Cayman Islands
Assessment of the Supervision and Regulation of the Financial Sector—Volume II—Detailed Assessment of Observance of Standards and Codes

This paper reviews key findings of the detailed assessment of the Observance of Standards and Codes in the Financial Sector of the Cayman Islands. Banks in the Cayman Islands operate within a well-defined prudential regulatory framework, generally in accordance with Basel standards, that is, largely modeled after the framework currently in use in the United Kingdom. The two-tiered required minimum risk capital standards are significantly above those required by the Basel Capital Accord and are applied in practice based primarily on the perceived differences in risk related to bank ownership.

Abstract

This paper reviews key findings of the detailed assessment of the Observance of Standards and Codes in the Financial Sector of the Cayman Islands. Banks in the Cayman Islands operate within a well-defined prudential regulatory framework, generally in accordance with Basel standards, that is, largely modeled after the framework currently in use in the United Kingdom. The two-tiered required minimum risk capital standards are significantly above those required by the Basel Capital Accord and are applied in practice based primarily on the perceived differences in risk related to bank ownership.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. With the agreement of the Cayman Islands Monetary Authority (CIMA), the mission assessed compliance with the Basel Core Principles for Effective Banking Supervision (BCP) using the Core Principles Methodology. The assessment was undertaken in the context of the Offshore Financial Center (OFC) Assessment Program. The domestic and offshore sectors were not subject to individual assessments, since they are both covered by the same legislation and supervised by the Banking Supervision Division (BSD) of CIMA. The assessment took place in September and October 2003, and was undertaken by Timothy Sullivan, formerly with the Office of the Comptroller of the Currency, and Stefan Niessner, Deutsche Bundesbank.

Information and methodology used for assessment

2. The assessment of fulfillment of the core principles is not, and is not intended to be, an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world, and theories, policies, and best practices of supervision are swiftly evolving. Nevertheless, it is internationally acknowledged that the core principles are seen as minimum standards.

3. This assessment of compliance with each principle has been made on a qualitative basis. A five-part assessment system is used: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable. To achieve a “compliant” assessment with a Principle, all “essential” criteria generally must be met without any significant deficiencies. There may be instances where a country can demonstrate that the principle has been achieved through different means. Conversely, due to specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the principle, and therefore, one or more additional criteria and/or other measures may also be deemed necessary by the assessor to judge that compliance is achieved. A “largely compliant” assessment is given if only minor shortcomings are observed, and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. A “materially non-compliant assessment” is given when the shortcoming is sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made. A “non-compliant” assessment is given when no substantive progress towards compliance has been achieved, or when insufficient information was available to allow a reliable determination that substantive progress had been made towards compliance. An assessment of “Not applicable” is rendered for a principle deemed by the assessors to not have relevance.”

4. The assessment was based on a review of the applicable laws, regulations, prudential guidelines, and discussions with staff of CIMA (primarily the head of the BSD and her deputies and BSD’s legal council). The assessors also met with representatives of individual financial institutions, lawyers, and accountants. Where relevant, a review was also undertaken of CIMA’s on- and off-site manuals, statistical and other reporting forms, anonymous prudential reports of individual banks prepared by CIMA, and Rules and Statement of Guidance under preparation. Before the mission, the Cayman Islands had prepared a formal self-assessment.

Institutional and macroprudential setting, market structure—overview

5. CIMA is responsible for the licensing and supervision of the domestic banking sector as well as offshore banks. CIMA’s BSD employs well-trained and experienced staff. It carries out its responsibilities through a combination of routine off-site surveillance, based on a quarterly reporting system, and an on-site inspections program. CIMA can address compliance with laws as well as safety and soundness concerns. Arrangements for sharing information with foreign supervisors are in place.

6. There are three different kinds of banks conducting banking business in the Cayman Islands. Category “A”-Banks may carry on banking business within and outside the Cayman Islands (30 at the end of 2002). Among the “A”-Banks are one domestically-owned bank, Cayman National Bank, and four international banks serving the domestic market. These banks are universal banks offering both banking and investment services, including mutual funds. “B”-Banks may carry on banking business with the restriction that the bank is not allowed to take deposits from any person resident in the Cayman Islands other than from another bank and invest in any asset which represents a claim on any person resident in the Cayman Islands except, for example, for transactions with another bank or the purchase of securities issued by the government (353). CIMA may impose the restriction to the “B”-license that the holder of the license shall not receive or solicit funds by way of trade or business from persons other than those listed in any undertaking accompanying the application for the license, in particular for their own group only (Restricted “B” Bank, 5). The majority of the predominant U.S. banks provide overnight accounts to pay clients more favorable interest rates through the offshore branch (sweep accounts). Besides banking services, the international active banks offer advisory brokerage, investment management, trusts, SPV products, custodial services, and corporate services. The banking services are offered to a large extent to facilitate these other services.

