions over the past two years as viable alternatives to Luxembourg or Ireland, with 18% because investors want to see greater transparency and saying they are thinking of moving to the smaller jurisdictions reporting processes as well as the internal controls and risk while a further 26% are open to the idea, particularly if these management systems of their fund managers. In many cases, locations continue to offer fund servicing on the same level what we are seeing is not so much pure re-domiciling but as Ireland or Luxembourg but at lower costs. Respondents also instead fund managers setting up onshore funds in Malta saw the increase in the number of international fund while keeping their offshore fund in the Caymans or Bermuda. administrators in Malta as a positive step.

8 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:45 Page 9 Malta Special Supplement_. 10/12/2010 15:45 Page 10

MALTAREPORT:

process. The result is the industry is set to grow exponentially  by way of not only the establishment of new fund administrators but also the increasing incidence of fund management companies setting up in Malta.”   Chris Bond, head of global banking and markets at HSBC in Malta, adds: “The dynamic growth of the fund administrator business has prompted us to sharpen our AN INCREASINGLYDOMICILE AN FUND DIVERSIFIED pencil. We have the advantage of being one of the global      players and also being able to leverage off the strengths and         global footprint of the HSBC group. However, the growth of the market and new entrants means that we need to ensure that we continue to have the best products and services.”    HSBC has the full range of products, including net asset   value calculations, investor record processing, corporate management services and turnkey fund solutions for new launches. Outsourcing has also become a major theme especially in the middle office arena. O’Driscoll says: “The collapse of Lehman Brothers and emphasis on counterparty risk forced fund managers in Europe Joseph Camilleri, head of Valletta Fund Services Business Development and the US to look towards the multi-prime broker models. Unit. “Investors are placing more emphasis on risk and as a result fund This requires support for multiple execution platforms, complex managers are looking for well-regulated jurisdictions with a strong reconciliation, trade allocation and counterparty risk. As a

reputation for high quality people and professional support,” he says. result, many managers find it more cost-effective and efficient Photograph kindly supplied by Valletta Fund Services, November 2010. to outsource these activities to administrators who can provide not only post-trade services but also pre-settlement trade According to Kenneth Farrugia, chairman of FinanceMalta processing and support, position and trade reconciliation, fund

and chief officer, Valletta Fund Services, the number of accounting and risk management reporting.” investment services licence holders totals 88, a significant jump Camilleri echoes these sentiments: “Currently, at Valletta from 59 in 2006. There are about 15 fund administrators but the Fund Services, we provide our fund management clients past two years has been particularly busy with Apex, SGGG with a comprehensive suite of fund services to include turnkey Fexco Fund Services, Custom House and Praxis setting up fund formation solutions, as well as the determination of shop. Meanwhile, Bank of Valletta, which had been the leading net asset value and transfer agency services, anti-money player, spun off its fund services operation as a separate business laundering reporting services and company secretarial services. to capitalise on the growing trend for fund administration.” We are also experiencing an increased demand for middle- Under the PIF regime where hedge funds fall, funds can office reporting services as a result of fund managers deciding chose service providers such as investment managers, fund to outsource this function to their administrators.” administrators, custodians and prime brokers established Although market participants are optimistic about the outside Malta. These providers in turn can also tend to funds future growth prospects of Malta, many see the dearth of authorised in other jurisdictions if the rules comply with custodians on the island as a stumbling block to further Malta. However, the latest survey taken in December 2009 development in the UCITS space. This is because under      shows that domestic players are gaining momentum with UCITS IV, managers can set up funds in any EU domicile,     around 47% of the total funds located in Malta being and manage these cross border, but the custodian has to be  administered by local firms. based in the same domicile as the UCITS. Overall, according to figures from the Malta Financial All eyes are on Deutsche Bank, which recently upgraded Services Authority, there are about 431 funds domiciled in the its licence in the country. The German bank is keeping tight-   country. Although activity dipped during the recession, lipped about its plans, only issuing a statement confirming     HSBC’s statistics show that the industry regained its lustre with that it was granted a “credit institution licence in March 2010, the number of new funds rising 26% in the first quarter of this replacing its existing financial institution licence. The bank 

year compared to 22% in 2009 and 30% in 2008. This is a far currently continues with its existing business and might also     cry from the 104 registered funds ten years ago. look into further business opportunities in the future.” Although both the number of funds and administrators Farrugia says: “The industry is experiencing the development continue to rise, the industry seems to still be dominated by of a cluster by way of the setting up of international fund four players, with Valletta and HSBC being frontrunners administration companies as well as fund management followed by Custom House and Apex. This is expected to organisations. It is however yet to experience growth in the change as the fund business widens and develops. Camilleri depositary/custody sector. I am confident that over the course of VFS, says: “Competition is definitely increasing but this of next year, Malta will experience the setting up of other    is healthy and one which I deem as being the evolutionary international custody service providers”. I  

10 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:45 Page 11

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Bank of f VVallettaalletta p.l.c. is licensed to conduct investment services business and to provide trustee services by the Malta Financial Services Authority. Issued by y Bank of VVallettaalletta p.l.c., 58, Zachar ar ryy Street, VVallettaalletta VLV T 1130 - Malta

In the time it takes you u to readread this page… …you would have discovered an alter er European fund domicile and a fund administration partner

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Visit our website at wwwwww.vfs.com.mt.vfs.com.mt or call Kenneth Farrugia or Joseph Camilleri on +356 21227311

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VVallettaalletta Fund Services Limited is recognised by the Malta Financial Services Authority to provide fund administration services. It’s well worth spending p g a few minutes justj talking g to us. Malta Special Supplement_. 10/12/2010 15:45 Page 12 MALTAREPORT:

Since its accession to the European Union six years ago, and the adoption of the euro in 2008, Malta’s profile as an onshore jurisdiction has been firmly established. The latest 2010 Global Financial Centre Index named the island in the top three financial centres most likely to succeed in the next couple of years, along with GROWING IN STATUREIN GROWING AS AGLOBALPLAYER Dubai and Shanghai. Also, Malta climbed to 11th from 13th in financial market development on the World Economic Forum’s Competitiveness 2010-2011 Index. Lynn Strongin Dodds explains how a small country with a population of less than half a million is building up the financial muscle to be able to compete with the big boys. PUNCHING ABOVE ITS

WEIGHT Photograph © Ronfromyork / Dreamstime.com, November 2010.

