Monday, January 23, 2017

Hedge funds more bullish on 2017

Although 2016 was far from a breakout year for hedge funds, performance improved over a lackluster 2015, and managers have a more positive outlook for 2017 as stock markets are boosted by President-elect Donald Trump’s plans to lower taxes, deregulate and spend on infrastructure.

Data provider Eurekahedge reported hedge funds were up 3.53 percent through November 2016, double the modest gains of 1.73 percent over the last year.

But fees and performance remained at the top of the list of investors’ concerns for the industry as the sector continued to trail the equity markets.

Cheaper passive investments have made inroads into the alternatives market by replicating some hedge fund strategies at a fraction of the cost.

Whether these smart beta exchange traded funds can fare in the same way in the choppier weather of more volatile markets remains to be seen. But alternative beta, in combination with the relatively modest performance of hedge funds, have raised the question of costs for institutional investors.

Pensions funds that made up a growing share of hedge fund investors over the past decade now set the tone. They put pressure on fees and demand customized investment structures and more detailed reporting on the funds’ positions to better align the hedge fund investment with their overall portfolio.

Others have scrutinized their allocations more critically after the unimpressive performance of hedge funds overall.

In a year when the S&P 500 gained 9.8 percent through Nov. 30, equity hedge funds returned a meager 4.9 percent, according to data provider Hedge Fund Research.

As a result, some investors have taken their money out of hedge funds altogether, pushing into better performing alternatives like private equity, real estate and infrastructure funds.

Hedge Fund Research predicts that 2016 could be the first year of net withdrawals from the sector since 2009. The number of hedge funds has also declined and is lower than in the past three years.

MetLife is one of the institutional investors that plans to radically reduce hedge fund investments in 2017. The firm said in December that it will bring down its hedge fund allocations from $1.8 billion to $800 million. This followed moves by CalPers, America’s largest public pension fund, which announced two years ago that it was eliminating its $4 billion hedge fund program. The New York City Employees’ Retirement System followed suit in April last year, along with a slew of smaller U.S. pension funds.


Institutional investors named cost and complexity as two of the main criticisms of their hedge fund investments. High fees and restrictive terms are less of a concern when the asset class produces outsize returns but amplifies once performance wanes.

“Allocations are hard to come by, so investors are really driving the fees,” said Dennis Westley, managing director, North America, Apex Fund Services, at the Campbells Fund Focus conference in December.

To attract further capital in a difficult fundraising environment, hedge funds had to respond.

Fee cutting and flexibility around incentives have become the norm in the industry.

Most funds used to command a management fee of 2 percent of assets under management and a performance fee of 20 percent of the profits. On average, this has come down across the board to about 1.65 percent and 18 percent, respectively. But depending on the size of the fund or whether it is a startup or established fund, fees can come down much lower. About two-thirds of funds offer some type of fee discount.

Managers give discounts depending on assets under management or time invested to reward early investors. Other structures use crystallization periods for performance fees, minimum return thresholds or hurdles for incentive fees, or they tie performance fees to the size of the return.

Managers are also looking for stickier capital and apply discounts for longer lock-up periods or reward particularly large investments.

“The most obvious one is longer lock-ups for lower fees,” said Westley. “We have seen that over and over again in the past months.”

In addition, founders’ shares, which incentivize early investors with discounted fees, have become more widespread.

For fellow panelist John McCann, CEO of Trinity Fund Administration, the convergence of the sector is part of the problem. Since hedge funds went mainstream, institutional investors have come in and set the scene.

“You have got pressures on fees, you have got hurdles, benchmarking. And yet performance is still not there. Ninety percent of the assets in the industry are controlled by 10 percent of the managers. And they are average,” he said. “Where are the alpha pickers? If they are vanilla strategies pretending to be hedge funds, I think that’s the problem. They lost their way.”

Looking at the industry’s average returns collated by data provider Prequin, large funds have indeed been the problem of the industry as small funds have shown the best returns, and emerging funds also performed better than institutional players.

This can still be an opportunity for the industry going forward, noted Ronan Guilfoyle, founder of Calderwood, an asset management fiduciary firm that offers directorship services.

“If you are diversifying your portfolio, you are going to allocate to emerging managers, emerging markets, as well as having your private equity and hedge piece. That’s traditionally where a lot of the best returns have been: the small nimble managers who have to do well,” he said. “The new managers that we are talking to are saying there is some excitement out there, some interest.”

However, he acknowledges that it will take time for these startups to get past the $100 million hurdle required to develop a critical mass in today’s market.

“You have to make significant investment in infrastructure up front on top of that outperformance for investors to take notice. The days with two guys and a Bloomberg and friends and family money are long gone,” he said.

Institutional investors are now demanding detailed information from managers similar to the reporting required by regulators.

While investors do not want to invest blindly, and ensure they know the risk characteristics of their investment, it puts them at odds with managers who want to protect their intellectual property.

Still, the volume and velocity of reporting of risk metrics has exploded, McCann said. In Europe, this is largely due to regulation, but the U.S. is seeing the same trend, according to Westley.

In any case, the infrastructure needed to report the vast amounts of data and analytics is costly. Managers must choose between adding staff and outsourcing.

Investors also demand more customized investments. EY’s annual survey of the hedge fund industry found that 42 percent of investors aim to shift from commingled hedge funds to customized vehicles and segregated accounts.

The move to customization is prompted by the desire to gain more control, flexibility and a more intimate understanding of the investment strategy.

Many institutional investors will turn to hedge funds only to achieve specific exposures, noted EY partner Jeff Short at the firm’s Hedge Fund Symposium in Cayman in December.

Top risk for the industry

Yet, EY’s survey showed only 8 percent of investors believe hedge funds can offer strategies or exposures that cannot be obtained elsewhere. Changing investor demands were thus the top risk for the hedge fund industry, the survey found. About half of all investors said they expect to shift their hedge fund investments to other alternative investments such as private equity, real assets and venture capital over the next three to five years.

Family offices and sovereign funds have already moved significant capital out of hedge funds, some of it going into private equity and real assets, said McCann.

“That may pause now because of Trump,” he said.

Although President-elect Trump said he would repeal the carried interest benefit for hedge funds and private equity funds, industry insiders are not sure whether he is going through with the proposal, nor whether he is bluffing with his stance on trade.

The stock market, however, has reacted positively to the prospect of large-scale deregulation, tax reform and a general pro-business stance of the new administration.

Banking stocks surged 20 percent since the U.S. presidential election. For McCann there are obvious sectors that should benefit. With a divergence of interest rates and the strengthening of the U.S. dollar, investors are showing strong interest in U.S.-centric businesses, he said.

“We have had many board meetings where certain sectors are anticipating to benefit. Everybody is anticipating deregulation. I think U.S.-centric will do very well. I think infrastructure sectors will do very well, certain parts of energy.”

Guilfoyle said he is not convinced that a lot of capital went from hedge funds into private equity.

“A lot of the money will be sitting on the sidelines. If you are diversifying your portfolio, you are already allocating to private equity. You don’t want to be overweight. So, it is a question of the mix. Maybe there is a bit of cash on the sides and that will come back into the hedge fund space in two years.”

Guilfoyle is also upbeat about the industry’s prospects in the near term.

“We have seen a lot of activity and out of the U.K. and Switzerland. We see new launches all the time and that has steadily increased as the year has gone on,” Guilfoyle said. “I think we will see more launches and more spinoffs from the larger managers.”

Westley agreed. “The last several months we have seen an uptick, not just in the U.S., but in the Asia Pacific region.”

Whatever direction the Trump presidency is going to take, panelists agreed, the uncertainty created by the political situation and the volatility from rising interest rates will form an environment with many opportunities for hedge funds.

RBC economist: Inequality drives the economy and politics

2016 has been a tumultuous year. Democracy itself has faced a crisis, and the political establishment has been shaken. Voters in the U.S. and the U.K. expressed their desire for change, regardless of the form this change is going to take and at times fueled by xenophobic sentiment.

Worldwide economic and political freedom has declined.

The Global Freedom Report, published by Freedom House, which promotes democracy and human rights, noted a 10th consecutive year of decline of political rights and personal liberties in countries around the world.

Last year, freedom diminished in 72 countries, the largest number during that period. Over the past 10 years, 105 countries have seen a net decline, and only 61 have experienced a net improvement, Freedom House noted.

The numbers indicate that democracy is under threat. The outcome of the British referendum to leave the European Union and the election of Donald Trump to become U.S. president are seen by some as symptomatic.


Political commentators have ascribed the current sentiment to xenophobia, automation causing job losses and the middle classes in developed countries being left behind amid the rapid change of a more globalized world.

“But I think underlying all those things is inequality,” Royal Bank of Canada group economist Marla Dukharan said during a Global News Matters webinar on the economic outlook for the  Caribbean region in December.

“If you look at how inequality has been trending since the financial crisis, the richest 1 percent of the world has more wealth than the rest of the world combined,” she said, citing a report by aid agency Oxfam.

The same report notes that 62 individuals have the same wealth as the bottom half of the population.

“That extensive inequality is unprecedented,” said Dukharan. “This rise in inequality has been exacerbated by the policy response to the financial crisis.”

The policy response of monetary fiscal stimulus to generate economic activity was somewhat successful, but it has been far more effective at driving up asset prices. “So the 1 percent have seen their wealth increase significantly as a direct result of the policy response to the financial crisis.”

The resulting rise in inequality is more than a political problem. It is an economic one.

A 2015 study by the International Monetary Fund determined that increasing the share of income of the top 20 percent results in lower economic growth, whereas rising incomes for the lower and middle classes increases growth.

In other words, “when the rich get richer, benefits do not trickle down,” the report concluded.

“Causes and Consequences of Income Inequality” thus recommended country-specific policies with a focus on raising the income share of the poor and preventing the hollowing out of the middle classes.

The answer in advanced economies, the authors said, has to be to raise human capital and skills and to make tax systems more progressive.

Inequality in the Caribbean, measured by the Gini coefficient, is even higher than in the U.S.

“We need to fix that inequality problem in the Caribbean and on a global scale,” Dukharan said.

But she concedes that although global growth is at 3.1 percent, only slightly above the level of 3 percent which the IMF considers to be a recession, “nobody sees a need for a coordinated response.”


Just like democracy, globalization has faced a backlash in the current political climate. Not only have trade flows dropped significantly, the flow of capital between countries has dried up.

Cross-border capital flows, measured as a percentage of gross domestic product, are at the lowest level since 1989. Current levels of 2.6 percent are down from 20.7 percent just before the financial crisis.

Dukharan says this suggests that the Caribbean will see similar patterns, for example in the form of lower foreign direct investment.

“That is a challenge in two terms: with infrastructure and to help us with our productive capacity. In the Caribbean we have a current account deficit in most countries, we import more than we export. And we finance the deficit through inflows on the capital account. That means we borrow U.S. dollars or we get FDI inflows,” she explained.

“If they are declining, we are challenged to balance our current accounts. We will face diminishing reserves, which we have seen in some countries.”

China, she added, will reduce its outflow of U.S. dollars to hold on to its reserves. The Chinese government recently issued a directive that state-owned enterprises will not be allowed to invest more than $1 billion on any single overseas transaction.

“That is going to have implications for the Caribbean. We have relied very heavily on Chinese capital inflows and direct investments,” the RBC economist said. “It has implications for refineries in Curacao and the Baha Mar project in the Bahamas as far as that they need more capital to finish that project.”

Commodity prices, currencies

Meanwhile, most Caribbean economies must likely deal with the challenge of rising oil prices. RBC Capital Markets is expecting West Texas Intermediate crude oil to average US$56.40/bbl in 2017, reaching the US$60/bbl range by late 2017.

This is not even a positive for oil producers like Trinidad and Tobago, which generates 75,000 barrels a day but imports 100,000 barrels a day.

“So higher oil prices can put a strain on the raw materials for running the refineries,” Dukharan said.

Guyana, Suriname, and Dominican Republic will also be impacted by an anticipated decline in the price of gold. And due to a strong correlation between the one-month gold and three-month natural gas prices, natural gas should soften as well, she added.

The strengthening U.S. dollar, on the other hand, can affect the exports and tourism competitiveness of Caribbean countries whose currencies are pegged to the U.S. dollar and have appreciated against major currencies like the Canadian dollar, the euro and the sterling.

A tale of two countries

Demonstrators wave flags from the top of a bus last month outside the Supreme Court in London where Prime Minister Theresa May's government asked the court to overturn a ruling that Parliament must hold a vote before Britain's EU exit negotiations can begin. - PHOTO: AP

Brendalee Scott-Novak,

2016 heralded unprecedented shifts in our global political landscape. The watershed moment, it can be argued, was Britain’s vote to abandon the 23-year-old European Union. As news reports of this historic vote surfaced, shock waves ricocheted across global financial markets, sending all the major indices into tailspins.

This unprecedented move by the euro area’s second-largest economy drove down the British pound more than 18 percent, caused the FTSE 100 Index to plunge more than 15 percent and pushed down GDP growth estimates to merely 1.4 percent for 2017.

Analogous to the shock of a Brexit reality was the striking defeat of Democrat Hillary Rodham Clinton in the U.S. presidential election, giving the presidency of the world’s super power to the populist, anti-establishment candidate Donald Trump.

Prior to the election, forecasts of a Trump victory suggested a sharp selloff in markets similar to the aftermath of Brexit. While equity markets did experience a brief selloff at the opening, as the initial shock wore off, investors began dissecting the reality of Trump’s policy initiatives. U.S. equity markets then rose in spectacular fashion on speculation that the president-elect will introduce fiscal stimulus, boost infrastructure spending and tackle deregulation, boosting the economy and spurring inflation. The sanguine mood in markets drove the Dow Jones Industrial average to new highs inching closer to a record 20,000. Fixed income markets, on the other hand, spun into a nosedive, pushing rates higher across the entire curve. The move dealt a crushing blow to bond holders, driving 10-year U.S. Treasuries up more than 94 basis points.

In the months leading up to the election, analysts and the media alike touted a Trump victory and Brexit as two sides of the same coin. But what exactly caused the euphoria in U.S. equity markets following Trump’s victory versus the flight to safety and free fall in British markets from a Brexit vote?

Admittedly, the referendum in Britain was the first in the sequence of political shake-ups our modern world has experienced. Italy’s vote to reject the referendum on constitutional reform and subsequent resignation of Prime Minister Matteo Renzi (increasing the probability for early elections this year) has left many concerned about the wave of populist sentiments and its potential impact on Europe.

While most of Europe’s populist parties are hoping to ride the wave of revolution taking place, the recent defeat of far-right anti-immigration Freedom Party’s Norbert Hofer in Austria means a sweeping move by anti-establishment ideologies is not a foregone conclusion. With elections in the Netherlands in March, France in May, and Germany in the fall, all eyes will be on the euro area as they navigate a new year riddled with political uncertainty.

As we usher in 2017, we are left to wonder if the shifting political dynamics and market euphoria around a Trump presidency have been miscalculated.

Adopting President-elect Trump’s policy initiatives in part or the whole can easily swing the pendulum from a country operating at or near the natural rate of full employment into a deep rooted recession. A large surge in activity when the economy is close to its full employment rate could bolster wage pressures, the most significant contributor to inflation. Current initiatives by states to increase the minimum wage, coupled with anti-immigration policies of the president-elect — specifically around the deportation of illegal immigrants — could further reduce the labor force, making the environment ripe for additional wage pressures.

The levying of steep tariffs on goods produced abroad by U.S. corporations, a major campaign theme of the president-elect, will make U.S. corporations less competitive, whilst driving imports of cheaper alternatives higher. A rising trade deficit and debt burden from large-scale fiscal stimulus and infrastructure spending will undoubtedly add to inflationary pressures, bringing the integrity of the U.S. balance sheet into question.

While Trump’s victory was met with much jubilation in the streets, the longer-term impact of his combined policies, if passed by Congress, may not bode so well for the U.S. economy. Paradoxically, the U.K.’s decision to exit the EU has resulted in short-term pain, but it could effectively serve to undergird an even stronger economy in the not so distant future.

