Establishing Structured Funds in Ireland

Transcription

1 Establishing Structured Funds in Ireland Law Firm of the Year: Republic of Ireland, European Awards 2011, The Lawyer One of the most innovative law firms in Europe and the only Irish law firm to be commended for corporate strategy, Financial Times Innovative Lawyers Report 2012 Client Choice 2012 award, International Law Office Dublin London New York Palo Alto

2 1 This brochure outlines the growth in structured funds and the flexibility associated with such funds arising from the fact that they are permitted to establish separate classes of shares with different structured returns. It sets out the steps for establishing a structured fund in Ireland. Finally, the brochure considers the advantages of domiciling a structured fund in Ireland. Matheson Our primary focus is serving the Irish legal needs of international companies and financial institutions doing business in and through Ireland. We regard efficiency, responsiveness and a practical and commercial approach to problem-solving as vital to the provision of first class legal advice to our clients, which include over half of the Fortune 100 companies, 27 of the world s largest banks, as well as some of the largest public, private and State owned companies and institutions in Ireland. Our firm is headquartered in Dublin, with offices in London, New York and Palo Alto. With over 350 legal and tax professionals, more than 600 people work across our four locations. Matheson is consistently recognised for its excellence and in 2012 was awarded, for the sixth time, the International Law Office Client Choice Award for Ireland. In 2011, Matheson was named the Irish Law Firm of the Year at The Lawyer European Awards for the second consecutive year. The Asset Management and Investment Funds Group Headed by a former chairman of the Irish Funds Industry Association and with eight s and 40 fund professionals in total, including a full offering from our New York office, Matheson s Asset Management and Investment Funds Group is the leading UCITS and alternative investment fund practice in the Irish market. It is ranked a tier one practice group by Chambers Europe, the European Legal 500 and PLC. In recognition of its expertise in alternative investments, Matheson was the first Irish law firm to be named European Law Firm of the Year by The Hedge Fund Journal and in 2011 the group was named European Adviser of the Year by Funds Europe. The Asset Management and Investment Funds Group offers a comprehensive and innovative advisory service to clients. In addition to asset management advice (including tax advice) on the structuring and establishment of all types of investment funds, the group can draw on the resources of: a regulatory risk management and compliance unit; a specialist outsourcing group and company secretarial unit; a financial institutions group advising on the corporate, regulatory and M&A aspects of our clients businesses in Ireland; and a dedicated derivatives team. This results in our having an unrivalled capacity to provide combined asset management, tax, regulatory, corporate and derivatives advice to clients.

3 Contents 2 1 Growth in Structured Funds 3 2 Share Class Flexibility for Structured Funds 6 3 Key steps to establishing a Structured Fund in Ireland 8 4 Advantages of Ireland as a Fund Domicile 12 Contacts 14

4 1 Growth in Structured Funds

5 1 Growth in Structured Funds 4 Many product producers who have traditionally used securitisation issues and structured products such as debt programmes, certificates, collateralised loan obligations or collateralised debt obligations to structure their deals are now creating structured funds for their product offerings. The growing focus on fund structures, and the use of equity in place of debt instruments to offer structured products, coincides with a renewed focus on regulated investment funds, and in particular UCITS funds, among investors. Ireland is the fastest growing fund servicing centre in the world with extensive industry experience and expertise in the areas of fund management, administration, custody, legal and auditing. This strong pool of expertise has given Ireland a significant advantage in this area of structured funds and Matheson has been at the forefront of the development of the structured fund industry in Ireland, acting for many of the leading promoters in establishing innovative structured products. UCITS Structured Funds Since 2003, UCITS funds have been permitted to invest extensively in derivative instruments, making them a suitable vehicle for structured products. The other benefits of the UCITS regime for structured products include: the European Union passport permitting marketing to retail investors throughout Europe; counterparty rating and collateral requirements that can be significant in addressing investor concerns in relation to counterparty exposure risks inherent in some structured debt instruments; investment diversification requirements applicable to the underlying exposure of the structured fund; and the independent custody and oversight regime applicable to UCITS funds. Structured Product Sample UCITS Fund Structure The three most common types of swaps we see utilised by UCITS to achieved structured returns are: Fully funded swaps where the fund receives the relevant return and pays over the cash notional to the swap counterparty; Performance funded swaps where the fund pays the returns of a basket securities and receives the relevant return; and Unfunded swaps whereby the fund makes periodic payments to the counterparty and receives the relevant return. Such structured funds may enter into repos to generate the swap payments. We also typically see clients entering into repos to generate the swap payments in relation to unfunded swaps.