ALTA MAY BE a fraction of the size of Luxembourg and the Middle East. This makes the country a highly and Ireland, but it has enjoyed success on the global compelling proposition for both EU and non-EU financial Malternative investment fund stage. The country plans institutions seeking to gain access to European investors and to increase its market share in the wake of regulatory calls for the Arab world at the same time.” greater transparency and the ensuing migration to onshore Low costs have also been a major selling point. Industry jurisdictions. The funds setting up shop may be small today estimates place professional fees, salaries and office expenses but the goal is to provide the right environment for them to at roughly two-thirds of those in the more established centres. flourish. Since its entry to the European Union in 2004 and Anthony O’Driscoll, managing director of Apex Malta, which the adoption of the euro four years later, the country’s profile is part of the Apex Fund Services, says: “Although Malta will never as an onshore jurisdiction has been cemented. The latest be a Dublin or Luxembourg because it will not attract the same 2010 Global Financial Centre Index (GFCI) named Malta deal volume, the country is a viable option. The main attractions along with Dubai and Shanghai as one of the top three are not only the low set-up costs, but a strong regulatory financial centres most likely to succeed over the next two to framework, fast-track approval process, quality global service three years. In addition, as the country continues to punch providers and an extensive double tax treaty network. The above its weight, it climbed to 11th from 13th in financial average size of the fund may start small—€5 to €20m—but we market development on the World Economic Forum’s Global have in the past seen clients grow their assets under management Competitiveness Index 2010-2011. quite quickly having started at that base.” Kenneth Farrugia, chairman of FinanceMalta, and chief Dr David Griscti, lead partner and founder of law firm officer of Valletta Fund Services, says: “Malta's fund industry David Griscti & Associates, a specialist in investment services is fast gaining growth traction and is today being increasingly law, says: “The fund industry took off after our entry into the recognised as an EU-based fund domicile alongside EU. Some would say that it has been a negative that we did Luxembourg and Ireland. Malta sits in a unique geographical not initially attract the larger players. I, however, see it as a position as a member of the EU and very close to the south positive because the country was not then in a position to and south-east fascia of the Mediterranean. This inherently handle it. Attracting the smaller players allowed the means that Malta is positioned to act as an important gateway professional service’ firms to grow their internal resources to the European market and at the same time to North Africa and as a result we are now able to deal with the larger funds.”

12 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:46 Page 13

Bannister notes: “The nature of the regulatory regime is one of the key things that financial institutions look at when they are considering setting up in a new jurisdiction. I think our model as a single regulator is unique. We cherry-picked the best practices from countries such as Germany and Sweden and have been very proactive in the development of both EU as well as national legislation. Our goal is to enact laws that allow business to develop innovative practices.”

Personal investment funds (PIFs) continue to account for the bulk of the 431 funds domiciled in Malta and the 51 funds that were granted licences during the first half of 2010.

Griscti adds: “The fund industry took off post-EU membership, mainly driven by flexible and market sensitive regulation that reacts swiftly to market changes and issues that arise. However, the key drivers are the professional firms, like ourselves, whom are extremely proactive in going out to get the business. We, for example, target asset managers and visit them in their offices to discuss how we can help them set up funds.” In terms of regulation, the linchpin has been the Investment Services Act, which is a comprehensive regulatory regime for investment services and collective investment schemes (CIS), including professional investment funds. Overall, the fund industry has enjoyed significant growth since ten years ago Chris Bond, head of global banking and markets at HSBC in when the net asset value (NAV) of the funds domiciled in Malta, agrees that “Malta has a strong professional infrastructure Malta stood at just €500m. The recession took its toll but as well as a robust regulatory framework which is aligned with total NAV has recovered, climbing steadily from its low point EU requirements”. He adds: “Our regulator in general has of about €6bn during the height of the crisis in June 2009 to adopted a firm but flexible approach. The other benefits of €7bn in December 2009 and €7.9bn for the first half of 2010. working in Malta are a multilingual and educated workforce and Personal investment funds (PIFs) continue to account for a well capitalised and sound banking system. Due to a strong the bulk of the 431 funds domiciled in Malta and the 51 liquidity position and prudent asset/liability management, funds that were granted licences during the first half of 2010. none of the banks needed a bailout from the government.” By contrast, the number of Undertakings for Collective Prof Joseph Bannister, who has been chairman of the Malta Investments in Transferable Securities (UCITs) funds remained Financial Services Authority (MFSA) since 1998, concurs that the same at 45 while non-UCITs fell three to 33. Joseph its hands-on approach has been one of the secrets of Malta’s Camilleri, partner at PricewaterhouseCoopers in Malta, says: success on the fund scene. He has been instrumental in “Asset managers can choose from a range of fund structures, navigating the country from being an offshore domicile in including UCITs, but PIFs have been the most popular to the pre-EU days to its current onshore status. With him at the date. The PIF regime is flexible and allows for a smooth and helm, the MFSA implemented a raft of reforms in preparation efficient application process. The vast majority are start-up for EU membership, plus it became a single regulator funds and most of the investors are from Europe, although amalgamating the work carried out by several agencies. we are seeing some interest from North America.” More recently, the MFSA underwent a further restructuring and shed its silo-based structures in favour of an integrated Minimum threshold and harmonised organisation. The main thrust was removing PIFs are broken down into three categories, with the the authorisation and regulatory development oversight functions experienced investment fund at one end of the scale. It from each of its three supervisory groups—securities and requires a minimum investment threshold of €10,000. These markets, banking and insurance and occupational pensions— funds are not bound by any investment restrictions as is the and creating two separate units. This was to ensure greater case with retail funds but they are still required to appoint a consistency in licensing, supervision and internal communications. custodian and can only leverage up to 100% of NAV.