Statistics and Data Source: Bloomberg LP., BCA Research, Federal Reserve

Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The bank accepts no liability for errors or actions taken on the basis of this information.

Wall Street starts 2017 with tailwind

Thanks to a series of new record highs, the leading U.S. stock market indices had a very successful end of the year. The recent momentum also puts the market in a good position heading into 2017.

The Journal looks ahead and names some favorites.

Time magazine named President-elect Donald Trump as “Person of the Year” for 2016. Though he does not take office until Jan. 20, Trump’s promises and policies have already captured the attention of stock market investors. Trump was not only deemed responsible for the push forward to new record highs in the market (the Dow Jones Industrial Average was close to 20,000 as of this writing), but also for the sector rotation, through which long-neglected parts of the market like financials or cyclical and value stocks have emerged as the new favorites.

In the most significant event, the sellout in the bond market, Trump was also considered to be partly responsible, largely attributed to the fact that the growth-promoting economic policy he strives for would presumably increase inflation as well.

If Trump’s plan proves to be successful, it could create further stock price momentum. After all, in recent years a lot of money went into bonds and comparatively little into equities. Should this trend reverse, it could turn out to be an important price support for equities.

Corporate tax reduction

The importance of Trump’s plan to reduce corporate taxes should not be underestimated. Strategist Ed Yardeni from Yardeni Research has already significantly increased his earnings estimates for the S&P 500 index. In 2017, aggregated earnings are expected to jump to $142 instead of $129, an increase of 20 percent, and in 2018 he expects $150 instead of $136.75. Apart from the expected positive outcome for corporate earnings, Yardeni says it is “important to see if Trump’s tax cuts really do benefit middle-class families and small business owners.”

It remains to be seen, however, which of Trump’s ambitious plans will be realized, since even in his own Republican ranks not everyone shares great enthusiasm for all of his ideas.

Finally, all policies that increase debt significantly or all protectionist measures, which ultimately turn out to be a boomerang, should be viewed with skepticism.

Recession unlikely

Although the trend on Wall Street in 2017 will, to a large extent, depend on what Trump will do, many of the most recent trends were already apparent before his election, including the rise of the inflation expectations and the upturn in the economy. Wall Street may even have headed for new records had there been a different election outcome simply because of the relief connected with the end of the political uncertainty.

That said, the valuation of the stock market can be considered a burden, since the P/E ratio of the market is above average in historical comparison. This should only backfire if there is a recession, a view shared by Sam Stovall, chief investment strategist at CFRA Research. He notes that this bull market is three months from its eighth birthday, a milestone reached by only one bull market since World War II.

“Bull markets don’t die of old age,” he says. “They die of fright. What are they most afraid of? Recession.“

Therefore, it is encouraging that economic models suggest the likelihood for such an event is still relatively low. Based on the recent development of the Philly Fed State Coincident Indexes, that is also the verdict of Veneta Dimitrova, senior U.S. economist at Ned Davis Research.

“Economic growth has broadened across more states, and the improvement has been sustained over the past several months,” Dimitrova says. “Our Recession Probability Model, based on state coincident indexes, edged down to 0.7 percent, indicating practically no odds of recession at this time.“

Bull trend

The Conference Board’s Consumer Confidence Index surged in December as the stock market reached record highs. The Conference Board said last week its consumer confidence index increased to 113.7 in December from an upwardly revised 109.4 in November. There is still plenty of room to run until the overbought 140+ levels (view graph). Bank of America Merrill Lynch views this as bullish in terms of secular sentiment. From this points of views, the road signs on Wall Street are still green. At least the completely intact long-term uptrends in the chart of the leading stock market indices allow no other conclusions.

Bank of America Merrill Lynch even speaks about a secular market trend like that of the 1950s. Technical Research Analyst Stephen Suttmeier continues to view the S&P 500 April 2013 breakout from the 2000-2013 trading range as a secular bull market breakout similar to those from 1980 and 1950, which lasted until 1966 and 2000, respectively. According to him, this means that the secular bull market triggered on the 2013 breakout remains at an early stage, with at least a decade more to run, in our view.

Apart from betting on the U.S. stock market as a whole in 2017, it should again prove to be particularly rewarding to invest in single stocks. In this case, it is important, as always, to pay attention to an advantageous combination of technical patterns, valuation and investment story. Stocks that have met these qualifications include UnitedHealth Group, Altria, General Dynamics, Citigroup, Boeing, Fedex, John Deere, Berry Plastics, Broadcom and Amazon.

As far as sectors are concerned, CFRA Research recommends overweight positions for consumer discretionary, industrials and materials. CFRA also suggests underweighting energy, consumer staples, real estate and utilities.

Analysts at investment bank Jefferies share the positive view of discretionary and industrials. In their opinion, given the dollar’s strength, it makes sense to focus the sector allocation more domestically.

Court of Appeal restores developers’ power to amend strata by-laws

Hector Robinson and Nicosia Lawson,
Mourant Ozannes

The Cayman Islands Court of Appeal has recently confirmed that the proprietors of a strata corporation registered under the Strata Titles Registration Law (STRL) have the power to govern, control and manage the strata through by-laws adopted in accordance with the STRL.

If a developer controls all the voting rights of the strata corporation, there is no limit to the power of the developer to adopt by-laws which confer enhanced voting rights at general meetings, and control of the executive committee, as long as such by-laws are adopted by a resolution passed with the requisite majority in accordance with the law, and the amended by-laws do not otherwise infringe the STRL.

On Nov. 4, 2016, the Court of Appeal handed down its judgment on the appeal in Thompson Resorts Ltd. and Castaways’ Timeshare Ltd. v Carl Clappison & Others. The court set aside the declaration of the trial judge that one of the by-laws of the Castaways’ Cove strata plan was ultra vires the STRL. The by-law had granted the developer enhanced voting rights and control of the executive committee for a period of 50 years.

In determining whether the by-law was contrary to the Strata Titles Registration Law, the court considered section 15 of the STRL, 1973, which was in effect at the time the impugned by-law was adopted (now section 21 of the 2013 Revision).

This judgment makes it clear that: (1.) The STRL expressly allows strata corporations to amend the default by-laws set out in Schedule 1 of the Law; (2.) There are no limitations on a strata corporation adopting, amending or varying the by-laws set forth in Schedule 1 of the law if the amendment is made in accordance with section 15 of the STRL, 1973 (section 21 of the 2013 Revision); (3.) The requirement for unanimity (now a super-majority) on the resolution amending the Schedule 1 by-laws is a legal imperative, rather than a procedural requirement; and (4.) It is for the legislature, not the judiciary, to amend a law which is governed by statute.

The Grand Court proceedings

In the case, two owners of unit entitlements in Castaways’ Cove brought proceedings in the Grand Court. They sought a declaration that the by-law in question was ultra vires the powers and duties of Castaways’ Cove and inconsistent with the strata law, as well as an order removing the by-law from the Castaways’ Cove by-laws.

By-law 2 was adopted in October 2003 by a unanimous resolution amending the default by-laws in Schedule 1 of the STRL.

At the time, the developer, Thompson Resorts Ltd., owned 100 percent of the unit entitlement within Castaways’ Cove and, under a Strata Management Agreement, was also appointed as the exclusive manager of the property for the period ending June 2050, with rights of renewal for subsequent five-year periods.

The amended by-laws and the Strata Management Agreement created a governance and management structure under which Castaways’ Cove would be managed together with, and as part of, the Reef Resort (now the Wyndham Reef Resort), for a period of 50 years ending in June 2050.

By-law 2 conferred on Thompson Resorts the power to call extraordinary general meetings at its sole discretion; the entitlement on a poll taken at a general meeting to such number of votes equal to all the votes cast at the meeting, plus two additional votes; and the power to appoint at least two out of five members of the executive committee.

The trial judge, Justice Ingrid Mangatal, held that by-law 2 was ultra vires the strata law, and ordered that the executive committee of Castaways’ Cove amend by-law 2 and file the re-amended by-laws with the Registrar of Lands.

Agreeing with Justice Alex Henderson (retired) in Keim v Proprietors, Strata Plan No. 275 (Ocean Pointe Club), the trial judge held that the intent of the Strata Titles Registration Law was that a strata corporation be run on democratic lines, and that the voting structure embodied in the model Schedule 1 by-laws was designed to be a democratic, inclusive process, enabling majority rule and allowing the proprietors to make collective decisions. The judge concluded that by-law 2 was repugnant to the structure and scheme of the legislation.

The Court of Appeal’s judgment

The Court of Appeal overturned the decision. The court held that notwithstanding what the trial judge described as its apparently undemocratic characteristics, by-law 2 would be valid so long as the amending resolution was passed unanimously (as was the requirement at the time), and the amended by-laws did not breach any provision of the strata law. This included, for example, section 15(4) of the STRL, 1973 (now section 21(4)), which provides that no by-law shall operate to restrict the devolution of strata lots or any dealing therewith, or any easement implied or created by the STRL; and section 15(5) [now section 21(5)], which provides that no amendment or variation of the by-laws shall be effective until they have been filed with the Registrar of Lands.

Sir George Newman, who delivered the judgment of the Court, stated that “it is impossible to see how the clear meaning of section 15(2) can be cut down by an implied reservation or limitation upon the validity of a duly passed unanimous resolution.” He noted that the STRL created no sub-class of resolutions which, if duly passed, lose validity, as the trial judge held, when proprietors other than the developer subsequently purchase units within the strata development. He further held that resolutions duly passed take effect after due notification, and bind the corporation and every member.


The Court of Appeal’s decision should come as welcome relief to a vast number of developers of strata developments in the Cayman Islands. It is common practice for developers, upon registration of a strata plan, to adopt and register amended by-laws replacing the default Schedule 1 by-laws. Typically, a developer will adopt some variation of by-law 2, at least, for example, to secure control over the development during the construction stage, or until all units in the development have been sold.

Developer control takes on added importance where the development is operated as a resort, or as part of a resort. In such cases, consistency in appearance and management standards is critical, more so where the resort is managed under a management agreement with an established international brand. Had the Court of Appeal not set aside the Grand Court’s judgment, all by-laws adopted since 1973, which contain provisions similar to the Castaways’ Cove by-law 2, would also be ultra vires the STRL. This would have given proprietors of those strata corporations the right to have such by-laws set aside. The difficulties which would have been caused by such an eventuality are not difficult to imagine.

The STRL has been the subject of review and consideration for reform for a number of years. The issue of a developer’s ability to amend the default Schedule 1 by-laws has been recognized and discussed in a report of the Law Reform Commission but, to date, there has been no proposal to limit or restrict that power, as has been done in other jurisdictions which have adopted legislation similar to the STRL.

There is no reason to believe that the current state of the law does not reflect the desired policy. In any event, whether or not that policy changes is, as the Court of Appeal has pointed out, a matter for the legislators, not the judiciary.

Facts in the age of post-truth, truthiness and Trump

The year 2016 will be remembered for Brexit and for the election of Donald Trump to become the 45th president of the United States, for the media and pollsters getting it wrong, for experts being out of touch with “regular” people and for the establishment being oblivious to the extent of public discontent.

Perhaps 2016 will also be remembered as the year that facts ceased to matter.

In November, Oxford Dictionaries chose “post-truth” as its international “Word of the Year.” The term is defined as an adjective “relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief.”

Casper Grathwohl, the president of Oxford Dictionaries, said it was not surprising that “post-truth” was selected to define 2016, given it has been a year “dominated by highly charged political and social discourse.”

“Fueled by the rise of social media as a news source and a growing distrust of facts offered up by the establishment, post-truth as a concept has been finding its linguistic footing for some time,” Grathwohl said in a statement.

The use of “post-truth” spiked in June with buzz over the Brexit vote and again in July when Donald Trump secured the Republican presidential nomination.

The post-truth campaign

Trump’s U.S. presidential campaign and the Leave.EU campaign in the U.K. succeeded with a deliberate strategy not to engage in a debate based on facts and to focus solely on winning the emotional argument.

Businessmen Arron Banks, who funded the Leave.EU campaign, said he relied on the explicit advice of U.S. political consultancy and public relations firm Goddard Gunster that “facts don’t work.”

“The remain campaign featured fact, fact, fact, fact, fact. It just doesn’t work,” Banks said earlier this year. “You have got to connect with people emotionally. It’s the Trump success.”

The Trump and Brexit campaigns were particularly effective in appealing to voter emotions with their slogans “Make America great again” and “Let’s take our country back.”

The messages tapped into the dissatisfaction of people who feel they have no control over their lives, which, seen through the proxy of their country, are heading in the wrong direction.

Modern campaigns no longer attempt to offer plausible policy solutions. Engagement on an emotional level is much more important.

The Brexit campaign communicated with short video clips shared on social media asking, “Are you concerned about the amount of crime being committed in the U.K. by foreign criminals?” or “Are you worried about the overcrowding of the U.K. and the burden on the NHS [National Health System]?” The supposed answer came in the form of another question: “Isn’t it time to take back control?”

Trump followed a similar strategy.

Political theorist Danielle Allen, who directs the Edmond J. Safra Center for Ethics at Harvard University, says the U.S. has split into a culture that reads and a culture that watches.

Most of Trump’s campaigning was directed at people who watch and do not read, she said, which is one of the reasons why he could ignore the press. Instead of policy papers, Trump’s campaign website featured short videos expressing his attitude on specific topics.

“The old-fashioned read-a-lecture-from-a-text does not meet audiences where they are right now. And Trump gets that,” Allen told the Harvard Gazette in June. Trump appreciates the new culture, the changes in news consumption, and he knows how to amplify conversations through social media more than any other political actor.

“The communications marketplace has been transformed, and Trump is the only candidate in either party who understands the new architecture,” Allen said. “Any candidate could actually master the communications architecture just as well as Trump has and fill it with positive content. We’re in the very unlucky situation that the first person who happens to have mastered the new communications architecture is also filling those channels with junk.”

Trump, who says he has more than 10 million people following his social media accounts, is fully aware of the effectiveness of communicating on these platforms. In 2012, he tweeted, “I love Twitter … It’s like owning your own newspaper – without the losses.”

Lies do not matter

Yet, owning a newspaper, unlike Twitter, comes with the added responsibility of being bound by reporting facts. Newspapers can certainly be biased by omitting information and emphasizing certain facts over others. However, telling inaccuracies or even lies is much harder to do in traditional news media than in social media.

In his public statements, Trump often contradicted the established record, the facts and even himself without the negative consequences typically attached to outright lying.

PolitiFact, a nonpartisan fact-checking organization, verified more than 300 of Trump’s statements since 2011 and found 70 percent of his claims were “mostly false,” “false” or “pants on fire.” About 15 percent of his statements were “half true” and the remaining 15 percent rated “mostly true” and “true.”

By comparison, PolitiFact verified nearly 300 of Democratic opponent Hillary Clinton’s statements since 2007 and found 26 percent of her claims were “mostly false,” “false” or “pants on fire.” About 24 percent of her statements were “half true” and 51 percent rated “mostly true” and “true.”

During the presidential campaign, both Trump and Clinton tried to taint each other as untrustworthy, habitual liars. In previous elections, this would have damaged the candidate who made the allegations. Not so in 2016.

“This has just been a clinic on the post-truth age of politics, Trump in particular. It’s performance art at this point,” Christopher Robichaud, a lecturer in ethics and public policy at Harvard said in the university’s Gazette. “It’s true that what Trump is saying is false, it’s just that in the post-truth age of politics, we’re beyond criticizing someone for that. It’s like criticizing an actor for saying a lot of false things. He says whatever he needs to say to move people emotionally.”

The media called this practice, rightly, populism and reported on Trump’s inaccuracies, putting the president-elect on a war footing.

The logical response for Trump, in dealing with organizations that trade in facts, was to deride the news media as elitist and partisan, and to brand them as part of the establishment that is, according to him, the real problem.

