Cayman Islands: The Cayman Islands Stock Exchange

The Cayman Islands Stock Exchange, now in its third year of operation, has recently launched a serious of new products, which have confirmed its status as the world’s fastest growing bourse.

Although it was initially set up to provide a listing facility for the specialist products of the Cayman Islands, including offshore mutual funds and specialist debt securities, demand for new products from institutional investors world-wide has resulted in a rapid expansion of services.

In recent months the Exchange has introducing listing rules for sponsored and unsponsored global depositary receipts. It has also won plaudits from the finance industry for its new rules governing the listing of derivative warrants.

Major institutions from the US, Europe and Latin America have found that the Exchange’s innovative and flexible approach has proved a major draw when compared with other exchanges.

The Exchange’s Chief Executive Officer, Ann Nealon, said: "We have developed a very good relationship with a number of large institutions by being responsive to their needs and we will continue to develop and offer the necessary facilities for institutions world-wide.

"As well as institutional products we are now working on a number of initiatives to increase the Exchange’s local profile."

The Exchange is a private limited company wholly owned by the Cayman Islands Government but operated as an independent entity under the stewardship of Ms Nealon. It is fully electronic and has installed innovative information technology systems for the processing of listing applications, and provides a swift and efficient service. In terms of trading capabilities it uses a Bloomberg electronic trading platform and operates in a virtual environment. It also places great emphasis on its Internet facilities and listed issuers have access to the Exchange’s own web site for their marketing materials.

The achievements of the Exchange in its first two years of operations are impressive. It has around 200 issuers approved for listing and these issuers are a mixture of mutual funds, hedge funds, specialist debt vehicles and warrants.

Given that the funds industry in the Cayman Islands continues to grow it is not surprising that the first batch of approved issuers to list on the Exchange were mutual funds. Latest government statistics show that there are now over 2000 regulated mutual funds in Cayman with an estimated US$200 billion of assets.

The Exchange has won approval from the mutual fund industry because it focuses on disclosure of relevant financial information rather than on actually restricting the activities of the fund. It does not impose any investment restrictions on the investment policy of a fund, nor does it insist on any prescribed degree of investment diversification or prohibit newly incorporated funds from changing their investment policies for a specific period of time.

The lack of such restrictions gives a fund more flexibility and makes a listing particularly attractive to those funds offering highly focused investment strategies and to hedge funds in particular. Some of the most prestigious hedge funds managed out of the US have found the Exchange to be an attractive listing venue. These include Texas-based Maverick Capital, which manages over US$1 billion and Kingdon Capital Management Corp of New York whose offshore fund is capitalized at over $US1.7 billion.

In terms of deciding whether a fund is suitable for listing, the Exchange focuses on the parties involved with the fund, its directors, promoters, the investment manager and adviser and their relevant experience. It does not apply a benchmark figure with respect to assets under management to decide whether, for example, a fund manager is adequately experienced. It will take into consideration other factors such as a manager’s existing track record to decide suitability for listing. This may make the Exchange attractive to newcomers in the investment management business as well as more established players.

The Exchange guarantees response times in terms of dealing with comments upon documentation. Delay is a common complaint about other stock exchanges but the Cayman Exchange guarantees initial comments on the first draft of listing particulars within five days of the receipt of the draft listing document, and a three-day turnaround thereafter. With commitment on both sides to expediting the listing process, it takes approximately two to four weeks to approve a mutual fund listing application.

The Exchange has also introduced a responsive regime for specialist debt listing. This has paid dividends attracting business from international finance houses like Merrill Lynch, Deutsche Bank and Lehman Brothers.

The debt listing facility offers a significant advantage for asset-backed securities. Only limited information on the underlying assets must be disclosed in the listing document, if the Exchange is satisfied that investors are able to obtain information from publicly available sources which is sufficient to enable them to form an opinion as to the value of such the securities being acquired.

The Exchange also has a special provision for listing debt programmes. Once an application for listing a debt programme has been approved, the issuer will be able to issue and list securities under that programmme for a period of five years before they need reapply.

A specific provision has also been made to accommodate issuers who wish to list a tranche or series of securities under a debt programme in circumstances where all the securities to be issued under the programme have already been approved for listing on another recognised exchange. The Exchange will accept the listing documentation prepared in connection with the issuer’s application to the other exchange.

Only the pricing supplement setting out the final terms of the issue and any supplementary listing particulars, needs to be prepared.

The Exchange has introduced also new rules for listing collateralised bond and loan obligations (CBO’s). These specialist forms of debt instrument have witnessed spectacular growth in the last two years. In 1997 the estimated value of the industry was US$45 billion compared to US$12 billion the previous year.

Issuers of debt securities often require a listing to satisfy the needs of institutional investors. The new rules for CBO’s are designed to address the complex issues raised by these specialist products and the Exchange is confident that it will attract business in this area and compete successfully with other exchanges. Salomon Smith Barney in New York were the first to have a listing approved under these new rules

The growth in the number of debt securities listed on the Exchange is partly due to the fact that the Exchange is aware of the time pressures under which issuers and their advisers in the debt securities market operate. It makes every effort to accommodate an issuer’s time table as it is aware that delay is a common complaint as regards other bourses. Document turnaround times are guaranteed and with commitment on both sides to expedite the listing process, it usually takes only 10 – 14 days to approve a debt listing application.

The latest addition to the Exchange’s list of products is rules governing the listing of derivative warrants and these are proving enormously successful. The first institution to take advantage of the listing procedure was Credit Agricole Indosuez which listed five issues under the W.I.Carr Developing Markets Growth Index Tracker (WIDGET) Programme.

Under the terms of the programme, Credit Agricole Indosuez may issue instruments (known as WIDGETS) relating to a specified security, basket of securities or index with respect to securities listed on markets throughout Asia

The listing fees of the Exchange for both mutual fund and debt listings are competitive with those charged by other exchanges. The lack of any requirement for a local listing agent in the case of a listing of debt securities also offers a significant cost advantage.

With its obvious advantages, the Exchange is set to consolidate its existing well established following amongst institutions world-wide.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com

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