7. Assets from local banks increased from C$641 million in 1998 to C$1.1 billion in 2002. The total international assets and liabilities held by banks in the Cayman Islands were US$1.04 trillion, of which 70 percent originate from the Americas. Banks usually maintain capital that is well above the minimum capital adequacy ratio of 12 percent for subsidiaries of banks that are licensed in a country or territory outside the Cayman Islands and 15 percent for privately owned banks. Data on the return on assets and return on equity were not available.

General preconditions for effective banking supervision

8. Preconditions for effective banking supervision in the Cayman Islands are generally in place. Currently, there are no macroeconomic vulnerabilities and risks that could have implications for the effectiveness of prudential safeguards or the stability of the financial system. The public infrastructure provides for an environment that fosters the honoring and enforcement of financial contracts. There is a comprehensive set of laws, which governs the financial sector. These laws are supported by a body of professional lawyers and judges. The court system is efficient. Although the Cayman Islands has not established its own accounting standards, there is a professional body of accountants and auditors which use US-GAAP or IAS (IFRS) for their audits. CIMA’s supervision of other financial sectors and markets is generally efficient. There has been no evidence of government efforts to influence lending operations. Finally, there is no deposit insurance in the Cayman Islands and CIMA can not act as lender of last resort, since CIMA’s liabilities have to be covered for not less than 90 percent by foreign assets and since the CI dollar is pegged to the US dollar.

9. Although the two most important sectors of the Cayman economy—the hospitality industry as well as the financial sector—have suffered from the worldwide economical downturn, the economy of the Cayman Islands is in stable condition. The fiscal surplus is estimated at 4.6 percent of GDP in 2003. The outstanding debt of 130 million US dollar was paid off by issuing a bond with a maturity of 15 years, rated aa3, in order to reduce the interest rate and the administrative cost. The inflation rate is low at 2.4 percent.

Principle-by-principle assessment

10. Objectives, Autonomy, Powers, and Resources (CP 1)—Besides its monetary functions, the principal function of CIMA is to regulate and supervise banking business carried on in or from within the Cayman Islands in accordance with the Monetary Authority Law (MAL) and the Banks and Trust Companies Law (BTCL). In performing its functions, CIMA is required to promote and maintain a sound financial system in the Cayman Islands. In this respect, CIMA is responsible for the authorization of banking establishments and their ongoing supervision. CIMA has the necessary powers to address compliance with laws, as well as safety and soundness concerns. CIMA is entitled to have access to books, records, and documents of any licensee and to request any information from any relevant person. CIMA is entitled to share supervisory information with other relevant supervisory authorities.

11. CIMA is operationally independent from the Governor.1 The Governor, however, may, after consultation with the Board of Directors, give to CIMA general directions, when it is deemed necessary by him in the public interest. He also approves CIMA’s budget. Furthermore, the members of the Board of Directors including the Managing Director of CIMA are appointed by the Governor; no CIMA director may be a member of Cabinet or the Legislative Assembly. Four of the directors are overseas directors and two of the directors are the managing directors of licensees but do not sit in meetings which would affect the business of these licensees. Although CIMA is staffed with qualified and experienced personnel who are granted regular training opportunities to enhance its supervisory functions, the BSD with over 300 banks under its jurisdiction and with only 26 positions seems to be understaffed. A 2003 salary survey indicated that salaries are comparable with the industry, except for a few posts. CIMA, its Directors, and its employees are provided with legal protection while discharging their duties in good faith, since none of these shall be liable in damages for anything done or omitted in the discharge or purported discharge of their respective functions, unless it is shown that the act or omission was in bad faith.

12. Licensing and Structure (CPs 2–5)—The permissible activities of entities that are licensed and subject to supervision as banks are clearly defined. Only licensed banks may receive deposits from the public and use the word “bank” or any derivatives in the description or the title under which the are carrying on the banking business. The Banks and Trust Companies (License Application and Fees) Regulation (BTCLAF), issued by the Governor under the BTCL, establishes the information an applicant has to provide and the criteria for licensing banks. The licensing process consists of an assessment of the banking organization’s ownership structure, the fitness and propriety of the directors and senior management, its operating plan and internal controls, and its projected financial condition. CIMA may not grant a license unless the necessary information to assess the compliance with the licensing criteria are provided and the licensing criteria are fulfilled.

