At their most basic level, money market funds ("MMFs" and each an "MMF") are funds that invest in high quality, low-risk, short term debt securities, with the aim of providing a greater return to investors than the interest (if any) that might be paid on their surplus cash balances. MMFs are considered by many investors to be a relatively safe and highly liquid investment alternative to simply holding surplus cash in a bank account.
MMFs aim to maintain a constant net asset value ("CNAV") of USD1.00 while generating a low rate of return, eg. through dividends. MMFs attract an extraordinary amount of investor capital, with some funds holding tens of billions in assets - in aggregate regulated MMFs in the US and MMFs in Europe currently hold around USD4 trillion in assets.
Partly as a result of the 2007-2008 financial crisis, and the importance of the liquidity provided by MMFs to the global financial economy, both the United States and Europe recently proposed reform measures with the intent of making MMFs better equipped to address a run on the funds (ie. a large amount of capital being withdrawn by investors in a short period of time). The proposed reforms became law in the United States on 14 October 2016 and are expected to come into force for newly established European MMFs on 21 July 2018 (with existing European MMFs having until 21 January 2019 to comply).
The detail of, and rationale for, the reform measures are beyond the scope of this article, but some of the key amendments (hereafter, the "Amendments") broadly include the following:
- certain MMFs must move away from a CNAV to a floating / variable NAV;
- the imposition of a default liquidity fee on redemptions if an MMFs' liquidity levels fall below a prescribed threshold; and
- the power of the MMFs board to temporarily impose a redemption gate.
In response to the Amendments, asset managers and sponsors in the US and Europe are reassessing the most suitable jurisdiction to domicile their MMFs as well as related structuring vehicles (eg. feeder funds).
While some investors may welcome the Amendments and, for example, the move to a floating/variable NAV, other investors may instead be more familiar with the attributes of the traditional CNAV MMFs. As the Cayman Islands can facilitate both the CNAV MMFs and the floating/variable NAV MMFs (ie. both forms of MMFs, pre and post the Amendments), the jurisdiction is proving a popular choice for promoters looking to launch new MMFs.
In addition to being able to accommodate both the traditional form of MMF and the newer form, there are a number of other compelling reasons why MMF managers and sponsors might consider domiciling their MMFs in the Cayman Islands, including the following:
SPONSOR, MANAGER AND INVESTOR FAMILIARITY
The Cayman Islands is a popular offshore jurisdiction for establishing investment funds of all types and, as a result, it will be familiar to a significant number of MMFs managers, sponsors and investors. As an illustration of the jurisdiction's popularity one need only look at the total number of Cayman Islands 'financial institutions' that are registered with the US Internal Revenue Service (the "IRS") for FATCA purposes - this would include hedge funds, private equity funds and non-CIMA registered mutual funds. According to the IRS Global Intermediary Identification Number ("GIIN") list, as at 18 October 2017, there were 52,777 Cayman Islands financial institutions that had registered with the IRS for a GIIN. This number is significant, especially when compared to other jurisdictions with strong financial services industries such as Luxembourg (12,693), Hong Kong (6,719), Ireland (6,202) and Singapore (3,047). In addition, as at 30 June 2017 there were 10,621 open-ended mutual funds registered with the Cayman Islands Monetary Authority and 103 registered mutual fund administrators.
The Cayman Islands is a tax neutral jurisdiction, which represents a significant benefit to asset managers looking to structure vehicles that are attractive to investors. As a tax neutral jurisdiction, there would be no domestic Cayman Islands income or corporations tax that would apply to the MMFs nor any Cayman Islands tax that would apply to investors, whether directly, eg. income tax, capital gains tax or inheritance tax or indirectly, eg. dividend withholding tax.
This keeps things simple from the investors' perspective. Investors continue to be subject to tax in their own home jurisdictions in the normal way on the proceeds received from the MMFs, but they do not have to obtain Cayman Islands tax advice or tangle with the complexities of another jurisdiction's tax filings. An MMF would, of course, be subject to tax in the relevant jurisdictions where it makes its investments and the investment manager would arrange for the MMF to attend to any such taxes.
SIMPLE AND FLEXIBLE
The process for forming Cayman Islands MMFs is simple and can be done in short order (as quickly as 24 hours if required), at relatively low cost and without the requirement for prior governmental approval. There would be no requirement for directors of MMFs to be resident in the Cayman Islands or for shareholder meetings to be held on an annual basis. The Cayman Islands law underpinning investment funds is aimed at sophisticated investors and has a framework that enables documents to be tailored to many different situations, including, if necessary, the types of changes contemplated in the Amendments, eg. floating/variable NAV's, redemption gates and liquidity fees.
SOPHISTICATION AS A JURISDICTION
The Cayman Islands is a British Overseas Territory. It is a stable jurisdiction with no exchange controls and a Moody's credit rating of a Aa3. The jurisdiction makes its own laws through a democratically elected legislature and has an independent legal and judicial system. The substantive law of the Cayman Islands is based on the English common law with well-recognised legal concepts, such as separate legal personality applying to corporate fund vehicles. It is a trusted centre of excellence in the global investment funds industry and is home to thousands of experienced and highly qualified professional service providers.
INTERNATIONALLY FRIENDLY AND WELL REGARDED TRANSPARENT JURISDICTION
It is a well-regulated, co-operative and transparent jurisdiction. By way of illustration, the Cayman Islands was one of the early adopter countries to both the US Foreign Account Tax Compliance Act and the OECD's Common Reporting Standard ("CRS"). The jurisdiction has a beneficial ownership regime requiring certain companies to establish a non-public register of their beneficial owners.
As a result of its efforts, the Cayman Islands has been rated by the OECD as 'largely compliant' with respect to transparency and information exchange – the same rating as the United Kingdom, the United States and Luxembourg.
The Cayman Islands is conveniently located, geographically, with a large number of direct flights operating daily to the United Kingdom, Canada and the USA. The jurisdiction operates on Eastern Standard Time. There are a number of compelling reasons why the Cayman Islands is particularly well-placed to become the jurisdiction of choice for MMFs formations and, potentially, re-domiciliations.
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.