Reporters were singled out for abuse at Trump rallies and blacklisted for critical stories. Trump threatened to sue the New York Times for reporting on his taxes and NBC for the release of the “Access Hollywood” tape from 2005. In the video, he bragged about grabbing women by their genitals and getting away with it because he is famous. On “Fox News,” he threatened to go after Amazon for unpaid taxes. Amazon founder and CEO Jeffrey Bezos owns The Washington Post.

To do so, Trump advocated the introduction of tougher libel laws.

When the New York Times reported on the infighting in Trump’s transition team in November, the president-elect tweeted the Times “is just upset that they looked like fools in their coverage of me.” He claimed that the newspaper “is losing thousands of subscribers because of their very poor and highly inaccurate coverage of the ‘Trump phenomena.’” The Times responded by saying its subscriptions are surging.

The media struggle

Post-election, media critics called news organizations “smug” and out of touch with ordinary people, in line with Trump’s allegations of an “elitist” and “establishment” media.

Conversely, it can be argued that ordinary people have become out of touch with traditional news media.

Since the advent of social media, the lines between reporting and opinion are increasingly blurred.

Traditional media not only have to fight free-falling advertising revenues, they also are no longer an authoritative voice. Newspapers, unsure about how to react to their diminishing influence and how to embrace digital media in a way that makes money, are now just one of many voices in the media landscape.

Media consumers have changed their behavior accordingly.

A 2016 Pew Research report on the modern news consumer confirmed a trend away from traditional news media. Although local and national news organizations remain the most trusted, only 20 percent of adults regularly get their news from print newspapers, down from 27 percent in 2013. And of those 20 percent, 85 percent are over the age of 50.

The same age group drives TV news consumption, which is still the most prevalent news platform. However, half of all news consumers under 50 receive their news online. Those who prefer digital news have a more negative view of the news media overall. They trust it less and sense more media bias, the research found.

In January, in another survey by Pew, more people under 50 reported that they get their news from late-night comedy programs than from local and national newspapers.

Ironically, it is comedian Stephen Colbert, who more than 10 years ago coined the term “truthiness” in “The Colbert Report,” a satirical mock news show on Comedy Central, in response to the increasing number of lies told on regular TV news channels. The term denotes that something is true because it comes “from the gut” or “feels right” regardless of evidence, reason or facts.

Media and ‘anti-media’

Meanwhile, the proliferation of partisan media has led to a rising polarization that reinforces bias and has made political dialogue and problem solving more difficult.

Following the U.S. presidential election, CNN’s Brian Stelter said traditional news media reporting still mattered to some people. “But maybe something else mattered even more, something I would call anti-media. Breitbart is anti-media. Much of ‘Fox News’ is anti-media. Fake news websites and some right-wing blogs are anti-media.

“These outlets provide a different audience with a different set of facts about the world, but too often what they’re really selling are opinion and conspiracy theory masquerading as fact.”

All journalists have a responsibility to the truth, he said.

“The truth is not in a bubble. It is not elitist to reject conspiracy theories or fact-check obvious falsehoods. It should be done equally, but truth is the word we can keep coming back to. Don’t cower before the truth. Don’t tell half-truths, don’t shade the truth. Don’t fear the truth. And then we can focus on the other “t” word – trust. Winning back the trust of people who right now prefer anti-media.”

This will be a difficult task.

The internet and social media have democratized the news by giving everyone with access to a computer or cellphone a voice. They have brought about new forms of journalism like citizen reporting. They have also created an enormous amount of noise.

Social media sites like Facebook, through which most millennials receive their news, even call their main messaging boards “news feeds.” On this social media news feed, links to traditional news reports compete for attention with news from family and friends, entertainment, puppy and cat videos, food photos, conspiracy theories, fake news and well-packaged misinformation.

An analysis by BuzzFeed News found that in the final three months of the U.S. presidential campaign, the top-performing fake election news stories on Facebook generated more engagement in the form of shares, reactions and comments than the 20 top stories from major news outlets like the New York Times, Washington Post, Huffington Post or NBC News.

Google faced similar criticism when after the election its top search result featured a fake news blog claiming, with detailed results, that Trump had won the popular vote.

Facebook CEO Mark Zuckerberg rejected the allegations that fake news on the social network could have swayed voters in the U.S. presidential election as a “crazy idea.” He added that Facebook does not want to become an “arbiter of the truth.”

Facebook and Google nevertheless announced they will stop placing their advertising on sites that present fabricated news. Facebook later outlined plans to combat misinformation.

Changing and hidden values

The relative anonymity of the internet has brought about increasingly coarse language in the public discourse that is now even mirrored by mainstream political candidates. Traditional fact-based reporting is countered with a permanent diet of “crisis mode” talk, needed to make the new radicalized rhetoric more palatable for the disoriented, dissatisfied voter.

More than just a changing culture of language, the diminution of fact reveals a fundamental shift in the basic common value of honesty and a growing tolerance for divulging opinions and core values that in the past remained hidden.

“Telling it like it is” no longer means disclosing a hitherto little shared fact. It has become uttering something that until now was unacceptable because it is, at the very least, bordering on the obnoxious.

This is also reflected by the inability of surveys and opinion polls to get a correct handle on the true beliefs of their focus groups in the run-ups to Brexit and the U.S. election.

It is a valid criticism that the media, in an effort to supplement the reporting of campaign slogans with fact, overly relies on polls and surveys without the disclaimer that they have a considerable margin of error.

The limitations of surveys have been known for decades. One factor is the spiral of silence theory, which has provided numerous examples since the 1970s showing that people remain “silent” in surveys when they believe their views are in opposition to the majority. Or they plainly lie if they feel their views are socially unacceptable, for example because they might be perceived as sexist or racist.

Other sources of potential inaccuracy in surveys include poor sampling of a population, not weighting data properly in a “non-random” sample, and bias on the part of researchers asking the questions and interpreting the results.

The danger is that disregarding facts has wider consequences for everyone.

“If we are not serious about facts and what’s true and what’s not, if we can’t discriminate between serious arguments and propaganda, then we have problems,” President Barack Obama said in November.

“If everything seems to be the same and no distinctions are made, then we won’t know what to protect. We won’t know what to fight for. And we can lose so much of what we’ve gained in terms of the kind of democratic freedoms and market-based economies and prosperity that we’ve come to take for granted,” he said.

Mid-level rental market heats up, hits constraints

A surge in demand in the most popular segment of Cayman’s rental property market has caused prices to rise by more than 10 percent in the last 12 months, real estate experts say.

Following the financial crisis, the rental market in the Cayman Island was characterized by falling prices in line with the drop in demand as work permit numbers plummeted.

In September 2011, then-Premier McKeeva Bush told the Legislative Assembly, “My information is that there are over 2,200 rental apartments currently empty.”

Since then, both the economy and demand for rental properties have experienced a considerable turnaround. So much so that mid-level rental properties for up to $2,000 are now in short supply.

Websites of local real estate agents and property managers show few listings, particularly in the mid-price segment.

Amber Yates, a realtor at Century 21 says, “I can list a rental under $2,000 and it is gone that day.”

The current state of the market is primarily a result of increased demand. From a peak of 26,659 in November 2008, work permit numbers fell to a low of 18,500 in the fall of 2010. This summer the number of foreign workers climbed back to 24,077 and is expected to reach 25,000 early next year.

Samantha Payne, a realtor at IRG, says the rental market is most sensitive to Cayman’s economic growth.

“As such, the lack of supply in the $1,000 to $2,000 range is largely an indication of demand due to an improving economy. Many in this sector will be workers on permits, and the generally improving economic outlook as well as demand from growth in the tourism area – the opening of the Kimpton for example – has led to an absorption of the existing rental supply.”

This has already resulted in rental rates firming and significantly increasing. Currently rents are about 10 percent to 15 percent higher in the $1,000 to $2,000 market than last year, and they are about 5 percent to 8 percent above 2015 rent rates in the $2,500 to $3,500 segment, Payne estimates.

“Of course, there is an upper end to the amount tenants can afford to pay, so rents will not increase indefinitely,” she says. “That said, it’s definitely becoming a landlord’s market once again.”

The tipping in the demand-supply balance has been exacerbated by some popular rental properties coming offline.

“The Rivera has closed its doors, as has Treasure Island – these were two hot spots for affordable one beds and studios,” says Yates. “All these tenants have had to find new accommodation, thus flooding the lower rental market along with new Kimpton employee service industry staff. As a result of this shift in supply and demand, we have seen more people seeking to share to still be able to afford to be in the prime areas and close to work.”

She notes that Cayman always had a lack of one-bedroom apartments. “The island is booming and it only takes a few things to happen for the dynamics to change within this lower affordable rental section.”

Yates agrees that the market shift caused rental prices to rise, so far without affecting demand.

Demand in the mid to upper-mid segment of the market, in the $2,500 to $3,500 range, has not been as strong as in the lower-mid bracket and there is not the same undersupply, says Payne. But the IRG realtor believes that the general economic growth of the island will bring in more professional and managerial work permit holders, so that the demand-supply equation will also favor landlords in the higher priced segments in the near future.

Commercial property recovering

The commercial property has also rebounded, says Payne.

“The commercial market is recovering nicely too with a low supply in the Class A market and space in the Class A- to B market gradually being absorbed.”

There are still high vacancy rates mainly in central George Town, but landlords have responded with more attractive lease terms, including more aggressive rental rates, upgraded buildings including improving common areas, providing remote parking and by adding generators to improve hurricane resiliency. All this “has led to increased tenant take up of the vacant space and bodes well for the health of the market in future,” she says.

Pension plans cite cautious investment strategies with retirement funds

Silver Thatch Pensions manages nearly half-a-billion dollars, and has, during its nearly 20-year lifetime, returned an average 4.43 percent to 4.57 percent – probably insufficient to underwrite a retirement of uninterrupted luxury, but nevertheless a solid foundation.

Still, local pension plans, have long endured complaints of low returns, anemic investment strategies and antiquated regulations governing those strategies.

Pension plans, however, are unlike other discretionary investments. To begin with, they are compulsory. They are not founded on a family’s disposable income, but are aggregated from monthly salary deductions, matched by an employer’s contributions, with the idea of creating a self-sustaining resource that will provide ongoing support throughout retirement.

Pension plan administrators cannot lose their investments, and this mandates caution, and that caution is enshrined in the National Pensions Law.

Factors affecting returns

“Post-credit crisis, one of the challenges has been navigating what has become known as the low-return environment,” says Jack Leeland, a Saxon Pensions agent for Silver Thatch, pointing out that Silver Thatch has nonetheless produced consistently positive results.

Leeland explains the typical returns, pointing to two factors: National Pensions Law restrictions on the kinds of investments managers may pursue and a built-in conservatism among managers who are handling the life savings of its members.

“Under Cayman Islands law,” he says, “your asset allocation to fixed income has set ranges.”

The National Pensions Law, last revised in 1998, devotes most of its 15 pages to a list detailing where managers may and may not invest their plan’s funds and sets ranges for investments in specific asset classes. The pensions law mandates that between 20 percent and 40 percent of pension funds’ assets be allocated to fixed income. Between 40 percent and 70 percent should be invested in large capitalization equities which are traded publicly. And up to a maximum of 10 percent of the market value of pension funds’ assets can be invested in publicly traded small-to-medium capitalization equities, publicly traded investment-grade convertible debentures or “closed end or open end mutual or pooled funds, which themselves invest in “equities or convertible debentures” listed on one of 28 stock exchanges specified in the pensions law.

Elsewhere, the law stipulates 25 percent or less of pension fund assets must be invested in U.S. Treasury Bills or similar bills – approved by the superintendent – from other countries. The same 25 percent dictates funds placed in investment-grade commercial paper, money-market funds, certificates of deposit or fixed-term deposits or cash in a bank rated as “investment grade.”

Managers are warned against “undue risk of loss or impairment,” and must have “a reasonable expectation of fair return,” keeping in mind “the demographic composition of the members of the pension plan.”

They are also enjoined to hold “at least 70 percent of the market value of the assets” in U.S. currency, and no more than 20 percent in Cayman Islands dollars, and no one “selecting an investment for, or making a loan from, a pension fund” can select an investment or make a loan “except in a category or sub-category of investment or loan that is specifically permitted by these regulations.”

Six areas of investment are prohibited entirely, such as real estate, venture capital and derivative securities, and conflict-of-interest regulations are detailed in section 4(2).

Leeland says “limiting the ability to invest in more conservative asset classes can often lead to more volatility during periods of market stress.”

But he underlines the protections it affords pension members.

“The intent of the constraints is to encourage diversification, help[ing] to limit the potential for losses. These constraints also help to ensure that plans are investing in liquid vs. non-liquid assets, quality assets, etc.

“As you can see from our results, we have been able to produce consistently positive results. One of the [things] we have done is to lower our expense ratio – expenses as a percentage of total assets – each year.”

A summary of Silver Thatch results demonstrates consistent – if modest – gains. Leeland reminds investors that these gains were achieved after navigating the collapse of the tech bubble in 2000, the global financial crisis in 2007/2008 and in a subsequent low-return environment as global economies struggled to their feet.

The asset mix

Silver Thatch, similar to other plans, offers a choice among four investment plans, tailored to age, income, marital status and aspirations of any member.

A “conservative” plan invests 65 percent of its funds in bonds, 25 percent in equities, 10 percent in “alternatives,” hedge funds, and 5 percent in cash. The five-year average return on the conservative portfolio is 5.39 percent.

With slight changes to those elements, portfolios progress through “balanced,” which earned an average 4.48 percent in the last five years, “growth,” which has returned 4.89 annually percent since 2011, and “aggressive,” which recorded an average 4.99 percent during five years.

Silver Thatch is designing a new “ultraconservative” portfolio, but has not yet settled the details: “We plan to advertise it in our next handbook,” Leeland says, “which should be coming out before the end of the year – the portfolio will be active as soon as someone elects to use it.”

“Aggressive” investments, he says, “seek to maximize the long-term growth of capital. Current income is not a consideration as the portfolio does not allocate any portion to fixed-income investments.

“To pursue this goal, the portfolio, which is a fund of funds, normally invests approximately 90 percent of its assets in underlying funds that invest primarily in equity securities. The portfolio offers instant and broad diversification with exposure to a wide range of asset classes and investment styles. The fund may also gain exposure to alternative-asset classes including commodities and hedge funds.”

Silver Thatch’s list of investments takes up eight fine-print pages of the company’s June 30 financial statement. As expected the Balanced and Conservative portfolios largest holdings are in bonds, holding $51 and $22million of iShares Core U.S. Treasury bonds respectively (19 percent and 28 percent of their total respective portfolio). The Growth and Aggressive plans on the other hand have their largest holding in Vanguard S&P 500 ETF Equities, $30 and $1.5 million respectively (24 percent and 34 percent of their total respective portfolios).

Since inception Silver Thatch has outperformed its internal benchmark in the Balanced and the Conservative portfolios, which make up over 71 percent of the total plan, and underperformed in the Aggressive and Growth portfolios.

Silver Thatch’s internal “benchmark” goals, set by the investment board as a sort of ultimate target for managers, are derived from several global indexes such as the MSCI All Country World Index and the Barclays Capital U.S. Treasury Bond Index. The reason it makes sense to use a benchmark is that it helps define the appropriate level of risk and return, Leeland says, with the benchmark having a similar risk profile to that of the portfolio. [see chart]

The results are “net of investment management fees,” which range from 1.5 percent to 1.6 percent, and include management fees, audit fees, everything down to printing and posting of the statements.

Silver Thatch manages $493 million, among the largest of the six – with more than 18,000 individual members.

The Chamber of Commerce is the only other pension plan to publish annual figures – with more than 17,000 individual members, 900 businesses and a reported $305 million under management as of June 2016.

Silver Thatch funds are managed by Deutsche Bank, and the board of trustees – not remunerated for their pension-plan efforts – reviews its investments every two months.

“The trustees review both compliance and performance of the plan at each of these scheduled meetings,” Leeland says. “Deutsche Bank provides active management services and their portfolio-management team reviews each of the portfolios on a daily basis.