A SUPPLEMENT TO FTSE GLOBAL MARKETS • DECEMBER 2010 / JANUARY 2011 13 Malta Special Supplement_. 10/12/2010 15:46 Page 14 MALTAREPORT: GROWING IN STATUREIN GROWING AS AGLOBALPLAYER

Chris Bond, head of global banking and markets at HSBC Dr David Griscti, lead partner and founder of law firm David Griscti & in Malta. “Malta has a strong professional infrastructure Associates. “Attracting the smaller players allowed the professional as well as a robust regulatory framework which is aligned service’ firms to grow their internal resources and as a result we are with EU requirements,” he says. Photograph kindly supplied by now able to deal with the larger funds,” he says. Photograph kindly HSBC, November 2010. supplied by David Griscti & Associates, November 2010.

In the middle is the most common—the qualifying investor Alternative Investment Fund Managers Directive (AIFM) fund—which requires a minimum investment of €75,000. These which was recently approved by the European Parliament. On funds are not subject to investment or borrowing restrictions the UCITS IV front, Malta hopes to capture business from and may make unlimited use of leverage. They also do not changes within the master and feeder structure. Under the need to appoint a custodian or prime broker provided adequate new rules, the master and feeder funds are not required to be safekeeping arrangements are implemented. Last but not least situated in the same member state plus they may also have is the extraordinary investors category, which joined the fold in different depositories and auditors, subject to implementing 2007. They are geared towards private equity investors and adequate information-sharing arrangements. For example, family offices with the minimum investment threshold standing fund providers could establish a management company under at €750,000. The turnaround process is faster than the other UCITs IV in Malta while keeping their fund administration two and they have proved popular for those looking to move in Luxembourg or Ireland. from an offshore to onshore location. There is also hope that both pieces of legislation will bring According to Farrugia: “The MFSA has ensured the presence different types of funds to the country as well as accelerate of a comprehensive legal and regulatory framework to cater the trend of hedge funds wrapping certain strategies in a for the different needs of fund managers and their clients. The UCITs umbrella. Farrugia says: “We have seen an increase regulatory framework for PIFs is highly flexible and in the number of so called ‘Newcits’ funds in Malta, or hedge accommodates a variety of fund structures to cater for a wide funds that create UCIT funds to mirror their strategies. This range of fund strategies, which amongst others include long is being driven by investors who want a more transparent short strategies, arbitrage funds, directional, global macro and tightly-regulated product in the wake of the Madoff and algorithmic funds. The MFSA also has in place policies scandal and financial crisis.” to accommodate property funds which may likewise be structured as PIFs. We have also experienced the PIF regulatory Liquidity for investors framework being used to structure private equity and venture Bond, however, is more circumspect about the Newcit product: capital funds.” “Newcits account for a relatively small percentage of the Looking ahead, market participants expect to see further €5.5trn UCITs market. There are still constraints, bans on growth opportunities on the back of UCITS IV and the short selling and OTC derivatives rules which will make

14 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:46 Page 15

certain hedge fund strategies ineligible for a UCITs structure. able to tap into Chinese investments under certain circumstances. Liquidity for investors is also a major issue. Having said that, As for the obstacles ahead, economic uncertainty is of Malta is still seeing growth in the UCITS space.” course a concern. Bond notes: “As Malta has an open economy Although Europe is an important region, Malta is also it was not isolated from the global downturn. However, we hoping to capitalise on its ties with its North African and did not shrink as much as others. Our GDP growth rate is Middle Eastern neighbours. To that end, Farrugia notes: currently estimated at about 3.4% this year, which is better “Malta is also seeking to attract the setting up of Shari’ah- than the European average.” compliant funds. Within this context, in March 2010, the The other big challenge is a skills shortage which might not MFSA published a guidance note for Shari’ah-compliant be surprising in a population of around 413,000. Companies funds, which enable the setting up in Malta of such funds. This as well as MFSA and trade organisations are trying to rectify regulation allows these funds to be set up either as retail the problem by running professional development courses and funds (UCITS or non-UCITS) or as PIFs. retraining to ensure members of the sector are up to speed However, in the specific case of Ijarah funds (which are with the latest developments and techniques. Bannister notes: structured around a specific asset, such as a building, “Although our population is small, there are over 10,000 full- property, or infrastructure), commodity funds, and Murabaha time university students and an additional 11,000 in vocational funds—a method of financing the purchase of a house training. We also have several training institutes which have according to Islamic principles—these can only be set up as come together to design programmes aimed to train the PIFs, due to the largely non-conventional assets in which middle layer; asset managers, risk managers, fund accountants these funds invest.” and underwriters.” The country is also looking towards Asia and the MFSA Expats are also coming back but as Camilleri notes: “Human signed a memorandum of understanding (MoU) earlier this resources and a limited talent pool in a dynamic and growing year with the China Securities Regulatory Commission to sector is one of the biggest problems the financial services “protect and promote the development of the securities markets sector in general faces. Over the past five to ten years, we by providing a framework for co-operation, increased mutual exported our graduates but recently, due to the growth in understanding and the exchange of information”. According to financial services, there has been a huge demand for the best Bannister, the deal allows Chinese “qualified domestic and brightest and we are now importing people from other institutional investors” (fund managers) to invest on behalf of European countries to meet the demand. We are still sending Chinese investors into Malta-domiciled investment funds, both people on long-term strategic deployments to different countries PIFs and UCITS, while Maltese fund managers will also be to learn certain skills and bring back their expertise.” I

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A SUPPLEMENT TO FTSE GLOBAL MARKETS • DECEMBER 2010 / JANUARY 2011 15 Malta Special Supplement_. 10/12/2010 15:46 Page 16

MALTAREPORT: The Malta Stock Exchange intends to capitalise on its position in league tables with the objective of internationalising and promoting itself to investors as well as issuers. It has taken its show on the road and has been proactively marketing its pre and post-trade wares to an audience which is

MSE STRIVES FOR ASTRIVES PIVOTALMSE ROLE MARKET more interested in onshore locales in the wake of the financial crisis. Eileen Muscat, chief executive of the MSE, says: “We see ourselves as acting as a gateway for issuers from non-European countries to tap into a European investor base and vice versa.” Lynn Strongin Photograph © Solarseven / Dodds reports. Dreamstime.com, November 2010. MSE AIMS TO BE A GLOBAL PLAYER