6 5 Structured Product Sample UCITS Fund Structure Counterparty 95% Collateralised Swap Fund Funding Assets/Basket of Securities Collateral Return Cash Repo Counterparty Qualifying Investor Fund Alternatively, structured products in Ireland can also be established as Irish Non-UCITS funds, the most popular of which is the Non-UCITS qualifying investor fund ( QIF ). A QIF provides added flexibility in investment policy, as it is not subject to the same diversification, collateral or counterparty requirements as a UCITS, and speed to market available through a one day fast-track authorisation procedure. Under the fast-track authorisation procedure, a QIF can be authorised by the Central Bank within 24 hours of a single filing of final documents, provided all relevant parties to the QIF (eg the promoter, directors and service providers) have been approved in advance of the application.

7 2 Share Class Flexibility for Structured Funds

8 2 Share Class Flexibility for Structured Funds 7 Structured funds are permitted to establish separate classes of shares with different structured returns provided that this does not result in any prejudice to investors in one share class vis-á-vis investors in another. In 2010 the Central Bank announced an enhancement to the existing rules and framework applicable to the establishment of shares classes for structured funds for both UCITS and QIFs. UCITS UCITS funds may establish distinct share classes with different structured returns. This approach facilitates the structuring of returns based on variables such as level of participation in an underlying portfolio or index, level of capital protection and maturity date. A UCITS may obviously also establish different shares classes with different fees, dividends and for the purposes of currency hedging. A UCITS wishing to utilise this opportunity to establish distinct share classes with different structured returns must comply with the following conditions: The financial derivative instrument for each share class must be based on the same underlying portfolio or index; The arrangements cannot result in a leveraged return per share class, ie the participation rate can be up to but cannot exceed 100 per cent of the relevant share class s performance of the underlying portfolio; The board of the fund/management company as appropriate (the Board ), must confirm that they have reviewed and are satisfied that the proposed arrangements will not cause any prejudice to investors in one share class over the investors in another share class; and The Board must confirm that there will be no cross liability between the share classes. In addition, the Central Bank will permit interest rate hedging at share class level where the benefits and costs of such hedging may be accrued and attributed solely to investors in a particular share class. QIFs In the case of QIFs, the Central Bank also confirmed that it will consider proposals for the use of derivatives at share class level with different features such as, for example, leverage and participation based on different sub-indices of a single initial index. This allows a QIF to launch different share classes within the same fund, each with different structured terms, such as maturity, capital protection, currency and payout-rates. This development is an extension of the Central Bank s existing position in relation to side pockets, which have been permitted at share class level since the end of 2008 and its position in relation to hedged share classes (which have been permitted for many years now). QIFs are also permitted to carry out interest rate hedging at share class level. Structured Product Sample UCITS Multi-Class Fund Structure Structured Fund Share Class A Maturity: 31/12/2015 Currency: Euro Capital Protection: 80% Return: 100% of FTSE100 Share Class B Maturity: 31/12/2017 Currency: Sterling Capital Protection: 100% Return: 70% of FTSE100 Collateral Swap Collateral Swap Counterparty Counterparty