“Deutsche Bank’s regional investment committee reviews the [Silver Thatch] portfolios on a monthly basis. Meetings of the regional investment committee take place at minimum once per month and during periods of market-related stress (e.g. Brexit) can occur more often and on an ad hoc basis.”

Each trustee has an additional incentive to make sure Silver Thatch investments deliver attractive yields: All of them are members of “the plan.”

No one should be surprised to learn that Silver Thatch regularly changes its investments. Leeland explains: “This is why diversification is so critical. Asset classes perform differently year over year; the leader from last year may be this year’s laggard.

“A multi-asset class approach allows the investor to benefit by participating in broad-based asset classes. Put simply there would always be a winner to offset any losers,” he says.

Finally, Leeland points to “additional voluntary contributions” as a significant source of funding for a member account.

The Silver Thatch website describes AVCs as “contributions over and above the required basic contributions,” which can be invested in any of ST’s portfolios.

Contributions can be deducted automatically from a salary check and can be increased, reduced, stopped, restarted or – under pending changes to the National Pensions Law – withdrawn for a down payment on a home or other critical needs.

Pointing to government data, Leeland says all the portfolios outstrip average annual inflation of 1.64 percent between 2001 and 2016.

“You can see our results outweigh this considerably by 2 to 4 percent each year,” he says. While acknowledging that investment advice provided to individuals might differ from that provided to pension planners, Leeland reminds everyone that life savings and retirement accounts must be treated carefully: “We must remember that this is a pension plan and by nature should be a low-risk investment.

“I would like to highlight that all of our investments are in high quality liquid assets. We would not want to invest in any lower-quality, high-risk high-reward-type assets.”

Cayman leaders watch for de-risking after US election

Minister Wayne Panton

All eyes are on the changing political landscape in the United States as government and the financial services industry in Cayman worry about continued bank de-risking, the process of banks reducing the risk of money laundering and terrorism financing.

In the weeks since the U.S. election, headlines like Politico’s “Bankers celebrate dawn of Trump era” have proliferated in industry publications and popular websites. President-elect Donald Trump’s transition team posted a statement in mid-November promising to dismantle the Dodd-Frank Act, a suite of financial regulatory reforms passed after the last decade’s financial crisis.

It’s unclear so far whether the president-elect’s plans include de-risking, and as of press time Mr. Trump had not announced his nominee for Treasury secretary. But the conservative ideology of the Republican Party could lead to fewer regulations for big banks, a possibility that has gotten the attention of Cayman’s financial services industry and the government.

In a recent statement, Financial Services Minister Wayne Panton said, “Our issues with local money services businesses, which Cayman’s Government and the private sector worked together last year to resolve, were linked to de-risking.

“This issue didn’t just affect persons who send remittances from Cayman to their families and friends in their home countries. It affected banking services across the board, for all of us.”

Acting Under Secretary for the U.S. Treasury Adam Szubin, addressing a conference the week after the U.S. election, said de-risking “remains a key priority for the U.S. Department of the Treasury.”

He told the American Bankers Association and American Bar Association annual Money Laundering Enforcement Conference, “Last year the World Bank undertook a survey that found that small jurisdictions with significant offshore banking activities were disproportionately affected. Given what we have come to understand about some of the reasons why some global banks are reassessing their business relationships, this is not entirely surprising.”

According to a copy of his speech published on the Treasury website, he said, “These reasons include that correspondent banking is a low-margin business in a global banking environment that has seen many multinational banks reassess their global strategic footprint, cut costs, and reallocate capital.”

Cayman, as one of those offshore jurisdictions, has felt the impact, most publicly when Western Union closed without warning in July 2015. A month later, Cayman National Bank closed the bank account for MoneyGram and JN Money Services, almost shutting down all cash-transfer counters in the islands. Many expat workers rely on cash transfer services to send remittances overseas to support their family.

A Nov. 16 press release from the Financial Services Ministry said a delegation from the ministry visited Washington, D.C., in September to meet with representatives from the Treasury, the State Department, the World Bank and several Democrat congressmen.

“We appreciated their strong interest in hearing how Cayman, as a well-regulated international financial centre, was affected,” Minister Panton said in the statement. “We are planning further visits in the coming months to continue these discussions, and we look forward to working with US leaders to strengthen our collaboration.

“As we told our experiences, we were particularly heartened to learn that the lawmakers we met – some of whom have constituents from the Caribbean who use MSBs [Money Services Business] – agree that de-risking is affecting a significant group of persons whom it was never intended to affect.”

Explaining de-risking, Minister Panton said, “Rather than working to reduce the risk, some banks have moved to eliminate the risk completely by terminating certain types of banking business altogether.

“However, by trying to eliminate risk rather than assessing and mitigating it, they are also cutting off lines of business that were not intended to be captured by the regulation, such as the MSBs, whose business by its nature does not appeal to money launderers and terrorist financiers because the monetary value of the transactions are so small.”

The de-risking actions, he said, have created their own risks by moving people outside of the traditional financial system. “The international banks are hindering law-abiding individuals from conducting daily, necessary financial transactions, such as wiring money home to families. Persons then may turn to alternative means of money transfer, which have greater associated risks,” he said.

Fidelity Bank ran Cayman’s Western Union cash transfer franchise until the windows closed overnight in July 2015. At the time, Fidelity Bank (Cayman) CEO Brett Hill told the Cayman Compass that the costs of compliance with new regulations are increasing while income from the cash transfer business is declining. “It’s been an increasingly marginal business for us,” he said.

In the month after Western Union closed, Cayman National Bank closed the bank accounts for JN Money Services, which runs the MoneyGram franchise on the islands. Without a local bank account, JN had to close or find another way to reach the international banking system. The company opted to accept only U.S. cash, so that it would not have to convert Cayman dollars and the cash could be flown to another country and deposited in a bank.

Cayman experienced a shortage of U.S. cash, with banks running out of the notes and some charging fees to convert local currency to U.S. dollars.

Months of closed-door negotiations between the ministry, banks, the Cayman Islands Monetary Authority and the cash-transfer companies dragged on, while people became more upset with the difficulty in sending cash back home to family members.

Western Union reopened in late November 2015 under Jamaica-based GraceKennedy Remittance Services and with banking through Scotiabank, effectively ending the crisis.

Minister Panton, announcing the deal last year, thanks JN for keeping its windows open for remittances, but JN was left out of the deal and still does not have a local bank account.

Cayman captives gain complexity

Comparing the number of captives in the Cayman Islands – 711 as of Sept. 30 2016, up from 709 captives 12 months ago – would suggest a flat market. But the pure statistics and consolidation in the industry masks a strong influx of new captives and the increasing complexity and amount of business carried out by insurance managers in Cayman.

In the first nine months of 2016, the Cayman Islands Monetary Authority issued 33 new licenses, a significant jump from 22 for the entirety of 2015 and 23 for all of 2014.

“Given the continued soft insurance market and increased competition from many newer domiciles, we are doing exceptionally well to keep adding on that number of new licensees,” says Kieran O’Mahony, chair of the Insurance Managers Association of Cayman.

“And there are at least another 10 applications in the hopper with CIMA,” he adds. “So we could get to 40 or 45 new licenses being issued this year, which is a tremendous achievement.”

On the surface, the trend toward consolidation in the captive insurance industry continues. The Affordable Care Act and healthcare reform in the United States have forced mergers and acquisition in the sector. This amalgamation at the hospital system level leads to the merging of underlying captives in Cayman, the global leader in healthcare captives.

O’Mahony says even the repeal of Obamacare, proposed by president-elect Donald Trump, is unlikely to stop the trend. “In the immediate future, there will not be any impact because even if Trump changes everything, trains have left the station for a number of those mergers and I expect them to continue.”

Cayman, as a mature domicile for self-insurers since 1976, will also naturally see statistics plateau as a certain number of captives reach the end of their life cycle each year.

Statistics alone neither tell the whole nor the most important part of the story, says O’Mahony, which is: “New shareholders in various guises – as single parent captives, as group captives, as SPCs and as larger third party underwriters – are coming to the island.”

Other than healthcare, Cayman is a major domicile for group captives, aimed at small and medium-sized businesses that instead of each forming their own captive, share their risk and purchasing power.

Group captives can have anything from a dozen to 100 members, which in aggregate results in a significant premium volume.

Cayman is also a well-known center for “cell” companies or segregated portfolio companies (SPCs). With about 613 cells within 146 SPCs, cell companies range from straight, simple pass-through entities used to access reinsurance capital to very large, complex programs.

Both group captives and SPCs compete with and tend to suppress the number of single captives, the IMAC chair says. “We are somewhat a victim of our own success in that regard.”

Portfolio insurance companies (PICs), introduced in 2015, which allow standalone corporate entities to be wholly owned by individual cells within a segregated portfolio company, are also gaining in popularity. Following what was essentially a “build it and they will come” strategy, there are now six portfolio insurance companies up and running and a number in the pipeline.

They can be used in a number of ways, from being a receptacle vehicle for business that is transferring from other jurisdictions to Cayman and on to reaping the benefits of a segregated portfolio company formalizing greater corporate governance and oversight of an individual “cell.”

Because a portfolio insurance company is a separate legal entity, it can have its own board, allowing stakeholders to appoint directors and have more input in its governance.

“It is better from a governance and oversight perspective. And we see it being used as an incubator for a future captive that will eventually spin off and form its own single parent captive,” says O’Mahony. “It’s gaining traction and I see … great potential for it.”

Meanwhile, there is a change in the nature of the insurance business that Cayman attracts, with increasingly complex and larger entities that write unrelated party business for a broader palette of risks, which require more management time and effort.

This includes private equity and hedge fund-backed vehicles that write third-party business using various structures.

“The ownership of these entities is more complex, the business plan is more complex and the governance around it has to be more complex as well,” O’Mahony says.

Moreover, he says, existing captive programs are used to manage different forms of risks, for example, equipment maintenance and medical stop loss.

Hospitals and other large companies that use expensive equipment, from computers to specialist diagnostic equipment, have dozens of warranty and maintenance programs to manage. Putting these programs into an insurance policy reduces a huge number of vendor relationships to just one, brings benefits of scale and manages the inherent volatility better. Medical stop-loss, in turn, is driven by U.S. healthcare reform.

“Changes in lifetime limits and on the medical benefits stop-loss side mean that companies now have to manage that risk differently, and a captive is a fantastic vehicle for that” the IMAC chairman says.

After Brexit vote, pound resumes its long-term decline

Juergen Buettner

The British Brexit vote has caught many market participants off guard, particularly in the foreign exchange market.

Since the Brexit vote on June 23, the British pound has lost 20 percent against the euro. Against the U.S. dollar it is down nearly 20 percent. Together that leads to a trade-weighted sterling index which trades significantly less than the average seen between 1975 and 2016.

The negative price reaction can easily be explained by the assumption that the decision to leave the European Union may heavily impact the growth perspectives of the U.K.

Since Oct. 11, however, the British currency has stabilized and even rebounded a bit. That newfound resilience in turn can be explained by the firmness of the latest British macroeconomic indicators, notably the sharp increase in retail sales in October (up 1.9 percent month-on-month compared with an anticipated increase of 0.5 percent). Also noteworthy is the now robust labor market. The unemployment rate fell to 4.8 percent from 4.9 percent last month, while pay rises strengthened to 2.7 percent from 2.4 percent for earnings exclusive pf bonuses and to 2.5 percent from 2.1 percent for regular wages.

U.K. Supreme Court hearing ahead

What happens next will also be determined by the U.K. Supreme Court hearing between Dec. 5 and 8, when the judges will decide whether to uphold or overturn the ruling by the London High Court. As has been reported, the court has decided that Prime Minister Theresa May must seek the approval of Parliament to trigger Article 50 of the Lisbon Treaty, launching official Brexit talks.

If the lower court ruling is overturned, according to the currency analysts at the French corporate and investment bank Natixis, this will penalize sterling and support the scenario of a hard Brexit, with Article 50 being triggered before March 31, 2017. On the other hand, if the lower court ruling is upheld, sterling’s rebound could show more lasting power, especially since short positions on the British currency are significant. This could lead to an acceleration of sterling’s technical rebound.

“But over the medium term, there will be a Brexit, in what promises to be difficult conditions given the upcoming elections in France and Germany, which suggests that sterling could go on the back foot in the first quarter of 2017,” says Natixis research analyst Micaella Feldstein.

David A. Meier from Swiss private Bank Julius Baer is also skeptical. He forecasts that “Once uncertainty rises after the Brexit process is finally initiated, outflows of foreign direct investment hold the potential to significantly weaken the currency again.“

New record lows against the euro would be very negative sign

In that context it is important to recall another very important point: Apart from temporary interruptions, the pound in relationship to the euro in the long term is a depreciation currency. According to recalculations, the pound devalued since the end of January 1976 from 2.70 to 1.02 GBP/EUR until the end of 2008. Then the pound showed one of its temporary recovery movements before the Brexit vote caused a new weakness. Purely from the chart-technical point of view, it is important that the pound holds above the mentioned record low against the euro. However, should this level be undercut, it would be synonymous with a pro-cyclical sell signal.

To avoid the latter, good economic data would be helpful.

It is not only analysts at Bank of America Merrill Lynch (BofAML) who assume that the fallout from the pound’s decline will start to hit consumer spending in the near future. News of price increases has started to mount significantly of late, ranging from “Marmitegate” to Apple computer price increases. The BofAML economists expect this to start to squeeze real incomes and consumer spending over the winter. That fits with the forecast of independent research firm Capital Economics, whose economists think that inflation will breach 2 percent by spring 2017 and will peak at around 3.2 percent in the first half of 2018.

Optimists bet on the pessimism of market participants

Staying bearish on the basis of macro fundamentals is also a high-conviction call for Swiss banking giant UBS. In the opinion of the currency experts there, the direction is still heading toward leave despite the recent ruling by the High Court, resilient activity data and a less dovish Bank of England’s Monetary Policy Committee. As a result, the correction of the U.K.’s current account deficit via the moderation of the capital flows currently funding it remains the main longer-term driver of the currency, “We continue to expect EUR/GBP to reach parity by end-2017 and stay around this level for a considerable period thereafter,“ according to a UBS report.

The most important factor that currently speaks in favor of the pound sterling is the already widespread pessimism about its outlook among market participants. That means unexpected, but positive surprises could make investors rethink their positioning, including in case new political problems should arise in the eurozone or in the United Sates. With the constitutional referendum in Italy that is set for Dec. 4, especially in the case of the eurozone, such a development is possible.

Brian Martin, head of Global Economics at ANZ Research, points out that, “According to the purchasing power parity, sterling is severely undervalued. Producer price estimates suggest it is 30 percent undervalued versus USD, while the Big Mac index estimates imply it is 23 percent undervalued.“

This means that there is already a lot of pessimism in the price. Taking into consideration all the facts makes a price forecast for the pound very difficult. Nevertheless, anyone with sterling income and euro or dollar expenses who does not want to take any risk is probably well advised to hedge at least a part of the pound sterling position.

ETFs continue to disrupt asset management industry

Juergen Buettner

Exchange Traded Funds (ETFs), that track indexes like the Dow Jones Industrial Average, S&P 500, Nasdaq-100 Index etc., are nowadays very popular among investors – a trend that is reflected in the capital flows. While traditional equity funds, which rely on an active selection of individual stocks, have been losing market share for years, passively managed investment products are increasingly in high demand. If that development continues, according to Bank of America Merrill Lynch (BofAML) in the not too distant future this could lead to the following tectonic shift: Passively managed equity assets could exceed actively managed equity assets by 2023, at least based on the projection of trailing five-year growth rates.

Why that happens has a lot to do with the performance: Many actively managed funds simply often fail to beat their benchmark in the long term. The extent of the failure can be seen in the attached table, which is taken from a report published by the French investment bank Natixis. According to that 98% of all global equity funds performed worse than their benchmark over a 10-year period. This result raises inevitably the following question: Why should investors put money in these established products, when alternative offers are available, which at least promise a market-conform performance and that at much lower cost (in some cases the expense ratios are only 0.3 percent per year compared to over 1% yearly cost for actively managed mutual funds).