13. Generally, CIMA grants licenses only to branches and subsidiaries of banks that are licensed in a country or territory outside the Cayman Islands. In this respect, CIMA assesses whether the home supervisor in accordance with internationally recognized standards conducts consolidated supervision. It will not grant a license unless it receives confirmation from the home supervisor that there is no objection to the establishment of an office in the Cayman Islands, that there are no regulatory concerns with respect to the parent entity or the integrity and competence of the management, to the overall financial soundness of the bank, and that the branch or subsidiary will be included in the consolidated supervision of the parent entity.

14. Without CIMA’s prior approval no shares in a bank may be issued and no issued shares may be transferred. Whenever CIMA is of the opinion that a person acquiring control or ownership of a bank is not fit and proper to have such control or ownership, it may take the necessary corrective actions. A locally incorporated bank may not open, outside the Cayman Islands, a subsidiary, a branch, an agency, or a representative office without the prior approval of CIMA. The acquisition of a stake in any another entity is regarded as a change to the business plan of the bank and needs the prior approval of CIMA.

15. Prudential Regulations and Requirements (CPs 6–15)—Banks operate within a well-defined prudential regulatory framework, generally in accordance with Basel standards, that is largely modeled after the framework currently in use in the United Kingdom. The two-tiered required minimum risk capital standards are significantly above those required by the Basel Capital Accord and are applied in practice based primarily on the perceived differences in risk related to bank ownership.

16. Pursuant to its authority under the law, CIMA is putting in place rules and detailed guidance to set out its standards for the management of virtually all of the primary risks within which the banks in this market operate; the rules and guidance await only the final approval of the Governor. Guidance has been developed for credit risk, provisioning, large exposures and connected lending, foreign exchange risk, interest rate risk, liquidity risk, and operational risk. Guidance on investment risk and country/transfer risk is still to be developed. This guidance articulates the requirements for identifying, measuring, monitoring, and controlling each of these risks. The standards in all these guidelines are already used in practice based on CIMA’s previously-issued policies and/or its complementary off-site surveillance and on-site inspection processes.

17. Pursuant to its authority under the law, CIMA is putting in place rules and detailed guidance to set out its standards for the management of internal control systems and internal audit programs, including required policies and procedures, as well as separate guidance for the implementation and operation of the corporate governance activities of the banks; the rules and guidance await only the final approval of the Governor. The standards in these guidelines are already used in practice based on CIMA’s previously-articulated policies and its complementary off-site surveillance and on-site inspection processes.

18. Comprehensive guidance on anti-money laundering, which sets out the detailed requirements for implementing the requirements of the anti-money laundering laws and regulations, has been issued to the banks. Implementation of the requirements of the law, the regulations, and the guidance is being monitored in practice through CIMA’s off-site surveillance and on-site inspection processes.

19. Methods of Ongoing Supervision (CPs16–20)—The Banking Supervision Division of CIMA operates a comprehensive and effective risk-based supervision program, consisting of continuous off-site surveillance, periodic on-site inspection, and ongoing communications with the jurisdiction’s licensees and, where applicable, their home country supervisory authority. Detailed supervisory polices and procedures have been developed and implemented for both the off-site and on-site processes. The diverse nature of the licensee population requires independent assessment of each licensee to determine the necessary risk-based scope of supervision. CIMA supervises the banking groups for which it is responsible on a consolidated basis.

20. The law permits CIMA to have unrestricted access to the licensees’ business activities and records, facilitating both the off-site and on-site processes. A comprehensive regulatory reporting program has been put in place. Quarterly monitoring reports are produced by CIMA analysts. CIMA conducts annual inspections of retail banks and banks where it is the home country supervisory authority; inspections of other licensees with a physical presence in the jurisdiction are conducted every two years. CIMA also conducts overseas inspections of branches and subsidiaries. Contact with licensee management is maintained through both the off-site and on-site activities.

21. Information Requirements (CP 21)—CIMA, in general, and the accounting profession require the use of international accounting, auditing, and reporting practices and standards. Exceptions are known to and understood by CIMA. Comprehensive regulatory reporting requirements are in place and reporting is regularly provided to CIMA. Audited financial statements are provided to CIMA annually, prepared by auditors approved by it. Meetings are held with the licensee’s external auditor during each on-site inspection. CIMA is authorized to use auditors to conduct special audits and other investigations on its behalf. An amendment to the banking law is being drafted that would place on the external auditor the obligation to report to CIMA on solvency, non-compliance with laws, and other significant matters that the auditor becomes aware of during the audit. Relations and cooperation between CIMA and the audit industry are effective.