9 3 Structuring an Exchange Traded Fund in Ireland

10 3 Structuring an Exchange Traded Fund in Ireland 9 As with any other investment fund authorised by the Central Bank, the authorisation of a structured fund is a standardised process and we have outlined the essential elements of this below. 3.1 Promoter Approval The promoter is the entity regarded by the Central Bank as the driving force behind the establishment of the fund and must be satisfied with the experience, expertise, reputation and resources of the intended promoter of an Irish domiciled investment fund. The timeframe for an entity not previously approved as a promoter of Irish funds and seeking to obtain this approval varies. There is a fast track process in place for applicants which can demonstrate previous experience in the promotion of collective investment schemes or are authorised either as a firm under the European Union Markets in Financial Instruments Directive ( MiFID ) or as a credit institution in a member state of the European Economic Area. If an applicant does not qualify for the fast-track process, it should be possible to obtain the relevant approval by completing the Central Bank s application form and providing relevant supporting documentation. Promoter approval will generally issue within a three week timeframe and the practice is generally to prepare other fund documentation during this period so that it may be filed upon receipt of the relevant approval. 3.2 Investment Manager Approval It will also be necessary to identify the entity or entities which will act as investment manager(s). If an investment manager has been previously approved to act in respect of Irish collective investment schemes, no further authorisations will be required other than the filing of a form with the Central Bank. In the case of an investment manager holding an authorisation under MiFID or which is a credit institution regulated within the European Economic Area, the applicant would avail of a fast-track approval process. There is a slightly longer process for an entity regulated by the SEC or similar entity. This is similar to the process for promoter approvals. It should not take longer than two to three weeks to complete and may be run in conjunction with the drafting of relevant documentation. 3.3 Approval of Directors All directors of Irish domiciled management companies must be pre approved by the Central Bank. Sufficient information in respect of all directors must be submitted to the Central Bank to demonstrate the appropriate expertise and good reputation of a proposed director. Each director must complete an online individual questionnaire including pre-formatted C.V. sections. At least two directors must be resident in Ireland. 3.4 Selection of Custodian and Administrator It will be necessary to appoint a Central Bank approved custodian for the safe-keeping of assets and a Central Bank approved administrator which is responsible for maintaining the books and records of the fund, calculating the net asset value of the fund and maintaining the shareholder register. In each case the entity must be located in Ireland and the relevant service contracts will form part of the filing with the Central Bank. As noted above, all major fund service providers have a presence in Ireland and a number of service providers have developed expertise in the provision of services to structured funds. 3.5 Approval of Documentation by the Central Bank In the case of a UCITS, the prospectus and deed of constitution are filed with the Central Bank for prior approval. Once these documents have been cleared of comment by the Central Bank, they may be dated and submitted in final form. The review process will typically take four to six weeks to complete from first submission. The approval procedures for QIFs have recently been streamlined by the Central Bank and a one day authorisation is now possible, subject to the provision of the relevant confirmations, and pre-approval of the promoter, directors and investment manager. It would only be necessary to seek prior Central Bank approval of documentation in the event that the proposed structure contains any unusual features or might require a derogation from those provisions of the Central Bank s notices applicable to QIFs.

11 Irish Stock Exchange Listing A structured fund may wish to list the fund on the Irish Stock Exchange (the ISE ). A stock exchange listing on a recognised exchange in an OECD jurisdiction, such as the ISE, can be particularly important for the profile of a fund, attracting certain categories of institutional investors, including certain pension funds or investors in certain jurisdictions who are prohibited or restricted from investing in unquoted securities. The listing process can normally be completed within four weeks of submission of relevant documents and, in the case of Irish domiciled funds, it can be completed contemporaneously with the Central Bank authorisation process. The listing requirements for Irish domiciled funds which are authorised by the Central Bank have been substantially streamlined and, in the case of QIFs, many of the listing requirements are disapplied. Once the ISE has cleared the relevant listing document (which in the case of the structured fund will be the prospectus) of comment, it may be filed with the ISE together with the relevant supporting documents. A fund must allow a period of 48 hours to elapse after this filing before it commences trading. 3.7 Role of Legal Advisers The role of the legal advisers to a structured fund would generally include the following: obtaining Central Bank approval of the proposed promoter of the structured fund; obtaining Central Bank approval of the proposed promoter of the fund and the investment manager(s) to be appointed to individual sub funds; drafting and finalising the prospectus and deed of constitution and investment management agreement; preparing documentation in relation to listing on the ISE and obtaining ISE approval of the prospectus and other relevant documentation; negotiating the custody and administration agreements; preparing all ancillary documentation for approval of fund by the Central Bank; incorporating the management company, if required, and arranging for authorisation of the management company by the Central Bank; and co-ordinating the launch board meeting and providing legal advice on any other issues relevant to the establishment of the structured fund.