Critics warn of potential risks

How big the ETF-industry has become, can easily be demonstrated with the help of a few numbers. According to Factset data, the U.S. ETF had $2.4 trillion in assets as of the end of October. BofAML estimates that “passive” funds had inflows of $2.1 trillion since 2002 versus $1.8tn outflows from “active” funds. S&P Equity and Fund Research has rankings on 1,173 equity and fixed income ETFs, 356 that launched less than three years ago. At the end of 2015 based on data provided by Factset and among the investment advisors 81 percent recommend ETFs as an investment vehicle to client. This percentage was only 40 percent in 2006 and compares with a percentage of 79 percent for funds (85 percent in 2006). Altogether close to 30% of U.S. domiciled funds are now passive, as J.P. Morgan reports. That is not bad for a sector which was mostly unnoticed by the general public only 10 years ago.

However, as nearly always when an asset class is booming, there are certain risks connected with it. Looking at ETFs, critics claim that there is no longer a distinction between good and bad managed companies or between expensive and cheap stocks. For example, Inigo Fraser-Jenkins, chief strategist at the U.S. investment house Bernstein, because of that considers ETFs to be “worse than Marxism.” On top of that the experts at J.P. Morgan fear, that asset concentration could potentially increase systemic risk and therefor make markets more susceptible to the flows of a few large passive products. Others criticize a potential liquidity risk in many ETF products. In a stressful situation, one day in the future all these factors could have dire consequences, they say.

Decisive is the performance

These warnings should not be ignored, but at the same time it must be acknowledged, that ETFs are for sure not the only asset that carries liquidity risks in a difficult market situation. Beside this, the nowadays available wide variety of different ETF-products already allows investors to conduct different investment strategies, including a value approach. Therefore, the shift in favor of the ETFs should continue until the passive-managed competitors become more successful than in the past in their attempt to consistently beat the market.

To achieve the latter, some representatives of the traditional fund industry secretly may wish to soon witness a strong price correction or even a bear market. The underlying hope for such an attitude could be that at least during a difficult market period it could be easier to play out the strength of the pursued investment approach and to outperform the market. But that is probably not more than a straw a segment in decline is clinging on. Currently the experience based on the past is, that when active success occurs, it tends not to persist. According to Craig Lazzara an inhouse persistence scoreboard demonstrates that an investor has a better change of flipping a coin and getting four heads in a row than he does of identifying a fund manager who will be above average four years in a row.

Observations like this make the Global Head of Index Investment Strategy at S&P Dow Jones Indices think that the ranks of the “passivists” are likely to continue growing. A view, that is shared by J.P. Morgan’s Global Asset Allocation-team lead by Nikolaos Panigirtzoglou, since they predict the following in a note: “There is likely more room for passive investing to grow over the coming years at the expense of active managers until more low skilled active managers are removed from the marketplace and market inefficiencies start emerging for the skilled ones.”

Chartered Financial Analyst Society offers ethical training

Again and again, featuring heavily in conversations and correspondence, throughout video clips both introductory and advanced, on websites, in brochures and testimonials, the word that recurs is “ethics.”

More than a frequent refrain, “ethics” is almost a plea to the “outside world” from the insular, almost self-contained universe of financial advisers and specialists, that the public might hear, accept and trust the professional practice of investment advice.

Too frequently, the profession appears abstruse, disconnected and awash in jargon, and that too frequently serves as cover for the incompetent and the greedy. The hapless observer is reminded of the TV advertisement that opens in the offices of MUFG, one of the world’s leading financial groups with 1,100 offices in more than 40 countries.

A trim, man in a suit sits at a conference table with a series of three “clients,” discussing retirement investments as the “more traditional way to go,” but steers the conversation toward “asset allocation.”

The clients eagerly nod, declaring their confidence in his professionalism – until the big “reveal” – Our adviser is a fraud, a dreadlocked DJ who displays a video of his recent haircut and acquisition of a three-piece suit and proper shoes. When he starts to dance in the boardroom, his clients are visibly shocked – although their explicit comments go unrecorded for the hidden camera.

“You just never know,” goes the voice-over refrain, pitching an institute of professional training for financial advisers.

Another advertisement suggests a TV game show in which putative clients choose among three candidates, hidden behind doors, to provide financial advice. Each “adviser” recommends gold: “With the right investors there is a lot of money to be made.”

However, one of the candidates is revealed to be a charlatan. The client declares himself “done with you” as the faker protests: “But … I can … I can …” and the door slams in his face.

A globalized economy and legions of middle-class workers with a little spare cash – and dreams of hitting it big in the market – have sent the financial-advice industry into hyper-drive.

The Chartered Financial Analyst Institute, both globally and locally – perhaps especially in Cayman, which is known as the world’s fifth-largest financial center – seeks to counter that image of slippery fly-by-night advisers.

The institute offers educational programs, lectures, conferences, seminars, printed and video material – and official CFA designation – through its 90 branches in the Americas, nearly 20 more in Asia and another 40 in Europe, the Middle East and Africa, registering more than 142,000 members in 159 countries.

The nonprofit, headquartered in Charlottesville, Virginia, was founded in 1947, and throughout its network offers a Chartered Financial Analyst certificate and designations in Investment Performance Measurement and Claritas Investment.

The CFA certificate is a professional/graduate-level program aimed at portfolio and wealth managers, investment and research analysts, professionals involved in making decisions about investments, and finance students seeking work in investment management.

The Investment Performance Measurement program targets professionals charged with appraising and selecting portfolio managers, evaluating portfolio performance and communicating with clients.

Claritas, renamed the CFA Institute Investment Foundations program, is almost a “finance 101” review of industry imperatives, offering a snapshot of the roles and responsibilities of investment decision-makers, regulators, compliance officers, fund lawyers, fund administrators and back-office personnel. The certificate also indicates a grasp of the importance of ethical conduct.

The institute also operates the CFA Institute Research Challenge for university students and the Research Foundation of CFA Institute.

Locally, the CFA Society was created 20 years ago as a chapter of the Virginia institute. CFA president Monique Frederick says the 145-member Cayman branch “sets the standard for professional excellence and credentials,” championing ethical behavior and standing as a “respected source of knowledge in the global financial community,” while administering what she describes as “the gold standard of investment examinations,” the CFA exam.

The society’s 11-member volunteer board is comprised largely of those in the accounting and fund industries who are resident on island. Annual elections select executive committee members for one-year and others for two years.

Funding, Frederick says, is from membership dues, resources from the U.S.-based institute and corporate sponsorship for some of the larger events.

Among those events was May’s “Putting Investors First” initiative, part of the society’s “Future of Finance” program, which, says Frederick, “is about taking a leadership role to shape a trustworthy, forward-thinking financial industry that better serves society.

“It’s our way of furthering our financial literacy initiative while giving back to the broader community,” she says.

A 16-minute documentary from the “Putting Investors First” program featured a diverse group of local community members: students, CFA charterholders, financial professionals, government ministers and investors.

“We have also made available a series of investment guides which can be downloaded from our website,” Frederick says.

The website offers more information, recommendations overviews, testimonials, brochures, videos and advice than anyone can absorb in a single sitting.

The society’s flagship event is the annual half-day October Cayman Investment Forum, featuring prominent international speakers. The gathering is open to the public and typically attracts more than 200 attendees.

The next CFA event is the Jan. 19 annual Charter Award and Forecasting Dinner, “an opportunity to congratulate those who received their charter and celebrate their achievement,” Frederick said. Details of the gathering, also open to the public, will be published on CFA’s website.

Among CFA’s essential tools that help “motivate and empower the world of finance to become an environment where investor interests come first, markets function at their best and economies grow,” according to Frederick – is the 10-point “Statement of Investor Rights,” based on the institute’s Code of Conduct and Standards of Ethics.

Like the consumer bill of rights or the American Hospital Association’s patient bill of rights, CFA’s “investors bill of rights” advocates a more active role for participants in their financial activities.

“While engaging the services of financial professionals and organizations,” the list begins, “I have the right to … honest, competent and ethical conduct; independent and objective advice; my financial interests taking precedence; fair treatment; disclosure of any existing or potential conflicts of interest; an understanding of my circumstances; clear, accurate, complete and timely communications; an explanation of all fees and costs charged to me; confidentiality of my information; and appropriate and complete records.”

Finance executives are not obliged to be CFA members or hold CFA certificates, but, says Frederick, “most developed financial markets require that those who trade in specific financial instruments – i.e. stocks, bonds, derivatives, mutual funds – obtain the requisite licenses to sell these products. There are a myriad of courses, diplomas and designations within the investment industry, all designed to educate those seeking a career in the industry.”

While Cayman has no minimum standards for practicing as an investment adviser or manager, she says, “Most well-established investment firms recruit professionals with the necessary skills and qualifications.”

Myriad courses are available globally, but, says the society president, “the CFA designation is a global qualification recognized worldwide demonstrating a mastery of knowledge of investment management, and earns lasting respect from peers, employers and clients.”

The chief reason CFA charterholders are in demand is “the high ethical standards and respect for compliance prominently featured throughout the program,” Frederick says.

“Not all financial advisers are members of the CFA Institute, and not all financial advisers are Chartered Financial Analysts. We definitely encourage Cayman regulators to consider implementing minimum qualifications for those practicing in the industry,” she says, adding, “We try to make the investing public aware of the designation and what it represents.

Put simply, Frederick says, “The CFA charter is: knowledge plus ethics equals a CFA charterholder. This is what investors should look for in an investment professional.”

More than 97 percent of CFA members are charterholders, she says, adding that affiliate membership is open to investment professionals who are unlikely to participate in the CFA program or who have not yet qualified for regular membership. Associate membership is for professionals and students who have completed the Investment Foundations Program.

Gaining a full charter, however, requires three levels of exams, four years of relevant professional investment experience and a commitment to a code of ethics. Frederick – and the society – are uncompromising: “The curriculum covers academic theory, current industry practice and ethical and professional standards to provide a strong foundation of advanced investment analysis and real-world portfolio-management skills.”

The society, as the forum for investment professionals in the Cayman Islands, means creating a series of initiatives engaging all “stakeholders,” which includes society members, future investment professionals, educators, government, the media, employers, investors and the general public.

“We offer a world-class suite of educational offerings to students, working professionals and regulators who are shaping the future of finance,” she says. “Through the institute’s formal educational programs and our speaker events we aim to deepen financial expertise to the benefit of investors in Cayman and beyond.

“For CFA candidates we offer exam preparation assistance in the form of mock exams, three-day review courses and discounts on exam-preparation materials. More importantly is the availability of needs-based scholarships offered by the CFA Institute.

“We host several networking and social events throughout the year, including an after-exam social, an exam results social, an annual charter award and forecasting dinner, and a summer social.

“We also conduct CFA program information sessions aimed at anyone interested in learning more about the program.”

Finally, a network of local relationships not only helps sustain the society, but also keeps the industry apprised of developments.

“The society believes it’s important to build strong relationships with all participants in the investment community including regulators and legislators,” she says, “The society was instrumental in connecting CIMA, the Department of Labour and Pensions and the Department of Commerce and Investment with the CFA Institute’s Scholarship Department.”

The society offers regulator and media scholarships, which, Frederick says, promote top ethics, education and professional standards. The program has proved so popular that within the last two years several government departments and CIMA have become scholarship participants.

“The society has also worked closely with the Department of Labour and Pensions to provide a seminar to pension trustees on ethical decision making,” she says, and consultation is regularly offered on proposed legislation pertaining to the investment industry.

“We have worked with the University College of the Cayman Islands [in] the last three years to compete in the CFA Research Challenge,” an annual global competition providing university students with “hands-on mentoring and intensive training in financial analysis,” Frederick says. “This year we are incredibly excited to have two teams competing – one from UCCI and a second from the International College of the Cayman Islands.”

The society has responded to the need for greater financial literacy by creating a twice-monthly 30-minute Radio Cayman show, “Money Sense,” attracting speakers from government, the financial industry and investment professionals, Frederick said.

“Cayman Finance is another important body we have aligned ourselves with,” she says. “We have also been fortunate to have representatives from the different financial services sub-sectors join us on the radio show.”

Globally, CFA charterholders, she says, “are employed as portfolio managers, research analysts, risk managers, financial advisers and other roles,” but the designation does not limit professionals to a particular role or a particular industry, and gaining it requires at least four years in the investment decision-making process.

“Some charterholders pursued the designation for future career advancement or with the objective of changing roles in the future,” Frederick says. “The skills acquired are relevant for managing both private client and institutional portfolios.”

Regulating Cayman’s insurance industry

By Cayman Islands Monetary Authority

Over the years, the financial industry of the Cayman Islands has remained highly competitive in several areas. One in particular is the insurance industry.

Since the introduction of the Insurance Law in 1979, the Cayman Islands has become a major center for international insurance business. Today it is home to the second largest domicile for international insurers and holds the number one position worldwide for healthcare captives, with trends of continued growth.

State of the Cayman Islands insurance sector

The current state of the insurance sector in the Cayman Islands consists of both domestic and international markets. As of September 2016, there are 864 insurance-related licensees, of which 121 and 743 are related to domestic and international insurance markets respectively.

Pure captives and group captives represented the two main categories, with 361 and 125 companies, respectively. With approximately 34 percent of companies (re)insuring hospital and medical professional liability, this continues to be the largest primary line of business.

The domestic market is comprised of nine locally incorporated companies and 20 branch/agency operations of foreign companies. Of the 29 domestic insurers regulated by the Authority, 25 were engaged in active business.

Despite the competitive market, especially with emerging onshore captive domiciles such as the United States, 33 new insurer licensees have been added to the international insurance market in the first three quarters of the year. This reflects a 50 percent growth, compared to the number of new licenses issued in 2015. Total premium levels and assets of 711 insurers, representing the international segment, were at US$13.9 billion and US$58.9 billion, respectively.

Risk location of captives continued to be dominated by North America, which accounts for 90 percent of the Cayman market, followed by the Caribbean and Latin America at 3 percent, Europe at 2 percent, and the remaining global market at 5 percent.

One of the exciting developments in the Cayman Islands market is the recent trend in new captive or (re)insurance company formations, particularly backed by subsidiaries within international insurance groups, intermediaries and hedge funds.

As the regulator of the world’s second largest captive jurisdiction, the Cayman Islands Monetary Authority strives to ensure that the insurance sector is regulated in accordance with international best practices, while having consideration for the competitiveness and required innovation to remain as one of the top leading domiciles.

Domestic legislation

One of the key functions of the Authority is to enhance key regulatory laws and regulations. Some of these recent developments include the enactment of the Portfolio Insurance Companies (PIC) legislation in early 2015, which has resulted in positive changes to the industry.

PICs were introduced as an innovation to the existing segregated portfolio company (SPC) structure. One of the key benefits of a PIC is the ability to transact with other PICs and standalone (re)insurance companies.

Another advantage is that a PIC can have its own legal identity with a board of directors, without the risk of contaminating the core business or existing business.

Many captives also consider it to be more cost effective to establish a SPC first and create PICs within the SPC as business grows; thereby saving time and money.

There are currently six PICs registered with the Authority. However, given the number of enquiries from existing and prospective licensees, a steady increase in PIC formations is expected over the next year. This will be more evident as persons become more aware of the innovative ways in which PICs can be used.

As a reflection of the ongoing work and commitment to enhancing the reputation of the Cayman Islands, there has also been the introduction of the Rules and Statement of Guidance on Outsourcing arrangements, risk management, and market conduct. This ensures that the Authority continues to comply with international best standards, and confirms that the Cayman Islands is a jurisdiction which upholds robust and world-class regulatory standards.

Supervision of licensees

Fortunately, the Cayman Islands has been successful in striking a proper balance between regulation and developing a risk-based approach to ensure that our licensees are appropriately supervised. This is mainly due to the built-in flexibility of its legislation and practical application of business awareness. Over the years, the Cayman Islands has built an exceptional infrastructure of professionals who have facilitated, managed and supervised thousands of captive programs.