HE EXTERIOR OF the 19th century British Garrison our strategy has been to push for international listings and Chapel, which is home to the Borza Malta or Malta participants. We see ourselves as acting as a gateway for issuers TStock Exchange, may have retained its period features from non-European countries to tap into a European investor but the offices inside are anything but old-fashioned. State- base and vice versa. This is especially true of North Africa of-the-art technology coupled with innovative ideas and a and the Middle East investors and issuers who we have cultural determination to be a player on the global stage are its ties with because of our geographical position in the hallmarks. The MSE may be small in stature but its plans are Mediterranean. We are currently holding several discussions on a much larger scale. to see what fund managers in the region are doing and what Eileen Muscat, chief executive of the MSE, says: “European products clients would like to see being developed.” Union membership and entry into the euro was transformational Muscat notes that the MSE’s plan to expand its reach and because it helped us attract a wider investor and issuer base. product offering is part of the government’s 2015 Vision However, the performance of our stock market during the initiative which aims to make financial services account for financial crisis combined with the 2010 Global Financial Centre 25% of the country’s GDP. She says: “Financial services along Index Report, which named Malta as one of the top three financial with healthcare, tourism, information technology and centres for the future, has definitely raised our profile and communications are the four pillars of growth that the boosted investor as well as issuer confidence. We are not government is targeting for development. We think that complacent and what we are doing now is trying to capitalise attracting more local and foreign companies onto the exchange on our positions in the league tables.” will have a domino effect. We are looking to not only list Muscat, who took over the helm this year and has been with more funds and bonds but also smaller cap companies. We the exchange since it opened in 1992, is driving the changes believe that they may find it easier to deal with us than some laid down by her predecessor, Mark Guillaumier. The objective of our larger competitors. We offer a fast, efficient and personal is to internationalise and promote the exchange to investors service at very cost competitive prices.” as well as issuers. It has taken its show on the road and has The MSE, which is small by international standards with a been proactively marketing its pre and post-trade wares to market capitalisation of about €7.6bn, operates two markets— an audience which is more interested in onshore locales in the Regular Market, consisting of equities, corporate and the wake of the financial crisis. government bonds, and the Treasury Bill Market—but it has She says: “To date, the exchange has been largely a domestic come a long way in its almost 20 years. Muscat recalls: “When operation with activities geared towards the local market. we started there were only about 8,313 accounts in the central However, growth is finite because we are a small country and securities depository. Today we have about 170,000 accounts.

16 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:46 Page 17 Malta Special Supplement_. 10/12/2010 15:46 Page 18 MALTAREPORT:

a daily range of 20% in order to allow market participants to react faster when a company announcement is made. Although trade ranges had been revised several times since the exchange’s inception 18 years ago, many believed the methodology and procedures needed to be more proactive. In addition, the MSE launched a product in line with the EU’s shareholder directive, that enables shareholders to take MSE STRIVES FOR ASTRIVES PIVOTALMSE ROLE MARKET part in annual general meetings electronically. It will be rolled out initially to domestically-listed companies before going to non-listed companies such as fund managers and administrators Eileen Muscat, chief executive of the MSE. “Financial services along with who need to maintain company records and a share register. healthcare, tourism, information technology and communications are the On the post-trade front, the MSE has been busy forging four pillars of growth that the government is targeting for development,” technical links with other exchanges, depositories and she says. Photograph kindly supplied by MSE, November 2010. settlement systems. It recently joined Euroclear’s FundSettle, a system that facilitates order routing, cash settlement and fund We started with government bonds and then moved to corporate servicing across national, European and international borders. bonds and equities. Aside from government bonds and treasury It is used as a settlement platform between fund distributors bills, we have about 20 listed equities and 40 corporate bonds and transfer agents acting for fund promoters. The platform as well as over 300 funds from global players including HSBC, provides access to more than 50,000 funds and 520 transfer Fidelity and Lloyds TSB. Culturally, Maltese people are buy agents in 24 domiciles, including Malta. and hold investors but that is slowly changing and the numbers The MSE also struck a partnership with Clearstream, the who are regular traders is growing.” post-trade arm of Deutsche Börse Group, to offer settlement Although Malta navigated the financial storm better than for Maltese domestic securities. Both parties will be working many of its larger contemporaries, the stock market did take a closely together with the aim to improve cross-border hit on the equity trading side with turnover dropping to €23.5m settlement ahead of the implementation of Target2-Securities, in 2009 compared to €49.1m the previous year. Total turnover the settlement system that the European Central Bank plans though climbed 13.3% to €553m, an increase of 13.3% compared to introduce in 2014 for cross-border settlement. to 2008, mainly thanks to record activity in the corporate bond arena which saw 12 new listings, 11 new government securities A work in progress issues as well as a €1.6bn treasury bill listing. Although the deal is still a work in progress, Clearstream The MSE is building upon its successes and is currently and the MSE will offer settlement in Clearstream via the undertaking four to five major projects, including the Maltese Central Securities Depository (MCSD) for all types development of investor access facilities, improvement of of Maltese securities including stocks, government securities connectivity and the revamping of research and marketing and investment funds against Central Bank money. functions. It is also looking at listing a wider selection of Muscat says: “The Clearstream deal will be done in phased funds, including exchange traded and Shari’ah-compliant. stages but it allows us to offer a wider range of services to our While it has been successful in listing retail collective clients. All Maltese stocks will be cleared and settled in investment schemes, it has had less luck with hedge funds Clearstream, which will make them more marketable and and the alternative sector. The hope is that it will be able to easier for international investors to invest in. The most difficult tap into a new vein of business on the back of regulatory part of the process was the legal, regulatory and operational changes that are encouraging products to be exchange traded framework and that part has been completed.” instead of traded over the counter. As for its involvement in TS2, Muscat notes: “We are The other major plank in its strategy is to the replacement currently involved because we are one of the 27 CSDs, although of its trading platform. Unlike many of its contemporaries we are one of the smallest. Although no one is arguing against though, latency is not the main focus. Muscat says: “Although the common principle there are still fundamental questions, there have been several discussions around high-frequency particularly pricing and governance structures. These are all traders, they have not been an issue in Malta because we do open to discussion and agreements may not be easy because not generate the same level of volumes on the equity side. We of the diverse needs of the various users.” do not see technology as an end in itself but a means to an In terms of the MSE’s challenges, Muscat points to human end in order to improve our connectivity and functionality. resources as the biggest obstacle. “It is a problem in Malta The main goal is to attract more liquidity. overall but like any small organisation we need the resources “We are also working on our first cross listing, which we in order to achieve these goals. With the best will in the hope will happen by the end of the year or the first quarter of world, you can only stretch as far as your finances and people. next year. I am on a learning curve from an operational point Also, as the market becomes more international and of view but I hope that once it is finished it will raise our profile.” sophisticated, you need people with greater expertise and The MSE has also been working on the finer points. It knowledge. This is changing and we have sent many people recently revised trading limits to plus or minus 10%, giving for training but it takes time. “ I