12 11 Time-frame to Approval The chart below sets out an indicative time-frame showing key steps to be achieved in order to obtain Central Bank approval of a structured UCITS fund. The exact time-frame will vary from case to case and depend on existing approvals of service providers, and other factors. However, we would generally expect initial authorisation to take no longer than six to eight weeks and addition of a new sub-fund to take two to three weeks. Week 1 Week 2 Application made for promoter approval Application made for approval of investment manager(s) Prepare initial draft of prospectus, deed of constitution and investment management agreements Receive initial draft of custody agreement and administration agreement Week 3 Prospectus filed with ISE for review Week 4 Central Bank approves promoter and investment managers Comments received from investment managers and Service Providers Negotiate any amendments to documents with custodian Week 5 ISE comments received and second filing made Week 6 Documents finalised Documents finalised Additional ISE comments (if any) incorporated Week 7 Week 8 Final prospectus filed and approved

13 4 Advantages of Ireland as a Fund Domicile

14 4 Advantages of Ireland as a Fund Domicile 13 The advantages of Ireland as a fund domicile include the following. Ireland is a Member State of the EU and benefits from the harmonisation of EU financial services regulation and the ability to passport services across the EU. Ireland is a participating member of the European Monetary Union. All Irish collective investment schemes are exempt from domestic corporation tax and have access to Ireland s extensive and expanding network of double tax treaties. Unlike Luxembourg, there are no asset based taxes for funds launched in Ireland. In Luxembourg funds which are sold retail must pay a 5 basis point tax and funds which are sold to institutions must pay a 1 basis point tax on the value of their assets. Ireland has approved a range of tax-exempt fund vehicles (including investment companies, unit trusts, investment limited ships and common contractual funds) which can be tailored to suit investor requirements and preferences. Ireland is an OECD Member State and is featured on each version of the OECD s whitelist in the context of the OECD s internationally agreed tax standards. As a member of the European Union, Irish funds will not be subject to the marketing restrictions proposed under the Alternative Investment Fund Managers Directive. Ireland has introduced the exchange of information provisions of the EU Savings Directive and therefore is exempt from the withholding tax rates of 20 per cent, rising eventually to 35 per cent, which apply to funds in other member states, including Luxembourg, Austria and Belgium which have not adopted these provisions Ireland does not have any domestic legislation which requires the publication in local newspapers or similar publications of all notices to investors. Publication requirements in other jurisdictions can cost as much as 6,000 on each occasion that it is required and, as many host jurisdictions in Europe require a fund to follow the same publication requirements as they are subject to in their home jurisdiction, this cost can be multiplied many times over in jurisdictions which impose such publication requirements. The Central Bank has demonstrated prudent but practical regulation of investment funds, fund managers, administrators and custodians with regulatory sensitivity to the needs of international fund managers and service providers. Examples of the Central Bank s ongoing process to improve the procedures in respect of Irish investment fund offering include the introduction of a 24-hour authorisation process for QIFs, improved procedures for property funds and the publication of policy papers to advise on its position in respect of difficulties faced by funds in light of recent global market turmoil. Ireland has an experienced professional services workforce with specialist legal, tax and accounting skills, and a well developed infrastructure with sophisticated telecommunications networks. The Irish Stock Exchange is an internationally recognised, regulated exchange for the listing of Irish and non-irish domiciled investment funds and it is widely regarded as one of the leading exchanges in the world for the listing of investment funds. As Ireland is in the same time zone as London, business can be conducted with Asia and the Pacific in the morning and the Americas in the afternoon.

15 14 Contacts Michael Jackson Dualta Counihan Joe Beashel D E michael.jackson@matheson.com D E dualta.counihan@matheson.com D E joe.beashel@matheson.com Tara Doyle Anne-Marie Bohan Elizabeth-Grace consultant D E tara.doyle@matheson.com D E anne-marie.bohan@matheson.com D E elizabeth.grace@matheson.com Philip Lovegrove Shay Lydon D E philip.lovegrove@matheson.com D E shay.lydon@matheson.com Liam Collins Aidan Kelly new york office T E liam.collins@matheson.com T E aiden.kelly@matheson.com This material is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter. For detailed and specific professional advice, please contact your usual Asset Management and Investment Funds contact at the details set out above. Full details of the Asset Management and Investment Funds Group, together with further updates, articles and briefing notes written by members of the Asset Management and Investment Funds team can be accessed at. Copyright Matheson The information in this document is subject to the Legal Terms of Use and Liability Disclaimer contained on the Matheson website. Dublin London New York Palo Alto