22. Formal Powers of Supervisors (CP 22)—Whenever CIMA is of the opinion, for example, that a bank is or appears likely to become unable to meet its obligation as they fall due; that a bank has contravened the BTCL; or that a person holding a position as a director, manager or officer of a bank’s business is not a fit and proper person to hold the respective position; it may revoke the license; require the substitution of any director or officer of the bank; appoint a person to advise the bank on proper conduct of its affairs; appoint a person to assume control of the bank’s affairs; or require any action to be taken by the bank as it considers necessary. CIMA has issued guidelines on the ladder of compliance to clarify the procedures that it will follow in case of non-compliance by a bank.

23. CIMA has only limited powers to hold managers and directors personally liable, since rules issued by CIMA under the MAL may only provide for the imposition of penalties on banks and/or on the management for breach of such rules up to C$1,000. Moreover, CIMA’s ability to arrange a take-over by or a merger of a failing bank with a healthier institution is somewhat hampered by the fact that customers may file liquidation proceedings at the Court without CIMA’s consent.

24. Cross-Border Banking (CPs 23–25)—Although there is no explicit provision in the BTCL that gives CIMA the objective to supervise banks on a consolidated basis, CIMA requires banks to prepare all relevant supervisory reports on a globally consolidated basis. Without the prior approval of CIMA, no locally incorporated bank shall open, outside the Cayman Islands, a subsidiary, branch, agency, or representative office. In the process of approval, CIMA assesses whether management is maintaining proper oversight of the bank’s foreign branches, joint ventures, and subsidiaries, and whether the local management of any overseas offices has the necessary expertise to manage those operations in a safe and sound manner.

25. One of the principal functions of CIMA under the MAL is to provide assistance to overseas regulatory authorities. Therefore, CIMA may in the case of a routine regulatory request disclose to the overseas authorities requested information. In the case of a nonroutine regulatory request, CIMA has to notify the Attorney-General as well as the Financial Secretary before disclosing the requested information. The MAL allows CIMA to enter into MOUs for the purpose of assisting consolidated supervision by the foreign supervisor.

26. Subsidiaries of foreign banks are subject to the same prudential and regulatory reporting requirements as domestic banks. Although branches of foreign banks are subject to the same regulatory reporting requirements as locally incorporated banks, they are not subject to the same prudential requirements. The large exposure limit of branches is based on their head offices’ capital and the Rules for Large Exposures do not apply to them. CIMA, however, requires and verifies that they follow their head offices’ large exposure limits, which are expected to be similar to CIMA’s. Since branches do not have to have a donation capital, CIMA does not calculate any capital adequacy ratios for them. Based on its risk assessment, CIMA schedules routine on-site inspections of the local offices of subsidiaries and branches of foreign banks at least every second or third year. As part of its on-going supervisory process, CIMA’s inspectors meet with home country regulators. CIMA also facilitates visits of foreign regulators to the Cayman Islands and routinely conducts joint inspections of banks for the purpose of consolidated supervision. Inspections of all other entities are prioritized based on CIMA’s risk assessment of the bank.

Table 1.1

Detailed Assessment of Compliance of the Basel Core Principles

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Table 1.2.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

Recommended action plan and authorities’ response to the assessment

Recommended action plan

27. Although the most recent amendment of the MAL granted CIMA independence, the Governor retains the authority to approve the issuance of rules, and statements of principal and guidance and the signing of MOUs with other supervisory authorities by CIMA. The Cayman Islands Legislative Assembly may wish to reconsider the involvement of the Governor in these matters.

28. CIMA should use its existing authority to impose monetary penalties for violating prudential requirements issued in the Rules. The MAL should be amended to increase the currently permitted, minimal monetary penalties to significant amounts.

29. CIMA may wish to consider requiring assigned capital for those braches of foreign banks that are licensed to provide services to customers in the local banking market (i.e.,, “A”-licensed branches that provide retail banking services). This would provide comparable protection to the interests of these customers as is provided by the capital of the locally incorporated banks that are licensed to deal with the same clientele.

Table 1.3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response to the assessment

CIMA notes that the IMF mission has assessed banking supervision as “compliant” or “largely compliant” with all 30 recommendations included in the 25 Core Principles. The mission’s recommendations are under review or implementation, as set out below, unless otherwise indicated.