18 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:46 Page 19 MALTAREPORT:

The uncertainty created by the AIFM Directive together with the changes which are expected to occur to the European regulatory landscape have encouraged private equity funds to seek alternative onshore domiciles to what has traditionally been an offshore industry. The success of the Channel Islands in attracting private equity funds from all over the globe is a well known fact and a statistic which speaks for itself. Now Malta is setting out its stall as a natural home for the private equity segment. Steve Paris, head of Financial Services at Deloitte and Dr. Andre Zerafa,

partner, Ganado and Associates, Advocates outline the advantages. PRIVATEFUNDS TAXATIONEQUITYTHEIR AND THE NEW PE DOMICILE

RIVATE EQUITY FUNDS have traditionally used Maltese special purpose vehicles to invest in target Pcompanies in view of Malta’s common law based company law regime, favourable fiscal environment for holding entities bolstered by the benefits of the relevant EU tax directives and an extensive OECD based double taxation treaty network (56 in number with effect from the first of January 2011). However Malta has rarely, up until now, been resorted to as the domicile of choice for the main fund vehicle itself or for its general partner. Malta’s regulatory framework allows private equity funds to be set up as so called professional investor funds which may be made available to different types of investors. From a structural point of view most private equity funds are typically set up as limited partnerships. Limited partnership legislation has formed part of the Maltese Companies Act for a number of years. A Maltese limited partnership has its obligations guaranteed by the unlimited and joint and several liability of one or more partners, called general partners, and by the liability, limited to the amount, if any, unpaid on the contribution, of one or more partners, called limited partners. In 2003 new provisions were introduced in the Companies Act which specifically provided for the possibility for collective investment schemes to be set up as limited partnerships with a partnership capital divided into shares. Indeed such partnerships fall within a clean and concise corporate framework which allows a limited liability company to act as the general partner of the fund, albeit the general partner would be unlimitedly liable for the obligations of the fund. The general partner would not be required to obtain a licence or other authorisation from the Malta Financial Services Authority (MFSA) so long as it is not providing investment management services to the fund. Photograph © Chrisharvey / Dreamstime.com, Nevertheless, the Companies Act was still unclear where supplied November 2010. limited partnerships with a partnership capital which is not divided into shares were concerned. Indeed the law did not These somewhat archaic rules made it unrealistic for specifically provide that such partnerships could also be promoters to set up their fund in Malta as a limited partnership collective investment schemes so doubt subsisted as to not divided into shares since the general partner could not whether it was indeed possible for investment funds to be set- be a limited liability company in its own right. So while the up as such types of partnerships. In addition the general issue of the corporate form of the general partner was resolved partners of such a vehicle had to be an individual or else a body in 2003 with regard to limited partnerships with a partnership corporate (i.e. an entity with separate legal personality) which capital which is divided into shares it remained for those has its obligations guaranteed by the unlimited and joint limited partnerships with participation rights rather than and several liabilities of one or more of its members. share capital. Considering that the vast majority of private

A SUPPLEMENT TO FTSE GLOBAL MARKETS • DECEMBER 2010 / JANUARY 2011 19 Malta Special Supplement_. 10/12/2010 15:46 Page 20 MALTAREPORT: PRIVATEFUNDS TAXATIONEQUITYTHEIR AND

Dr. Andre Zerafa, partner, Ganado and Associates, Advocates. Photograph Steve Paris, head of Financial Services at Deloitte. Photograph kindly kindly supplied by Ganado and Associates, Advocates, November 2010. supplied by Deloitte, November 2010.

equity funds are set up as limited partnerships with income or gains derived from the fund’s activities represent participation rights this meant that Malta has not always an exempt category of income. Certain limitations do apply been perceived to be a viable domicile of choice for limited to the blanket tax exemption, but they should be of no concern partnerships without share capital. to funds investing primarily in assets situated outside Malta. These limitations are now being addressed through new The Malta tax exemption on income or gain derived by regulations which will enable a Maltese limited partnership the fund’s activities is supported by a zero withholding tax on with a partnership capital which is not divided into shares to outbound distributions to all persons, whether individuals or have a general partner in the form of a Maltese or a foreign companies, regardless of their country of residence and a constituted limited liability company. exemption from tax in Malta upon the disposal or redemption Furthermore if the fund is constituted under a foreign law of the interest held in the fund regardless of its legal form. (such as Cayman, English or Scottish law) then it would still Similarly no withholding taxes are levied in Malta on the be subject to licensing in Malta so long as it is carrying on provision of services to persons resident in Malta by persons any activity in Malta. The MFSA has taken the view that the resident outside Malta, regardless of their country of residence, active marketing of such funds in Malta to Maltese professional provided that the supplier does not have, in Malta, a clients would trigger a licensing requirement in Malta. It is permanent establishment with which the relevant service is then the choice of the promoter whether to incorporate the effectively connected. general partner in Malta or elsewhere, although it is necessary Tax exemption at the level of the fund coupled with the for the general partner to be a company resident in Malta in possibility of source country withholding tax mitigation order for the fund to be resident in Malta for Malta tax purposes. through resort to Malta’s tax treaty network and no taxes in Another alternative used over the years by some promoters Malta on distributions to, or gains realised by, investors brings was to set up the fund as a SICAV which is a variable share together the benefits of an onshore location without the capital company. SICAVs are generally open ended investment costs typically associated therewith. vehicles however the Maltese Companies Act provides for As an EU member state, Malta has implemented the sufficient flexibility for SICAVS to lock-in investors for a European VAT directive and is thus exempt from VAT number of years as long as a mechanism is included in the transactions in securities and the provision of services relating fund’s memorandum and articles on the manner in which the to the management and administration of funds. While the fund will handle redemption requests. Specific regulations have workings of the EU VAT system may, in practice, result in also been issued on the manner in which SICAVs can make an element of unrecoverable VAT at the level of the fund or drawdowns from investors. This was a welcome clarification the fund manager, the extension of the VAT exemption to since SICAVs are not allowed to issue partly paid shares nor also cover qualifying outsourced services considerably reduces are they allowed to issue shares at a discount. the instances which may give risk to unrecoverable Malta The MFSA have also issued supplementary conditions VAT. This aspect coupled with a reasonable degree of which apply across the board to all types of funds which appropriate planning typically ensures that Malta VAT does have a drawdown mechanism embedded in their structure. not in fact represent a material cost to a fund or fund manager The main principles of these conditions stipulate that any established in Malta. request on committed funds shall be effected pro-rata among Malta is rapidly establishing itself as an attractive domicile all relevant investors in the fund and that the fund may only for private equity funds. The planned innovations to its make a fresh call for further commitments once all outstanding corporate laws, which are imminently expected, will increase commitments from existing investors have been requested. Malta’s attractiveness in an interesting and challenging phase Apart from the regulatory and structural aspects, the tax of European regulation where funds will be expected to be treatment of fund vehicles in Malta is also fundamental and more transparent in their dealings and opt for onshore should be considered up front. In terms of Maltese tax law the structures, particularly for their European based clients. income of a collective investment scheme is exempt from Malta’s legislative framework should be able to address and tax at the level of the fund. Taxpayers also deriving income from accommodate the business models preferred by private equity other activities or sources remain liable to tax in Malta but the fund promoters within a robust regulatory framework. I