As a part of this development, the Authority recently appointed Ruwan Jayasekera as Head of the Insurance Supervision Division. He was confirmed to the post, effective July 14.

With more than 17 years of experience in insurance, in both regulatory and industry roles, Jayasekera brings a wealth of knowledge to the field.

In addition, the Authority’s traditional regulatory approach is not to micro-manage its licensees’ day-to-day operations, but rather to create an appropriate regulatory framework that addresses the associated risks, while remaining in compliance with the applicable laws and regulations, and being open to new ideas and innovation.


The Cayman Islands Monetary Authority also recognizes that the globalization of insurance markets evolves at a rapid pace, and that captive structures are being put to more sophisticated use by their owners. Therefore, the Authority continues its commitment to actively participate in international regulatory organizations.

This is demonstrated by the Authority’s participation in proceedings of the International Association of Insurance Supervisors (IAIS) as a member of the Education, Market Conduct, Financial Stability Committees, and the Reinsurance Task Force. The Authority also serves as a Regional Training Coordinator for the IAIS.

Other partnerships include membership in the Group of International Insurance Centre Supervisors (GIICS), formerly known as the Offshore Group of Insurance Supervisors, or OGIS, Group of International Finance Centre Supervisors (GIFCS), International Organization of Securities Commissions (IOSCO), the Caribbean Association of Insurance Regulators (CAIR) and the Financial Stability Board’s Regional Consultative Group for the Americas.

Ease of doing business

As the regulators of the financial services industry, the Authority continues to enhance the ease of doing business for industry stakeholders, particularly through the use of technology.

One of the advantages which we have seen in this effort has been in relation to a new online portal – Regulatory Enhanced Electronic Forms Submission (REEFS) – which enables regulated entities to submit applications and make change requests electronically. This portal significantly improves on the previous E-Reporting system and further allows the Authority to become more efficient.

Although REEFS is still in its initial phases, the Authority anticipates that the technological enhancements of this new system will facilitate greater efficiency and effectiveness of risk and data reporting and analysis.


With the changing landscape in the healthcare industry, especially in the United States, the Authority is optimistic about the new opportunities that this may present for captive insurers as it relates to volume and nontraditional risks.

In 2017, the Authority will continue to identify areas where greater efficiency, flexibility and innovation are necessary.

As part of our continued efforts to promote market confidence and consumer protection, the Monetary Authority, in conjunction with the Cayman Islands Government, and other industry stakeholders, is also preparing for the upcoming Caribbean Financial Action Task Force review. This exercise is slated for the fourth quarter of 2017, and will assess the anti-money laundering regime of the Cayman Islands.

Nevertheless, with a robust, yet flexible and competitive regulatory regime, infrastructure and high levels of expertise and experience, the Cayman Islands will continue to maintain its position as a leading world-class jurisdiction for offshore insurance, and remain attractive to quality business, for both existing and potential licensees.

Planned economic stimulus packages could benefit infrastructure equities

Juergen Buettner

Despite being exceptionally aggressive, monetary policies do not bear fruit as hoped anymore. As a result, fiscal policy as a means of stimulating the economy once again gains popularity worldwide. Should the concept find support in general, it will also have noteworthy consequences for the financial markets.

infrastructure-2On closer examination, one thing cannot be denied: Economies and financial markets have diva-like characteristics. They constantly need to be kept in a good mood by some kind of action. Without it, they sulk and slip into recession or a bear market. The job of entertainer was mainly left to the central bankers in recent years. They used much more of their firepower than in the past, with the only goal to keep the economy and the stock market running.

Unfortunately, the positive response seems to subside more and more. This is not surprising. Bank of America Merrill Lynch has counted nearly 700 rate cuts globally since 2008.

Despite these massive efforts, the world economy is expected to grow by less than 3 percent in 2016. That would be the lowest growth rate since the last financial crisis. For political leaders, that is not sufficient, as confirmed by the wording of the final declaration of the recent G20 summit in Hangzhou, China. In their communiqué, the leading industrial and emerging countries classified growth worldwide as still weaker than desirable.

Fiscal policy as a tranquilizer

The search for more growth momentum, however, is limited by a lack of alternatives to stimulate the economy. Reforms are certainly the best choice. But this is usually connected with steeper cuts, and therefore politicians most commonly want to make use of that tool only when it is really unavoidable. Compared to that, it is much easier to open the cornucopia of the state and to hand money to the people through an expansionary fiscal policy.

The reason why this option is preferred in the current situation is explained by Julius Baer chief economist Janwillem Acket: “The combination of central banks running out of options to stimulate growth and governments simultaneously imposing fiscal austerity measures has fuelled concerns over globalization pressure in more and more economies. Frustration levels among private households are rising, which is challenging the legitimacy of the ruling political parties and spurring radical factions. Instead of prioritizing structural reforms, which tend to hurt many in the short term, the ruling authorities are increasingly eroding fiscal austerity for deficit and even debt-financed spending.”

The pressure increases

The enthusiasm in terms of expansionary fiscal policy, however, is often slowed by empty state coffers. The debt of the industrialized countries is expected to reach 107 percent of annual economic output this year, the highest level since the end of World War II, cites Stefan Scheurer, capital markets expert at Allianz Global Investors, in data from the International Monetary Fund. But that does not stop influential institutions, such as the IMF, the Federal Reserve or the European Central Bank, as well as leading investment banks, from calling for new government stimulus.

It seems as if their proposals are met with approval with increasing frequency. China has already implemented such measures. Japan and the U.K. are on the verge of doing it. In Europe, the austerity provisions are already interpreted less strictly, once again the authorities work on an EU infrastructure fund, and for the first time in five years EU fiscal policy will turn expansionary in 2017. In addition, in the United States the campaigns of the two presidential candidates include infrastructure spending to the tune of 1.5-2.5 percent of GDP.

Separate from the funding issue, there is undoubtedly a need for action. In terms of government spending, U.S. public fixed investment as a share of GDP is running at a 60-year low, while in the eurozone a ratio of private capital expenditure to GDP reached record lows in 2014 and has not improved since, J.P. Morgan writes in a research paper.

“Today, the 20 largest economies in the world, grouped together in the G20, face an infrastructure spending gap of about US$20 trillion over the next 15 years,” adds Joachim Klement, head of thematic research at Credit Suisse. That is a big chunk of money, and without government involvement not easy to stem. In summary, all of that ultimately makes a new wave of fiscal stimulus measures quite likely.

Whether the upcoming fiscal spending will make a difference depends on sensible use of these resources. The way it should not be done can be seen in China. According to a study from the University of Oxford’s Saïd Business School, more than half of China’s infrastructure investment has destroyed economic value instead of generating it. Furthermore, the slow progress of implementing these projects has to be taken into consideration too. The proposed plans have to be passed by legislation and put into practice – a process that can drag on for years.

Stock market has smelled a rat

Nevertheless, the consequences of the emerging realignment of economic instruments should not be underestimated. No one knows this better than the investment banks. How much they have already picked up the scent is reflected in the numerous research reports they have published on this issue in recent weeks. But of course the masters of money do not only act as paper tigers. If they write something currently about fiscal policy and infrastructure spending, then sooner or later capital also flows in that direction, either because they invest themselves or because customers implement the recommendations made in these research papers.

In the current case, the consequences could be serious and extend to all segments of the financial markets. It therefore makes sense for all investors to deal with the issue. The problem is various scenarios seem to be possible and this means it is unclear how it will eventually play out. There is some disagreement, for example, about the impact on the bond market. On one side, Jeffrey Gundlach can imagine a sustained upturn in bond yields. The “king of bonds,” as the founder of the investment firm Doubleline Capital is called by media, underpins his view with the following explanation: “There will be two effects of an increase in fiscal spending and both will push rates higher. The supply of bonds will increase, and GDP growth will be higher.”

On the other side, Patrick Artus, the chief economist of the French investment bank Natixis, simply cannot imagine a more expansionary fiscal policy without continuously low interest rates. That has to do with his belief that most countries cannot afford higher borrowing costs. Both approaches sound plausible, which is why prudent market participants do not jump to hasty conclusions. They prefer a wait-and-see approach and observe closely which forces will finally become prevalent.

Construction, infrastructure and industrial benefit

Less controversial is the question which sectors would benefit most should the future really bring more public stimulus. Should that happen, construction companies and building materials manufacturers would profit, as well as industrial companies and infrastructure service providers in general. Also, some commodities, such as base metals, can expect a certain positive impact.

Merrill Lynch says in reference to the “Greenspan Put” (former U.S. Federal Reserve Chairman Alan Greenspan responded to every crisis by cutting interest rates) from a

“Keynesian Put.” This in turn refers to the economist John Maynard Keynes, who is considered the mastermind of economic and fiscal policy. Compatible with this, Chief Investment Strategist Michael Hartnett advises to switch the investment strategy:

“Cyclically, we recommend investors rebalance portfolios away from the “QE winners” and toward assets and sectors that should benefit from more fiscal largesse, such as companies with exposure to Main Street, infrastructure, defense, and real assets.“

His advice which sounds reasonable, especially if investors concentrate on companies in the mentioned sectors that are in a good shape now. These stocks have proven to be able to cope well with the status quo, and if expansionary fiscal policy was added on top of that, it would be a welcome addition. Then the existing upward trends in earnings and stock prices of these companies should be prolonged further.

Offshore: ‘Wealth preservation, asset protection more important than tax reduction’

Hans-Lothar Merten

Hans-Lothar Merten, trained in banking and business administration, is known in Germany as an insider in the offshore world. He has written books about tax havens for more than 20 years, and he also publishes articles on finance and taxes as a freelance journalist. According to the German financial newspaper Handelsblatt, his guide “Steueroasen” has cult appeal in relevant circles. His new book “Vermögen richtig schützen,” co-authored with German inheritance law expert Markus Schuhmann, will be published this month.

978-3-89879-988-1_4c_hiresQ. Many people are concerned about the stress in the global political, economic and financial systems and worry about their savings. Where is our money still safe nowadays, in your opinion?

A. In Europe, there are the classic examples: Switzerland, Luxembourg, Austria, as well as Liechtenstein or the Channel Islands. In Asia, Singapore and Hong Kong should be mentioned; in Africa, Mauritius; and in the Caribbean, the Bahamas or the Cayman Islands.
The deciding factor in these financial centers is not zero taxes. In addition to the quality of the respective financial industry, investors value political stability, legal certainty and access to their assets, either directly or via offshore structures.
Central Europeans, for example, should stay away from offshore destinations like Liberia or Sierra Leone in Africa; Panama or Paraguay in the Americas; or the financial centers in the Middle East.

Q. What do you think about the headlines around the Panama Papers?

A. The Panama Papers or LuxLeaks prove that customer data is no longer safe. There will be more whistleblowers. For tax evaders there is always the risk of getting caught. The media attention on the subject of tax havens in recent years has increased the public awareness around the topic.

Making billions in profits without paying taxes as Apple does currently with the help of Ireland and the Cayman Islands is not accepted by taxpayers anymore. Even less so since the coffers of treasuries in industrialized countries are empty, and at a time when in Europe hundreds of thousands of refugees have to be taken care of and many more are waiting behind the border.

Q. Does the increased media attention on offshore issues have a negative effect on the ability to avoid tax?

A. In any case, the tax savings practices of individual countries and companies, as well as offshore structures, are now in general under the microscope.

Q. Given the increasing criticism, does the “tax haven” business model still have a promising future?

A. In the light of empty state coffers in many industrialized countries, it is understandable that their finance ministers in recent years have targeted tax havens in their attempt to search for additional income sources. Bank customer data purchases by governments, LuxLeaks or the Panama Papers came at the right time.

Tax havens simply for tax evasion or for tax savings are no longer viable. Offshore destinations have to find new business models. The protection of assets will be the topic of the future. This applies to wealthy families and to businesses alike.

Only on this basis will offshore financial centers be able to successfully compete for wealthy individuals and companies.

Should the Caymans Islands succeed in preserving its more positive offshore image of the recent past and be able at the same time to develop solutions for the current changes in the offshore world, then there is a future. Here the offshore industry has to play its part.

Q. Where do you see the strengths and weaknesses of the Cayman Islands in the struggle for international capital?

A. Assistance in tax evasion is off the table. For wealthy individuals the topics of the future are wealth preservation as well as asset protection and that should be the direction of the business model of the Caymans Islands. The use of offshore companies is part of these topics.

For companies like Apple and Facebook, the new business model is still to be found. Their tax saving detours via Cayman and other offshore places in the Caribbean have no future in the face of impending back payments of taxes for previous years. Here the offshore industry in Cayman is also required to break new ground.

The required infrastructure for an offshore financial market is in place. Hedge funds and banks feel in good hands in the Cayman Islands with the customer money they manage because of the weaker regulations and capital requirements compared to other regions like Europe, for example. As a result, wealthy people feel well protected at the multinational financial institutions which are active in Cayman. They also make use of the local Trust Law in order to safeguard assets and to circumvent the often strict inheritance regimes in their home countries.

While other offshore places in the Caribbean have to fight for international clientele, the Cayman Islands remains an attractive destination in the offshore world.

Q. Where exactly has Cayman done things right or wrong lately in the rivalry with the competition?

A. Cayman has managed in the last few years to stay largely out of the global debate about tax havens. However, they are now required to adapt to new developments in the business of companies. The good image of the past years could otherwise be burned quickly. You only have to look at Panama to understand how quickly that can happen.

Q. The number of registered companies in the Cayman Islands has exceeded the 100,000 mark for the first time. That does not give the impression that offshore centers lose traction in that respect?

A. The Cayman Islands has developed quite late into an international financial center compared to other offshore centers in the Caribbean. The numerous hedge funds and branches of international banks contributed to that evolution. But in recent years the process was also helped by the flight capital that left Southeast Asia or Europe in reaction to the introduction of withholding taxes. That money is usually incorporated in offshore companies. That is one reason why now the 100,000 mark for registered companies has been exceeded. But compared to the more than 600,000 registered companies in the British Virgin Islands, there is still room for improvement.

Another contributing factor is the tax-saving models such as the “Double Irish” in Ireland, which is used by U.S.-companies like Apple and Facebook to channel their global earnings into the Cayman Islands because of the zero income tax regime there.

Q. How important are all the tax transparency initiatives like FATCA, the OECD common reporting standard, etc.?

A. Initially these treaties achieved little. It was only due to the mounting pressure of public debt in industrialized countries that political decision-makers saw the need to jointly combat the harmful tax practices of tax havens.

Q. How much value does the proposed agreement for automatic information exchange have, if even leading countries do not fully participate in it?

A. Whether it is the United States or others, unless all states around the world cooperate in the information exchange, gaps and tax havens will always exist. Taxes are typically still national law and therefore many different tax rates exist worldwide. In other words, international tax and corporate law firms will continue to find new loopholes and then try to design tax-saving models for the wealthy. The experts are always one step ahead of the regulators.

Q. What do you think about the accusation that the U.S. is the largest tax haven?

A. The United States is indeed a significant tax haven. While on the one hand they brought, for example, Switzerland to its knees in tax matters, they offer themselves, in states like Delaware, Nevada, Wyoming and Florida, many possible ways for companies, wealthy people, tax evaders and criminals from abroad to save taxes, hide or launder money, at the expense of their resident countries. The banks involved usually do not care about the origin of the money they manage.

What once was Zurich’s Bahnhofstrasse in Switzerland for many German tax evaders, is now called Brickell Avenue, Miami’s financial district. For the more than 300 banks there, business with undeclared money is still thriving. That means, instead of increasing the pressure on other tax havens and offshore centers, it is about time for the United States to question the tax practices foreigners can use in their own country. Here the OECD and the EU should also finally show their colors.

Q. After the Brexit vote, the United Kingdom has announced it will reform its tax system. Could this lead to the emergence of a new haven for foreign capital?

