Structured products in Jersey… An alternative to funds? (AMCS) – Fund Management/ REITs


To print this article, all you need to do is be registered or log in to Mondaq.com.

What is a structured product or AMC and why is it important?

Described simply, structured products are a contract with a bank or an issuer and the contract has a predefined outcome that if certain conditions are met, an investor will receive a particular rate of return or coupon. As such, they have become an integral part of many institutional and professional (non-retail) investor portfolios.

An actively managed certificate (CMA) is a debt instrument issued by a securitization vehicle as a structured product comprising a portfolio of underlying assets (liquid securities, bonds, funds, shares, derivatives, currencies, etc.). Usually, the AMC tracks a defined composition of underlying assets or an index that changes over time at the discretion of an external asset/portfolio manager.

Interestingly, this form of structured product can potentially meet the needs of investors in the same way as a fund and also allow easy integration of multiple structured products that can be actively managed simultaneously and be combined with other assets. or instruments such as shares, bonds or funds, but without the same legal or regulatory guise as a traditional mutual fund.

Modern AMCs also have limited SPV issuer risk without being subject to the limitations imposed by traditional issuers or funds. Structured products can also provide exposure to non-bankable assets ranging from forestry, machinery or hotel finance, to peer-to-peer lending and crypto are now investable on a balance sheet neutral basis.

As the alternative fund space becomes increasingly regulated, particularly with regard to the marketing of funds in EU jurisdictions, even to non-retail investors, managers are looking for a cost-effective structuring that meets the needs institutional and professional investors in a proportionate manner. where fewer investor protections are warranted.

If a manager’s investor base is able to invest in structured debt products rather than fund interest, products such as AMCs may well offer an attractive alternative to a conventional fund.

Typical characteristics

  • Private cell company issuer where both cell company and cell ownership are orphaned – i.e. owned by a charitable trust and off balance sheet

  • Issuer issues debt rather than equity

  • Usually there are at least two Jersey resident directors and board meetings are held in Jersey (ensuring compliance with Jersey’s economic substance regime)

  • Administered by a business service provider in Jersey

  • Cleared by a clearing system and/or listed on an exchange such as the International Stock Exchange (TISE) in the Channel Islands

  • Offered to “Professional Investors” or with a minimum consideration/denomination of EUR 100,000 (or currency equivalent) among other criteria that can ensure light offering memorandum content requirements

  • The asset or portfolio manager need not be regulated in Jersey (although they have relevant expertise and may be regulated in their home jurisdiction)

  • Audit not required (although policy generally dictates that terms allow at least 10% by value of holders to require one at requesting holders’ expense)

  • No established custody requirement

  • Not treated as a collective investment fund under Jersey law provided the requirements for an exemption are met and service providers can be exempted in respect of carrying on investment business

Structure example

1201600a.jpg

Advantages

  • Can access a wide range of institutional capital due to use of the clearing/and/or listing system, but without qualifying as a fund, resulting in lighter regulation and legal, regulatory and more limited administrative – less performance slowdown

  • Low AUM minus one factor versus obtaining service delivery and cost profile

  • An ability to trade the relevant securities and provide some degree of liquidity (depending on the exchange or clearing system)

  • Fast time-to-market compared to fund launches – same-day incorporation possible, then can be as fast as 5-10 business days from submission of regulatory application

  • Allows institutional investors to gain indirect exposure to an asset class that they could not hold directly but with active asset management

  • Remote “off-balance sheet” bankruptcy structure can limit risks of direct exposure to underlying assets, especially in volatile asset classes such as crypto

  • Proportionate regulation of the issuer in relation to the experience and profile of the investors compared to a similar fund structure

  • Can have a potentially unlimited number of investors

  • The offering memorandum will not necessarily require detailed prescribed content requirements (unless the relevant exchange or clearinghouse so requires) or need to address AIFMD requirements (including disclosure and reporting)

  • Can introduce varying degrees of investor protection through things like contract terms, security trust agreements, paying agents, custodians, etc.

  • Notes can be structured to provide different types and timing of return and redemption depending on the nature of the underlying assets

  • Can help build the track record of unregulated investment managers and advisers

  • Can be placed in a platform in an easier way than conventional funds and use standard Jersey companies, ICC and PCC models according to preference

  • Different asset managers can be used in different cells of the same cell structure and can be designed to facilitate highly personalized risk-return goals

  • More limited and cost-effective compliance requirements for the issuer due to investors accessing the issuer through a clearing house or exchange rather than directly.

Other Considerations

  • A typical Jersey issuer will be subject to Jersey income tax at a rate of 0%. Holders should generally not be subject to any tax in Jersey in respect of the holding, sale, redemption or other disposition of such securities.

  • No stamp duty is levied in Jersey on the issue, transfer, acquisition, ownership, redemption, sale or other disposal of securities

  • Jersey is an OECD territory but although it has a special relationship with the UK it is not part of the UK and is outside the EU. EU directives do not apply directly

  • There is a consistent and long-standing regulatory policy on securities issuance and the Jersey Financial Services Commission has extensive experience with structured products, CLOs and related securitization structures.

  • Jersey respects the integrity of Bankruptcy Remote Vehicles and is well known to rating agencies and ISDA transactions

  • A variety of flexible legal forms are available in Jersey, including charitable trusts, corporations, cell companies, unit trusts, limited liability companies and limited partnerships, facilitating access to various markets and the preferences of investors

  • Company law in Jersey has English statutory origins (so familiar to advisers and clients) although it has evolved to be more flexible in areas such as distributions and capital changes among others

  • Much lighter touch than the regulatory approach for similar vehicles in EU jurisdictions, reducing costs

  • Deep local expertise in several crucial disciplines of providing legal, administrative, tax, accounting and regulatory services that provides an end-to-end solution at a competitive price

  • Quality and responsiveness of service delivery that has a “can do” service ethos, driven by its natural and longstanding affinity with the City of London

  • Regulatory certainty through proper governance and substance and the Jersey Financial Services Commission (JFSC) is an accessible, globally respected and cooperative regulator, overseeing pragmatic regulation that meets international standards (IMF, IOSCO, ESMA, FATF)

  • Legal certainty through a respected and long-established legal and judicial system that ensures that any application or dispute can be managed and dealt with appropriately

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: Jersey Finance and Banking

An evolving regulatory landscape

Finance Malta

Finance Malta caught up with Michael Xuereb, Director of Strategy, Policy and Innovation at the Malta Financial Services Authority.

Alternative investment funds – 2022

Patrikios Pavlou & Associates

Yes, CySEC is the regulatory body responsible for the licensing, authorization and regulatory compliance of AIFs. The Registered Alternative Investment Fund (“RAIF”)…

Previous Japanese philanthropic group launches fundraiser for Ukrainians
Next Key Challenges and Considerations for New Fund Managers - Fund Management/ REITs