20 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:47 Page 21

MORE MALTAREPORT: FOR MORE FUND BUSINESS ADMINISTRATIONPOSITIONING NEW FOR

Photograph © Madmaxer / Dreamstime.com, November 2010.

The evolution of financial markets and how specific regions react is one of the more interesting observations one can make today. What makes one location more appealing than the next? Why do new centres emerge and others fade and why are some enduring and what will happen in the future? The criteria that define these trends evolve in response to market conditions and also as reactions to successes and failures in the response to these drivers. By Mark Hedderman, chief operating officer, Custom House.

ALTA IS ONE of the locations looking to establish useful tool for a global administrator. As well as servicing itself as a domicile of choice for the funds industry. local Maltese funds there is an opportunity for Malta to MIt faces a challenging time in an environment of position itself to service funds of other jurisdictions as part of fewer new fund start-ups, but it is possible that there are a global operating model. There are no regulatory barriers advantages to its emergence in period where there is such a to this and the abundant availability of knowledgeable local seismic shift in what investors are demanding when they staff it is possible that we may see Malta emerge as a location choose to allocate. The drive towards greater transparency, for the wider funds industry to take advantage of. relevant and robust regulation and the increasing importance Malta has attempted to position itself as an alternative for of the role of the administrator provides this relatively new the industry that offers the experience of what could be called jurisdiction with an opportunity create a model that will the ‘offshore product’ but with the benefits of an onshore specifically cater to these demands. approach. The global trend as we have mentioned is for The hedge fund industry has had to react to the events of increased transparency and regulation and empowering the recent years and nowhere is this more evident than in the investor. Combining these distinct requirements in a flexible support industries that service it. Specifically, the role of an operating environment is where Malta has an advantage. independent administrator has moved from a position of almost being seen as a necessary expense to playing a critical Practical regulation role in the legitimacy of a fund product. The domicile of the The Maltese regulator has been quick to identify that the fund and the requirements it puts on the administrator combination of EU membership and a practical regulatory therefore are key elements in the evaluation of the fund and environment will be key factors in its favour to attract managers in providing comfort to the investor. who look to create a product that can compete with the Administrators today are presented with increasing traditional jurisdictions. When choosing who to partner with challenges to provide more for less. The advance in the in Malta, the fund looks for a local presence with a global reach. demands for further transparency has led to increases in There is a challenge when selling Malta to the global technology requirements as the profile of the average market as to why one would choose to do business there administrator moves from a traditional accounting services and therefore the global recognition of the service provider only provider to a partner in an overall complex fund product. provides comfort. This is why we now see more and more of The challenge for the administrator is to meet these increasing the major providers opening offices in Malta. requirements without adding extra cost to the fund and a To date the experience has been for the administrator to flexible, low cost, EU centre such as Malta can become a react to the requirement of the funds to establish in Malta