A. Well, the Channel Islands, which belong to the United Kingdom, for decades have been an attractive haven for wealthy foreigners. Why should Great Britain not make itself more attractive for international companies as well? In 2013, the so-called “patent box” with a profit tax of just 10 percent, was introduced. And neighboring Ireland demonstrates how companies can be attracted.

Q. What functions must a legal entity fulfill nowadays to be attractive to potential founders?

A. Foundations, trusts, asset managing companies or special funds for large assets usually provide tax advantages to some extent. But that is not necessarily the most important feature anymore. Much more important for them is wealth preservation and asset protection.

This also applies to the protection from increasing state repression, against systemic risks in the financial system, against creditor claims and against claims from family members. By moving assets into such legal entities, risks can be avoided, and the legal entities can also assist in structuring assets in a sustained way across generations.

Q. How have the entities typically used in offshore jurisdictions changed over time?

A. The stronger international control measures against tax avoidance are, the more complex the constructs become that are used in the attempt to minimize the tax burden of wealthy people and corporations. It is a global race with new offshore destinations and the constant search for new loopholes in national laws, as well as bilateral and multinational agreements. But that is also always connected with new pitfalls in the international tax jungle. Without expert advice, nobody can navigate these anymore.

Q. How cost-effective are the available structures?

A. The transfer of assets or income into low- or zero-tax countries, just because of lower taxes, is often a zero-sum game given the costs connected with it.

And it is – as the recent examples of Apple or Starbucks demonstrate – more and more just a matter of time until the tax savings backfire in the form of billions of dollars in back tax demands. Due to the increased international information exchange, it seems as if this calculation will no longer add up.

Q. What should one consider with regard to moving inheritable assets abroad?

A. These assets can lead to unwanted pitfalls that adversely affect their value. There is a significant need for advice in advance. Asset holders with undeclared assets abroad, out of deference to their heirs, should in good time before their death report to the tax authorities. It saves their heirs a lot of trouble.

If untaxed inheritance money was stashed in the Caymans Islands in the past, this was usually done via offshore companies. This money is easily passed on to the heirs via the transfer of shares. The relevant tax authorities usually did not learn anything about that.

Hedge funds and banks feel in good hands in the Cayman Islands with the customer money they manage because of the weaker regulations and capital requirements compared to other regions like Europe, for example. As a result, wealthy people feel well protected at the multinational financial institutions which are active in Cayman.

Offshore destinations have been the topic of a lot of headlines in 2016, as in most every year. This is reason enough to ask German tax expert Hans-Lothar Merten for a European point of view about the controversial topic in general and about the prospects of the Cayman Islands as an offshore jurisdiction in particular.

Tackling the decline of correspondent banking relationships in the Caribbean

Dr. Warren Smith, president of the Caribbean Development Bank (CDB), Onika Miller, government relations and public policy executive at the Jamaica National Building Society, Gaston Browne, prime minister of Antigua and Barbuda, Earl Jarret, general manager of JNBS, and Ian Durrant, deputy director in the economics department at the CDB, at a meeting in September.

Correspondent banking, the collective term for banking services provided by a bank in one country to a financial institution in another, has been the backbone of international banking operations and payments for some time. Smaller banks without a large international network of their own, in particular, rely on their relationships with correspondent banks in other countries to make cross-border payments.

For the past two to three years, however, correspondent banks in the United States, Europe and Canada started severing ties with banks in the Caribbean.

The Caribbean Association of Banks warned in August that the decline of correspondent banking relationships among financial institutions in the Caribbean undermines trade and business activity and threatens the economies in the region.

At least 16 banks in five Caribbean countries have lost all or some of their correspondent banking relationships.

Worldwide the situation is similar. Although the overall volume of payments increased between 2011 and 2015, the Committee on Payments and Market Infrastructure of the Bank for International Settlements determined that the number of active correspondent banks declined in 120 of the 204 countries it examined.

According to a May 2016 IMF report, there are several reasons for the decline in banking relationships.

On the one hand, banks are more broadly reassessing the cost benefits of their business lines, including transaction banking activity like correspondent banking. On the other hand, the IMF stated in its research paper, banks are uncertain about their regulatory obligations and fear large penalties and reputational risks in connection with the enforcement of sanctions, tax transparency and anti-money laundering, which have significantly increased the compliance costs for global banks.

The confusion and uncertainty is in part related to the U.S. Justice Department’s Operation Choke Point, which in 2013 identified certain industries, such as money remittance services, as high risk for fraud and money laundering.

Although the Federal Deposit Insurance Corporation later clarified that U.S. banks should use a risk-based approach to determine the risks rather than cut business ties with all potentially risky sectors, banks have been exiting unprofitable business lines and businesses they perceive as risky, amid a general decline of cross-border activity.

Jamaica’s Minister of Foreign Affairs and Foreign Trade, Kamina Johnson-Smith, addresses members of the Congressional Black Caucus Foundation's legislative forum on de-risking and correspondent banking in Washington, D.C., on Sept. 16.
Jamaica’s Minister of Foreign Affairs and Foreign Trade, Kamina Johnson-Smith, addresses members of the Congressional Black Caucus Foundation’s legislative forum on de-risking and correspondent banking in Washington, D.C., on Sept. 16.

As a result, correspondent banking has been high on the agenda of both the Cayman Islands Bankers Association and Cayman Finance for some time.

Responding to questions by the Journal, both associations said in a joint statement that Cayman’s retail banks enjoy strong and long-standing relationships with U.S. correspondent banks.

“But as large correspondent banks exit business lines globally in the region, primarily due to ‘de-risking’ driven by regulatory obligations and pressures, it is important to proactively engage to ensure there are no unintended consequences that could affect efficient and effective access to the global financial payments and settlement systems,” they said.

The Cayman Islands Bankers Association, Cayman Finance and the Ministry for Financial Services therefore continue to work closely and proactively “to reinforce the message that the Cayman Islands is a well-regulated and key international financial center for the global economy which gives international correspondent banks comfort both at an institutional and jurisdictional level,” they added.

The effect in Cayman

In the Cayman Islands, the pressure on correspondent banking relationships has shown its effect in two ways.

Money service businesses, essential for sending remittances by migrant workers, found themselves cut off from all banking services after Fidelity Bank told its money service provider clients that it had decided to “de-risk” and exit the business of processing payments on their behalf because it had been made unprofitable by increasing regulatory obligations.

Other banks followed suit, also citing the anti-money laundering risk profile of this type of business.

This resulted in significant disruption with money service businesses closing operations until they were able to secure suitable alternative arrangements. “In that situation the Cayman Islands Bankers Association, Cayman Finance and the Ministry for Financial Services and the Cayman Islands Monetary Authority worked very hard to ensure an appropriate solution was found,” the financial services associations said.

In addition, Cayman Islands class B banks, which rely on correspondent banks to make international money transfers on behalf of their clients, have also encountered greater difficulties in maintaining their correspondent banking relationships.

The number of class B banks in Cayman has dropped to less than 200 from a high of 600 some 10 years ago. While this may be largely due to consolidation in the industry, correspondent banking difficulties are a contributing factor.

“There have been many global factors affecting the banking industry such as consolidations, increasing compliance and regulatory costs and de-risking by correspondent banks,” CIBA and Cayman Finance said. “The result of some of these global issues is that it is becoming increasingly difficult for class B banks to obtain new local correspondent banking facilities and also difficult to establish direct correspondent relationships with international banks, In addition, Cayman correspondent banks are finding it difficult to provide correspondent banking facilities to class B banks due to pressure from their own correspondent banks that prefer not to have ‘nested accounts.’”

So far, no Cayman banks have been completely cut off from the international payment system, but problems with sending remittances has already resulted in a greater consolidation of services.

A regional and global threat

In areas where correspondent banking relationships have ceased, the Caribbean Association of Banks said in August, the de-risking exercise of large global banks threatens to lead to financial exclusion, shrinking financial sectors, the thriving of underhand economies, the increased use of unregulated payment options and slower economic development.

In Jamaica the de-risking issue is at the top of government’s concerns. Jamaica’s Foreign Affairs and Trade Minister Kamina Johnson-Smith said at a conference in Washington, D.C., on correspondent banking problems, “Given the severity of the challenge of de-risking by international banks, the government has accorded the highest priority to this matter.”

Prime Minister Andrew Holness considers this issue to be “a clear and present danger to the growth and development prospect of Jamaica,” the minister said.

Jamaica is tackling the problem through diplomatic channels and by strengthening financial oversight and regulatory frameworks to ensure compliance with international banking standards.

“Jamaica has raised the issue in a number of international forums and will continue to let its voice be heard on this important subject. We are also exploring the feasibility of strengthening our anti-money laundering and counter-terrorist financing (AML/CTF), due diligence and monitoring infrastructure,” Kamina-Johnson said.

Meanwhile, the Caribbean Community (CARICOM) has deepened its partnerships within the region in order to strengthen its efforts to address the withdrawal of correspondent banking services from some regional institutions.

Prime Minister of Antigua and Barbuda Gaston Browne, who is leading CARICOM’s advocacy on the matter, met with the heads of the Caribbean Development Bank and the Jamaica National Building Society to discuss CARICOM’s high level advocacy in response to the emerging de-risking practices by correspondent banks.

“De-risking of correspondent banking services is an existential threat facing the Caribbean region which has the potential to decimate our living standards. We must work collectively as a region to address this threat to our survival,” Browne said following the meeting in St. John’s.

Earlier this year, CARICOM members appointed Browne to lobby policymakers in the United States, Canada and the United Kingdom on the threat to Caribbean economies from the withdrawal of correspondent banking services.

Browne says the Jamaica National Building Society and the Caribbean Development Bank will provide technical assistance to advance CARICOM’s advocacy efforts and work with CARICOM to identify solutions to the challenges. They will also be assisting CARICOM to coordinate implementation efforts and to strengthen monitoring mechanisms.

“Correspondent banking services are a public global good that is essential for participation in global trade, and is particularly important for small island economies,” Prime Minister Browne said.

The general manager of the Jamaica National Building Society, Earl Jarrett, pointed to the threat to services such as remittances, on which the region depends. Highlighting challenges faced by his organization’s remittance company in the Cayman Islands, he said that the value of remittances was equivalent to a significant percentage of gross domestic product for many receiving countries in the region.

“Remittances are the lifeline for migrant communities across the region. And, Jamaica alone, with a diaspora population of some 3 million, represents one of the largest recipient countries in the region, accounting for amounts equivalent to approximately 17 percent of our gross domestic product,” he said.

Last year, the IMF highlighted the challenges for banks in the Caribbean, concluding that while the impact had been contained, the risks related to correspondent banking relationships have strongly increased for all banks, and remittances and other payment flows may have been affected.

If all correspondent banking relationship were lost in one country, the IMF said, the consequence would be systemic risks for the financial system.

This has not gone unnoticed by the Financial Stability Board, the organization that deals with financial systemic risks globally.

The FSB presented a plan to leaders of the 20 largest economies in November 2015 to address the decline of correspondent banking. The plan consisted of further analysis, the clarification of regulatory expectations, including more guidance from the Financial Action Task Force, domestic capacity building and the strengthening of due diligence tools used by correspondent banks.

In March 2016, the FSB established a Correspondent Banking Coordination Group to implement the action plan. An initial report on the progress was published in September.

The FATF has since updated its guidance in areas where it affects correspondent banking. In February the organization clarified its guidance for a risk-based approach for money transfer services, and in June it updated one of its anti-money laundering recommendations in relation to nonprofit organizations.

U.S. regulators, concerned that banks have gone too far, have also pledged to be more clear in terms of what they expect from banks. In September the U.S. Office of the Comptroller of the Currency, which regulates large banks, said it will offer guidance on how banks evaluate foreign banking risks and make decisions on whether to shut down accounts.

Agency head Thomas Curry told a Las Vegas anti-money laundering conference, “The global financial system cannot be paralyzed by risk.”

The de-risking by banks could “lead to entire regions being cut off from the positive effects of modern financial systems and broader financial inclusion,” Curry said. “This is not the solution.”


A report by the FSB suggests a number of measures to improve the situation. For instance, several service providers have developed KYC utilities, which store customer due diligence data in a single repository. The idea is to give correspondent banks more transparency and the ability to identify and mitigate the risks associated with respondent banks and their underlying clients.

In particular, for banks that err on the side of caution in the absence of clear regulatory guidelines, additional information about the risks in foreign banking partners could tip the scales.

Grada, a Cayman Islands-based company, is in the process of offering such a solution to local banks. Owner Peter McKiernan says large banks want to make money with transactional banking business in the Caribbean because they are not making money on interest anymore. “But they are stifled by their Treasury departments which think it’s too risky.”

Grada’s solution provides these banks with more transparency in the risks associated with their Caribbean client banks and the customers of those clients. Grada’s service consists of conducting the due diligence on all of a bank’s underlying customers and validating that the information, such as passports, is correct.

The U.S. correspondent bank would not have access to details of each customer, but it would see a statistical breakdown of the customer types, where they are based, where they conduct business, the percentage of enhanced due diligence and due diligence completed for the bank’s customers and so on.

Based on the analysis, U.S. correspondent banks may have more comfort in their ability to assess the underlying risks. They may also establish certain rules or ask their respondent banks to exclude specific customer types.

Overall this combination of due diligence and KYC outsourcing and validation across several banks would help lower the compliance costs for banks.

The FSB believes that in addition to cost savings, KYC utilities would reduce the amount of information that needs to be collected several times, for example when customers have accounts with a number of banks. The information would also be more standardized and reliable, and the process would be faster.

Cayman’s financial services associations confirmed that the issue is being discussed by the banks as a potential option in the future to supplement internal compliance programs. However, they pointed out that all banks have to meet international and local regulatory requirements and head office requirements, so that a minimum standard must be met by the banks that would not be covered by an outsourcing or independent external validation process at this time.

The FSB also promotes the use of unambiguous Legal Entity Identifiers as an improvement that could help make correspondent banking more transparent.

Another Grada solution focuses on money service providers and the ability to verify the identity of the person sending a payment via a smartphone app. Before the money transfer is carried out, the customer will take a selfie using the app. In combination with the time stamp and the geolocation of the phone placing the customer near the money store, the payment is approved for a limited time, as long as it is in line with pre-approved parameters such as maximum transaction amounts and the designated country the payment is going to.

In sum, these efforts could increase the comfort of onshore correspondent banks doing business with the Caribbean and other alleged “risky” business regions.

In addition, Cayman banks will continue to maintain strong systems and processes that meet global AML standards. And they will maintain their ongoing regular communication with CIMA to ensure they are aware of all regulatory requirements and expectations, Cayman Finance and CIBA said.

“The jurisdiction will maintain its robust regulatory and supervisory framework and ensure that correspondent banks are aware of the strength of our regulatory regime,” they noted.

Paul Byles, CEO of First Regents Bank in Cayman, agrees that the issue has to be tackled directly with banks and regulators onshore.

The banks should already know that the Cayman Islands and its regulator the Cayman Islands Monetary Authority adhere to very high global standards, he said. “But apparently that is not sufficient. So the only way to tackle the issue is to meet directly with the major institutions onshore and educate them on the nature of the regulatory regime for banks in Cayman. It would also make sense to go a step further to ask these banks to be specific about what types of systems and risks they wish to see managed better from an operational perspective, so that local banks facing this challenge can consider adopting such practices,” he argued.

A similar approach should be pursued with onshore regulators to better educate them on Cayman’s banking supervisory regime. There should also be more regional meetings and coordination to tackle the issue.

CIMA has been engaged in correspondent banking discussions by attending international working groups with entities such as the IMF, FSB, World Bank, global banks, regional regulators and law enforcement agencies including the IRS, the SEC and the FBI, Cayman Finance and the Bankers’ Association confirmed. In addition, CIMA has reached out to local associations to provide guidance on enhanced regulatory requirements and expectations.

Although there have been some industry surveys to better understand the nature and magnitude of the problem, Byles said, “The truth is, there has been very little progress in terms of getting U.S.-based banks to change their current approach.”

