Pensword Capital

(SINGAPORE) Fund managers who currently do not need to secure a capital markets services (CMS) licence to operate can heave a sigh of relief at the regulatory regime that the Monetary Authority of Singapore (MAS) has proposed.

In a consultation paper yesterday, MAS formalised the rules for exempt fund managers (EFMs), creating a category of 'notified FMCs' (fund management companies). This category will continue to operate under a notification regime, but will be subject to certain conditions.

The major change in that category is a requirement for a base capital of at least $250,000 at all times. There is also now a requirement for a minimum of two individuals each with at least five years of relevant experience and at least two full-time resident representatives.

MAS said in its paper: 'The Authority understands the industry's concern over increases in start-up costs. Nevertheless, the Authority's view is that maintaining a base capital requirement is consistent with sound business practice and improves the viability of new FMCs by acting as a buffer for unexpected costs, especially during adverse market conditions.'

MAS said there are no restrictions on the use of the base capital for investments in assets, which can be cash, investments in the firm's own funds or fixed assets such as office equipment.

'However, given the need to maintain base capital at or above the mandated level at all times, it may be prudent for FMCs to consider maintaining an additional capital buffer (usually in cash), to allow for asset depreciation, drawdown of funds to meet operating or other expenses and/or losses.'

The need for two experienced professionals was earlier 'strongly encouraged' but not formally required.

The consultation document had been widely anticipated as hedge funds and private equity firms have come under increased scrutiny among regulators in the wake of the financial crisis.

More hedge funds have based themselves in Singapore in the last few years, thanks to light regulation and the relative ease of setting up shop. The number of hedge funds has been rising even if assets took a beating in 2008. That year there were 350 hedge funds with $61 billion in assets under management (AUM), compared to 300 managers and $80 billion in AUM in 2007. In 2006, there were 190 managers and $40 billion in AUM.

Michael Coleman, chairman of the Singapore chapter of the Alternative Investment Management Association (AIMA), said: 'It's a sensible set of criteria that strikes a reasonable balance between bringing some regulation without making it too draconian. $250,000 in paid-up capital is not onerous. What may cause more problems would be the requirement for two officers, but it's not an unreasonable criteria.'

Peter Douglas of GFIA says: 'At first glance, it seems incredibly sensible. I suspect the MAS wanted to reassure the rest of the world that they are tightening up on the regulatory environment . . . but still keeping the exempt regime which is arguably the most sophisticated for looking after hedge funds.

'There is nothing there that would be difficult for anyone running a sensible fund management business.'

David Sandison of PricewaterhouseCoopers said: 'If you don't have $250,000 as a fund manager, you can't be terribly serious. As far as the requirements for experienced individuals are concerned, that makes sense in terms of trying to upgrade the quality of people.'

The regime seeks to create three categories of FMCs: One is that of 'notified FMCs' which manage up to $250 million in assets and serve not more than 30 qualified investors of whom up to 15 can be funds.

A second category is that of 'licensed A/I FMCs' which service accredited and/or institutional investors. The third category is licensed retail FMCs which manage unit trusts. The latter two categories can operate only when their licence is granted. They also have to satisfy risk-based capital requirements.

Once a notified FMC's assets exceed $250 million, it will have to apply for a CMS licence to operate as a licensed A/I FMC, and to satisfy the relevant criteria.

MAS has proposed that professional indemnity insurance must continue to be required for licensed retail FMCs. For notified FMCs and licensed A/I FMCs, it is not mandated but is 'strongly encouraged'.

On exempt intermediaries, MAS also said that given the risks of leverage forex trading, such traders who are currently exempt are expected to be required to hold a CMS licence.