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rather than the funds choosing to locate there because of the proximity of service providers. This is evident in the concentration of the small number of existing providers around large fund structures. As with all new trends there may be a requirement for a period of time to elapse to establish a footprint and prove that there is substance to what is taking shape. One of the key advantages that Malta has is the presence POSITIONING FUND BUSINESS ADMINISTRATIONPOSITIONING NEW FOR of some of the major names in the financial services world that exist in a capacity outside the funds industry but are positioned there to support it. The ‘big four’ audit firms have operations there and have already shown a willingness to engage with the administrators in assisting them to support their clients. An interesting new dynamic that we have seen is an openness to assist the administrator outside traditional audit services. A major challenge for hedge fund administrators Mark Hedderman, chief operating officer, Custom House. Photograph is the preparation of financial statements as per the stated kindly supplied by Custom House, November 2010. accounting standards of the fund. It used to be the case that the administrator would hand over their NAV valuations to The flexibility in the structure means that managers can the auditor who would then prepare the audited financials break free and establish their own stand-alone vehicle once to IFRS, US GAAP etc. they have reached a suitable size. The SICAV allows for both This obvious conflict of interests was identified in recent of these models to exist and the flexibility and protection years as a dilution of the auditor’s function and specific reference offered make them attractive in their respective worlds. was made to this in the famous Sarbanes Oxley Act of 2002. The culmination of this was a move away from the preparation of The impact of UCITS IV the financial statements by the auditors and the onus was, There are already a number of UCITS structures operating correctly, placed on the administrator to provide prepare the successfully in Malta where they have targeted the Italian, statements for audit. This placed challenges on the administrator Spanish and French markets. Adopting the UCITS IV directive who was not positioned to handle it and responses varied from and in particular its impact on the master-feeder structure will the development of an in house function to the full outsourcing place additional reporting requirements on administrators. to specialist (not big four) accounting houses. Efforts are already underway to align reporting requirements What has been refreshing in Malta, which we have not with existing models and the successful administrators will witnessed elsewhere yet, is the willingness of the audit firms be the ones who have flexible report writing capabilities to prepare financial statements for funds that they are not which has become an essential element of any business these the designated auditor of and therefore facilitate the past few years as reporting requirements ever expand. administrator in their responsibilities. This practical and The financial services industry grew by over 20% in Malta flexible approach has been very useful in the establishment in 2009. In the context of an environment of fewer fund start- of a new administrative operation where the pressures to ups there is obviously traction gaining to the Maltese story. start from scratch can sometimes lead to an overlooking of Malta needs to position itself as a brand and also as a legitimate this vital function. alternative to Dublin and/or Luxembourg. Prioritising the flexible and practical nature of the regulatory environment is SICAV structures vital to ensuring that Malta continues to separate itself from The use of the SICAV in Malta and its ability to handle the more established locations. multiple sub funds with their own cross collateral risk Membership of the EU and what this entails for the protection has been popular for both the institutional and international managers and investors should be put to the front start up structures. As the administrator of the largest number along with the adoption of the UCITS IV directive. Malta of funds in Malta, Custom House has been exposed to both must ensure that it retains its evolving reputation as a ‘can- ends of this spectrum. On one hand there is the Innocap do’ business centre for both funds and their service providers. structure which offers investors access to a wide variety of It must focus on reigning in inflationary pressures that impact underlying managers via a suite of products at a feeder level. the cost effectiveness of locating there while at the same This structure has approximately one hundred valuations in time continuing to make significant investment in its its overall composition and is valued daily, making it one of technology infrastructure. When canvassing potential clients the most high volume and complex products for an about where they wish to set up their fund the first questions administrator to handle. At the other end we have the they always ask relate to the nature of the regulation, the Nascent Fund SICAV which is a new umbrella product cost, the administrators presence and the ability to do business specifically designed for emerging managers to cut their there. The future is bright for Malta if they keep these factors teeth in a protected structure that offers legitimacy while in mind while they expand and do not lose sight of the they establish their track record. reasons why other locations are becoming less popular. I

22 DECEMBER 2010 / JANUARY 2011 • A SUPPLEMENT TO FTSE GLOBAL MARKETS Malta Special Supplement_. 10/12/2010 15:47 Page 23

DIRECTORY

Investment Promotion

FINANCEMALTA FinanceMalta, a non-profit public-private initiative, was formally set up to promote Malta’s international Business & Finance Centre, both within, as well as outside Malta. It brings together, and harnesses, Address: Garrison Chapel, Castille Place, Valletta, the resources of the industry and government, to ensure that Malta maintains a modern and effective VLT 1063, Malta G Web: www.financemalta.org legal, regulatory and fiscal framework in which the financial services sector can continue to grow and Tel: +356 2122 4525 G Fax: +356 2144 9212 prosper. The Board of Governors, together with the six founding associations, four expert groups, its Contact: Bruno L’ecuyer, Head of Business corporate members and executive staff are committed to promote Malta as a centre of excellence in Development G Email: [email protected] financial services and international business

Bank / Financial Institution

SPARKASSE BANK MALTA PLC Sparkasse Bank Malta plc forms part of the Austrian Savings Banks and the Ertse Group Bank AG network. The ‘Sparkasse’ Brand is known to be one of Central Europe’s foremost Savings and Financial Address: 101 Town Square, Qui-Si-Sana, Sea Services Group. Front, Sliema, SLM 3112, Malta From Malta, the bank’s main focus is on private banking, wealth management and custody services to Web: www.sparkasse-bank-malta.com a range of international private, corporate as well as institutional clients. Tel: +356 2133 5705 G Fax: +356 2133 5710 Contact:Paul Mifsud, Managing Director The bank thrives on providing a highly personalised and efficient service backed by experience, Email:[email protected] competence and robust support services.

Financial Services Regulation

MALTA FINANCIAL SERVICES AUTHORITY The Malta Financial Services Authority (MFSA) was established by law on 23rd July, 2002. The Address: MFSA, Notabile Road, Attard, Authority is the single regulator for the financial services sector, which includes credit and financial BKR 3000, Malta G Web: www.mfsa.com.mt institutions, securities and investment services companies, recognised investment exchanges, Tel: +356 2548 5386 G Fax: +356 2144 1189 insurance companies, pension schemes and trustees. The MFSA incorporates the Registry of Contact: Communications Unit Email: [email protected] Companies and the Board of Governors also acts as the Listing Authority.

Fund Administration

CUSTOM HOUSE GLOBAL FUND SERVICES LTD Custom House Global Fund Services Ltd (CHGFS) is the Malta based parent company of the Custom House Group of Companies (Custom House). The Custom House Group offers a full 24/5, “round the world” and “round the clock” administration service out of its offices in Amsterdam, Chicago, Dublin, Guernsey, Luxembourg, Malta and Singapore. This service, which enables Custom House to offer daily dealing NAVs, covers all aspects of day to day operations, including maintaining the fund’s books Address: Tigne Towers, Tigne Street, Sliema, and records, carrying out the valuations, calculating the NAV and handling all subscriptions and SLM 3172, Malta Web: www.customhousegroup.com redemptions, as well as over-seeing payment of the fund’s expenses. Reporting can be effected through CHARIOT, Custom House’s secure web-reporting platform for managers and investors. Tel: +356 2380 5100 G Fax: +356 2702 2899 Contact: Lisa Byrne, PR Coordinator CHGFS is recognised as a fund administrator and licensed under a Category 4 license as a custodian Email: [email protected] for funds of funds. CHGFS is also an authorised trustee for trusts.

HSBC SECURITIES SERVICES (MALTA) LTD HSBC Securities Services (Malta) Ltd provides a full range of administration services to investment Address: 80 Mill Street, Qormi, QRM 3101, funds. We have significant experience, knowledge and understanding of the industry and we can Malta G Web: www.hsbc.com.mt therefore provide a high quality service to investment funds, leveraging on the HSBC Group’s scale Tel: +356 2380 5100 G Fax: +356 2380 5190 and capabilities where this is necessary. We hold fund administration mandates across most asset Contact: Charles Azzopardi, Managing Director classes (bonds, equities, property, etc.) and strategies (long, absolute returns, etc) and our offering Email: [email protected] consists of fund accounting and valuation, investor services and corporate management services.