In the meantime, some banks are turning to other options such as finding more “lenient” institutions that will open correspondent accounts for them. That may be effective in the short term, Byles said, but generally this approach also poses some risks, so each bank will have to carry out its own due diligence on these options.

Globally and locally there is also a certain amount of opportunism within the banking sector, he noted, with some banks “hiding behind the ‘de-risking’ excuse knowing full well that they stand to gain because the lack of correspondent banking accounts means fewer banks and therefore less competition.”

This works well from an individual bank’s perspective, Byles said, but regionally or globally, it is not the best long-term solution because it encourages a very high concentration of client assets in a smaller number of institutions.

“Those institutions then fall into the ‘too big to fail’ category which itself leads to a host of other problems. That result can’t be good for anyone,” he said.

Legally Speaking: Proposed amendments to the Trusts and Property laws

Morven McMillan and Maxine Bodden

Morven McMillan, Maxine Bodden
Maples and Calder

The proposed amendments to the Trusts Law (2011 Revision) and the Property (Miscellaneous Provisions) Law (2011 Revision) are part of a tidying up exercise to correct long-standing deficiencies in both statutes. Other proposed amendments are to correct technical errors made in the original legislation which have been identified or have emerged over time. Although the proposed amendments do not reflect any significant change of policy or new products for the Cayman Islands trusts industry, the amendments are timely. They reflect changing technology and the changing marketplace in the international trusts industry and are designed to make the Cayman Islands more attractive as a possible location for commercial or private wealth trust structures.

Trusts Law

Ten amendments are proposed to the Trusts Law and are contained in the Trusts (Amendment) Bill, 2016. The more significant of the proposed amendments are:
Sections 6(c) and 8: Appointment, retirement and discharge of trustees

The first amendment corrects a transitional provision made under the Trusts (Amendment) (Immediate Effect and Reserved Powers) Law, 1998. While the actual changes made in 1998 were largely correct, they applied only to trusts created on or after May 11, 1998, or if the relevant section was expressly extended to apply to the trust by deed executed by the trustee. Unfortunately, when the amending legislation was consolidated with the then-existing Trusts Law, the distinction between trusts made before or after May 11, 1998, was not preserved.

Accordingly, s6(c) as it appears in the current Trusts Law is incorrect and the proposed amendments are aimed at correcting this error. Section 6(c) as amended will contain express reference to trusts created on or after May 11, 1998.

The second part of this amendment concerns the retirement of a trustee where there is no simultaneous appointment of a new trustee. When the changes were made in 1998, they applied only to changes of trustee where a new trustee was appointed under s6(c); an equivalent change to s8 – when there is a retirement but no new appointment – was overlooked. The two conflicting procedures have thus existed since 1998, and so the proposed amendment of s8 is designed to resolve this conflict in a way that achieves the original intent.

Reserved powers

An amendment to s14 will allow a settlor of a trust to reserve to himself or to a third party, such as a protector, the power to appoint both trust income and capital. Under new s113(3)(a), the amendment will apply to all trusts whenever created.

Validation of appointments where objects are excluded or take illusory shares

This section will reflect s158 of Law of the Property Act 1925 of England. It will overturn an old rule of equity that required the trustee of a discretionary trust (but not of a discretionary power) to appoint at least something to every object of the power. Experienced Cayman Islands trust practitioners know how to draft around this. However, by introducing this new section, we are not only bringing Cayman Islands law into line with English law, but providing for certainty in the law. Under new s113(3)(b), s23A will apply to all trusts, whenever created.

Trusteeship of STAR trusts

The proposed amendment to s105 will correct a technical defect (inserted in 2008) in relation to the trusteeship of STAR trusts. This correction will allow a controlled subsidiary to be the trustee of a STAR trust as well as a registered private trust company. Under the new s113(5), the amendment to s105 will be deemed to have had effect on and from Aug. 7, 2008.

Property (Miscellaneous Provisions) Law

Seven amendments are proposed to the Property (Miscellaneous Provisions) Law and are contained in the Property (Miscellaneous Provisions) (Amendment) Bill, 2016. The more significant of the proposed amendments are:

Legal assignments

Section 9 of the Statute of Frauds 1677 still applies in the Cayman Islands, and prohibits the assignment of an equitable interest except in writing and signed by the transferor. Most other jurisdictions, including England, repealed s9 many years ago and replaced it with a more modern alternative that allows an agent of the transferor to execute the assignment. The newly inserted s8C will repeal s9 of the Statute of Frauds 1677 as it applies in the Cayman Islands and will bring us into line with the regime prevalent in most other common law countries.

Construction of expressions used in deeds and other instruments

Because the Cayman Islands adopted the English statutes on trusts and succession but did not adopt the English conveyancing statutes, this useful set of definitions is missing from our legislation, but the defined phrases are used in our statutes. The newly inserted s6A will provide for the construction of commonly understood terms in deeds, contracts, wills, orders and other instruments.

Execution of powers not testamentary

This useful relaxation of some of the more extreme formalities sometimes imposed on the execution of certain trust powers has been in place in English statute since 1925 but has not found its way into the laws of the Cayman Islands. Not having this provision has on occasion caught out lawyers unfamiliar with the detail of Cayman Islands law who may have complied with the execution formalities for a Cayman Islands deed but not necessarily with any additional formalities imposed in the power itself. Section 8B will facilitate the exercise of powers by deed or another type of non-testamentary instrument.

US elections: What really matters from an investor’s perspective

Juergen Buettner

The U.S. presidential election not only produces controversial headlines in the media, but also raises concerns for many investors.

The question of who will be the next U.S. president and what the election result could mean for the financial markets brings the kind of uncertainty that often rattles investors.

There is a saying that “political stock markets have short legs.” But it seems many investors doubt whether this applies to the November election. The uncertainty has to do with two things: First, the U.S. is in difficult times economically, and despite a low unemployment rate, its society seems to be increasingly more divided. Second, the presidential candidates are not very popular with the electorate, to say the least. The Pew Research Center found in a survey conducted in August that only 31 percent expected Hillary Clinton to be a “great” or “good” president, while 45 percent expected her to be “poor” or “terrible.” As for Trump, only 27 percent of respondents said he would be “great” or “good,” while 55 percent expected him to be a “poor” or “terrible” president.

Heidi Richardson, head of investment strategy for U.S. iShares, noted: “Judging by the frequency of questions we are asked these days about the implications of the upcoming U.S. election, it has become top of mind for many – if not most – investors.”

What bothers investors are the personal profiles of the candidates, as well as their campaign platforms. Johnny Bo Jakobsen, U.S. chief analyst at Nordic financial services group Nordea, considers the contest between “Dangerous Donald” and “Crooked Hillary” as a race between perhaps the two most unpopular candidates and polarizing figures in modern U.S. history.

Looking at the candidates’ campaign promises, there is a risk that after the elections more populism and protectionism will emanate from the White House. While both candidates favor more spending on infrastructure projects, there are significant differences in other areas. With regard to environmental policy, for example, the proposals of Clinton and Trump are polar opposites, says Hendrik König.

“While Clinton wants to transform the U.S. into a clean energy superpower, Trump prefers to focus on conventional energy sources,” explains the strategist at the German private bank B. Metzler seel. Sohn & Co.

A lot is pure speculation

Against this background, it is not surprising that investors are thinking hard about the impact of the election outcome on individual industries. Among the big questions they ask themselves is whether a President Trump or Clinton would be better for the stock market. If history is any guide, based on data since 1928, S&P 500 returns have been stronger under Democratic presidents than under Republicans (see graph). After a more detailed analysis, Merrill Lynch quantitative strategist Savita Subramanian concludes that historically, returns have been strongest in election years with a leadership change but not a political party change. A Clinton win would represent such a leadership change with no party change. If Trump were elected, the combination of both a leadership change and a party change, historically, has resulted in the lowest returns, Subramanian writes in a study.

With regard to a potentially more populist government in the future, James Butterfill, head of research and investment strategy at ETF Securities, says that would likely mean trade policy changes, rising government deficits, increased inflation and market volatility. In that environment, he prefers defensive equities, inflation-linked bonds, precious metals and infrastructure. As far as sectors are concerned, Christoph Riniker ranks infrastructure as the winner, regardless of whether Clinton or Trump wins. According to the analyst at the Swiss bank Julius Baer, this also applies to the aerospace and defense sectors. The impact on the pharmaceutical industry, however, could be mixed, depending on the industry segment.

For financials, he believes both Clinton and Trump could have a positive effect. A Clinton presidency should turn out positive for immigration, he says, but negative under Trump’s leadership.

Recession risks and regulatory trends matter

All of this is highly speculative and most of all, it should not be forgotten that U.S. policy largely depends on which party controls the House of Representatives and the Senate.

“The U.S. presidency may still be the most powerful job in the world. Except for foreign policy, however, there is little a president can do without congressional support. When it comes to the things investors care about most, notably fiscal policy, Congress is key,” says Stefan Kreuzkamp, CIO at Deutsche Asset Management.

The fact that the stock market has performed better under Democratic presidents than under Republicans should not be overestimated, if only for statistical reasons. Ed Clissold, chief U.S. strategist at Ned Davis Research, points to the fact that this is only the 30th presidential election since 1900. When one divides the elections into categories such as political party or incumbent winning or losing, there are even fewer cases for study.

In addition, stock prices are ultimately more influenced by the development of the economy and most of all by the health of corporate earnings. The first question investors should ask themselves is: In what direction is the economy heading?

To find reliable answers, market participants should follow the ISM Purchasing Managers’ Index. If that indicator of the economic health of the manufacturing sector falls below 45, it coincides with an official U.S. recession in 11 out of 13 times since World War II. That, in turn, according to Bank of America Merrill Lynch, was historically associated with a minimum drop in profits of 5 percent to 10 percent.

Since stocks usually suffer under overregulation, the future direction of the markets also depends to a high degree on what will happen in terms of regulation. Developments since the year 2000 have led to significantly greater regulation, and small and medium-sized U.S. companies currently consider overregulation and taxes their main problems.

Long-term investors stick to their strategy

Based on these findings, it is important to closely monitor the recession risks and the regulatory trends. As long as the lights on the stock market are not flashing red, it is also advisable to continue to bet on those winning stocks that move within existing long-term upward trends. These marathon runners, whose prices rose ideally over decades have proved that they can deliver price increases regardless of which party and which president is in office.

This approach is backed by findings of Capital Group analysts, who point out that in 17 out of 18 presidential election years, a hypothetical $10,000 investment in the index made at the beginning of each election year would have grown larger 10 years down the road. Given that past results are no guarantee of future results, the following advice of the Capital Group rings true: “Presidential campaigns draw the public’s attention to bad news, which can be a serious distraction for investors. But those who tune out the noise, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true during presidential elections – and any time of the year.”

Region of the Americas is declared free of measles

The region of the Americas is the first in the world to have eliminated measles, a viral disease that can cause severe health problems, including pneumonia, blindness, brain swelling and even death. This achievement culminates a 22-year effort involving mass vaccination against measles, mumps and rubella throughout the Americas.

The declaration of measles’ elimination was made by the International Expert Committee for Documenting and Verifying Measles, Rubella, and Congenital Rubella Syndrome Elimination in the Americas. The announcement came during the 55th Directing Council of the Pan American Health Organization/World Health Organization (PAHO/WHO), which is currently under way and is being attended by ministers of Health from throughout the Americas.

Measles is the fifth vaccine-preventable disease to be eliminated from the Americas, after the regional eradication of smallpox in 1971, poliomyelitis in 1994, and rubella and congenital rubella syndrome in 2015.

“This is a historic day for our region and indeed the world,” said PAHO/WHO Director Carissa F. Etienne. “It is proof of the remarkable success that can be achieved when countries work together in solidarity towards a common goal. It is the result of a commitment made more than two decades ago, in 1994, when the countries of the Americas pledged to end measles circulation by the turn of the 21st century.”

Before mass vaccination was initiated in 1980, measles caused nearly 2.6 million annual deaths worldwide. In the Americas, 101,800 deaths were attributable to measles between 1971 and 1979. A cost-effectiveness study on measles elimination in Latin America and the Caribbean has estimated that with vaccination, 3.2 million measles cases will have been prevented in the Region and 16,000 deaths between 2000 and 2020.

“This historic milestone would never have been possible without the strong political commitment of our Member States in ensuring that all children have access to life-saving vaccines,” Etienne continued. “It would not have been possible without the generosity and commitment of health workers and volunteers who have worked so hard to take the benefits of vaccines to all people, including those in vulnerable and hard-to-reach communities. Indeed it would not have been possible without the strong leadership and coordination provided by PAHO, Regional Office for the Americas of WHO.”

Measles transmission had been considered interrupted in the Region since 2002, when the last endemic case was reported in the Americas. However, as the disease had continued to circulate in other parts the world, some countries in the Americas experienced imported cases. The International Expert Committee reviewed evidence on measles elimination presented by all the countries of the Region between 2015 and August 2016 and decided that it met the established criteria for elimination. The process included six years of work with countries to document evidence of the elimination.

Measles is one of the most contagious diseases and affects primarily children. It is transmitted by airborne droplets or via direct contact with secretions from the nose, mouth, and throat of infected individuals. Symptoms include high fever, generalized rash all over the body, stuffy nose, and reddened eyes. It can cause serious complications including blindness, encephalitis, severe diarrhea, ear infections and pneumonia, particularly in children with nutritional problems and in immunocompromised patients.

As a result of global measles elimination efforts, only 244,704 measles cases were reported worldwide in 2015, representing a significant decline from earlier years. However, more than a half of these reported cases were notified in Africa and Asia.

To maintain measles elimination, PAHO/WHO and the International Expert Committee have recommended that all countries of the Americas strengthen active surveillance and maintain their populations’ immunity through vaccination.

“I would like to emphasize that our work on this front is not yet done,” warned Etienne. “We can not become complacent with this achievement but must rather protect it carefully. Measles still circulates widely in other parts of the world, and so we must be prepared to respond to imported cases. It is critical that we continue to maintain high vaccination coverage rates, and it is crucial that any suspected measles cases be immediately reported to the authorities for rapid follow-up.”

Process to eliminate measles

In the 1990s, a decline in cases was recorded, but the most notable decrease was observed after the Region had launched its initiative to eliminate measles in 1994. That year, the countries of the Americas established the goal to eliminate indigenous transmission of measles by the year 2000, through the implementation of surveillance and vaccination strategies recommended by PAHO/WHO.

PAHO/WHO’s elimination strategy had recommended three lines of action for countries: 1) conduct a one-time national campaign to bring children between 1 and 14 years of age up to date with measles vaccination; 2) strengthen routine vaccination to reach a minimum of 95% of children every year; and 3) undertake massive follow-up campaigns every four years, to reach a minimum of 95 percent of children aged 1 to 4 with a second dose of vaccine.

Following this strategy, the last indigenous measles outbreak was registered in Venezuela in 2002. However, some countries in the Region still notified imported cases. Between 2003 and 2014, 5,077 imported measles cases were registered in the Americas.

After declaring the elimination of rubella and congenital rubella syndrome in 2015, the International Expert Committee waited for evidence of the interruption of a measles outbreak in Brazil, which had begun in 2013 and lasted for more than a year. After a year of targeted actions and enhanced surveillance, the last case of measles in Brazil was registered in July 2015.

With this achievement and considering that the region has sustained elimination for more than 12 years, the International Expert Committee accepted the evidence presented by the countries and declared the elimination of measles in the Americas.

Key partners involved in in the effort to eliminate measles and rubella include the ministries of health of PAHO/WHO’s member states, the U.S. Centers for Disease Control and Prevention, the U.S. Department of Health and Human Services, Health Canada, the Canadian International Development Agency, the Spanish Agency for International Development Cooperation, the Sabin Vaccine Institute, the Serum Institute of India, March of Dimes, the Church of Jesus Christ of Latter-day Saints, and the Measles-Rubella Initiative, a coalition of global partners that includes the International Federation of Red Cross and Red Crescent Societies, the U.N. Foundation, UNICEF, and WHO.


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