SGGG FEXCO FUND SERVICES (MALTA) LIMITED SGGG Fexco Fund Services (Malta) Ltd is recognised as a fund administrator by the Malta Financial Services Authority. SGGG Fexco is your administrative partner for all your fund management requirements, bringing together the international experience of SGGG Fund Services Inc. and Fexserv Address: Alpine House, Naxxar Road, San Financial Services. Gwann, SGN 9032, Malta Web: www.sgggfexcofsmalta.com SGGG has been established in the fund administration business since June 1997. It is headquartered Tel: +356 2576 2121 / +353 868 398 133 in Toronto and also operates in the Cayman Islands. SGGG Fund Services is responsible for the Fax: +356 2576 2131 G Contact: Brendan administration of over CAD12bn including 220 alternative strategy funds of various structures and Conlon, Director G Email: [email protected] offers a comprehensive range of fund administration services.

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VALLETTA FUND SERVICES Valletta Fund Services ("VFS") is a fully-owned subsidiary of Bank of Valletta plc, and the largest fund administrator in Malta. As at November 2010, VFS provided its fund administration services to 90 professional investor and retail funds representing $2.2bn worth of assets. VFS was incorporated in 2006 and provides a comprehensive range of fund administration services Address: G Complex, Suite 2 Level 3, underpinned by the presence of sophisticated IT platforms. The Company’s clients included fund Brewery Street, Mriehel, BKR 3000 Malta management organisations based in the UK, Italy, Czech Republic, Holland, Latvia, Turkey, South Web: www.vfs.com.mt G Tel: +356 2122 7148 Fax: +356 2123 4565 Contact: Joseph Camilleri, Africa and Switzerland. Head - Business Development Division The Company's website at http://www.vfs.com.mt provides useful information on the full range of fund Email: [email protected] administration services.

Law Firm

CAMILLERI PREZIOSI Camilleri Preziosi is a leading Maltese law firm with a commitment to deliver an efficient service to clients by combining technical excellence with a solution driven approach to the practice of law. There can be no compromise on striving for excellence—not only in recruiting and training the best lawyers but in embracing a work ethic founded on the core values of honesty, integrity and quality of service. We take a multi-disciplinary approach to our practice and all lawyers advise across a broad range of areas. Each lawyer within the firm deals with a specific area or areas of practice that indicates Address: Level 3, Valletta Buildings, South a particular competence and experience in that sector, but he or she does not practice exclusively in Street, Valletta, VLT 1103, Malta that area, thus allowing our lawyers a wider scope of knowledge. Web: www.camilleripreziosi.com Tel: +356 2123 8989 G Fax: +356 2122 3048 Our clients work with lawyers they know well, and who know them and their businesses. The close Contact: Louis de Gabriele, Partner relationships we develop and the keen interest we take in our clients’ businesses enable us to give Email:[email protected] practical and effective advise with the aim of adding value.

DAVID GRISCTI & ASSOCIATES / QUBE SERVICES LIMITED David Griscti & Associates is focused, by design, on investment services law, and we are proud to be one of the leading firms. We advise our international fund, fund management and other investment service’ clients at pre-licensing stage, offering them structuring solutions and advice, taking them through the registration and licensing stage, and offering them a full range of post-licensing services Address: 168 St Christopher Street, Valletta, through our specialised team of professionals, including legal and tax services, fund accounting VLT 1467, Malta G Web: www.dglawfirm.com.mt services, company secretarial, compliance and AML services, directorship services and other back Tel: +356 2569 3000 G Fax: +356 2122 7731 office administration services. Our associated company QUBE Services Limited also offers full Contact: David Griscti, Partner corporate, trust, tax advisory and administration services, essentially offering a highly dedicated one- Email: [email protected] stop shop solution to our non-investment service’ clients.

GANADO & ASSOCIATES, ADVOCATES Ganado & Associates, Advocates was founded in Valletta, Malta and traces its roots to the early 1900s. It enjoys a successful international legal practice, advising on the whole spectrum of corporate and commercial law activities. From its earliest days, it has been one of the protagonists in local legal practice and has contributed specifically to Malta’s internationally recognised reputation as a centre for financial services.The firm is currently made up of a team of over 50 lawyers supported by a growing complement of managerial, administrative and secretarial staff. Address: 171 Old Bakery Street, Valletta, The firm’s financial services practice has experienced extensive growth since Malta joined the VLT 1455, Malta G Web: www.jmganado.com European Union particularly in areas of investment services & funds, banking and insurance. The Tel: +356 2123 5406 G Fax: +356 2123 2372 Contact: Dr. Andre Zerafa, Advocate Investment Services & Funds practice within the firm is considered a leader in this sector in Malta. Email: [email protected] Ganado & Associates is a Lex Mundi member firm and also a member of AIMA.

Professional Services Provider

DELOITTE Deloitte provides audit, tax consulting and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s more than approximately 169,000 professionals are committed to becoming the standard of excellence. In Malta, the firm services large significant international and national clients as well as smaller owner-managed businesses. Over the years, the practice expanded Address: Deloitte Place, Mriehel Bypass, steadily. We are now firmly established as one of Malta’s leading providers of professional services, Mriehel, BKR 3000, Malta Web: www.deloitte.com/mt reporting among the highest of any professional services firm. We have the largest international tax practice and a dedicated financial services practice, serving a range of multinationals that oeprate Tel: +356 2343 2000 G Fax: +356 2133 2606 Contact: Stephen Paris, Head of Financial through Malta to take advantage of our skills, competitive cost base, regulatory environment, EU Services G Email: [email protected] membership and attractive tax system.

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Malta Special Supplement Cover_. 10/12/2010 15:54 Page 4 Malta Special Supplement Cover_. 10/12/2010 15:53 Page 1

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7 reasons why international financial institutions are dropping anchor in Malta:

English as an official language; Cost competitive skilled workforce; EU member with euro as its currency; Consistently highly ranked quality of life; Meticulous yet accessible single regulator; Robust yet flexible legal and regulatory framework; Secure and stable business environment and a world class IT infrastructure.

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