CP 1, 3, 5, 22, 24, 25

Implementation of the IMF recommendations would require legislative changes to either the BTCL or the MAL. Legislative proposals on CP’s 3 and 5 have already been submitted to the government, and a proposal from CIMA on CP 22 is under development. Regarding CP’s 24 and 25, while there are no specific provisions in the MAL permitting CIMA to provide unsolicited information to home/host country supervisors, the MAL does not restrict such disclosures where the information is already public or where disclosure would assist CIMA in carrying out its supervisory duties under the Law. However, legislative change to expressly permit the provision of unsolicited supervisory information to home/host country supervisors will be put forward by CIMA for consideration by the government.

Regarding CP 1(2), CIMA believes that the current process allows for transparency and accountability and does not interfere with its operational independence.

CP 7, 8, 10, 11, 18

Implementation of the IMF recommendations would require CIMA to issue new or amended Rules or Statements of Guidance. The necessary Statements of Guidance or Rules to respond to the recommendations, on Investment Securities and Derivative Risk Management; Loan Loss Provisioning; Asset Classification; Credit Risk Management; Country and Transfer Risk Management, have either been issued to the industry for consultation or are under development.

II. IOSCO Objectives and Principles of Securities Regulation

A. General

30. The assessment of observance of the IOSCO Objectives and Principles of Securities Regulations (IOSCO Principles) in the Cayman Islands was undertaken as part of the offshore financial center assessment program. In the Cayman Islands, the Cayman Islands Monetary Authority (CIMA) is responsible for the supervision of all financial services with the exception of the Stock Exchange, which is regulated by the Stock Exchange Authority. Mr. Michael Deasy from the Central Bank of Ireland was the assessor.

Information and methodology used for assessment

31. The assessment was based on the Methodology for Assessing Implementation of IOSCO Objectives and Principles of Securities Regulation. The assessment was influenced by the structure of the securities market on the Islands. The licensing/registration of collective investment schemes (mutual funds) is an important element of securities activities; the Stock Exchange has a listing function only and a formal regulatory regime for market intermediaries has only recently been introduced.

32. The assessment was based on a review of the relevant legislation (i.e., primary legislation and regulations) and statements of guidance/ guidance notes issued by CIMA. It was also based on relevant information and a completed draft of the IOSCO assessment template submitted by CIMA. This information was supplemented by a review of a report carried out and published in 2000 on behalf of the U.K. Government on financial regulation in the Caribbean Overseas Territories and Bermuda and of other private sector reports available on the website. Detailed discussions were held with relevant representatives from CIMA, the Stock Exchange Authority, and the Stock Exchange as well as with relevant representatives from the private sector.

33. Cooperation was freely given by all concerned.

Institutional and macroprudential setting, market structure

34. The Monetary Authority Law (2003 Revision) sets out the broad supervisory powers of CIMA, and the Stock Exchange Company Law (2001 Revision) grants power to the Stock Exchange Authority to supervise the Exchange. In the securities area the Monetary Authority Law is supplemented by two other laws—the Mutual Funds Law (2003 Revision) and the Securities Investment Business Law (2003 Revision). The Mutual Funds Law provides for the licensing/registering of mutual funds as well as the licensing and supervision of mutual fund administrators. The Securities Investment Business Law provides for the licensing and supervision of investment business firms (e.g., asset managers, investment advisors, brokers, etc). The financial sector is serviced by a sophisticated and well-developed legal and accounting sector.

35. The Stock Exchange has a listing function only i.e., it does not engage in trading. Currently there are about 700 listings on the Exchange, the vast majority being mutual funds. Even though it does not trade, it has 6 member brokers, 5 of which are affiliated to banks. These are execution brokers only and have obtained their broker status to facilitate their being able to deal on overseas exchanges and as a means of lending support to the Exchange in its earlier years (it was established in 1997). Under the Mutual Funds Law, CIMA as of June 2003 has licensed/registered 4457 funds; 3835 are registered and 46 licensed. A third category, administered funds (576), are those for which a licensed mutual fund administrator on the Islands provides its Principal Office. The distinguishing feature of the registered funds is that they have a minimum investing threshold of US$50,000 and they are targeted at sophisticated investors only. In theory, licensed funds are opened to the public but in practice, they are also targeted at sophisticated investors. It would appear that less than ten funds could be described as truly available to the public. The overwhelming majority of funds are in fact hedge or hedge-type funds. There are 183 licensed fund administrators on the Islands. These are permitted to carry out fund investment activity as well as normal fund administration activities, although in practice the fund management activity is almost invariably carried out overseas. Many of the major international fund administration companies are represented on the Islands. The Securities Investment Business Law was brought into effect in July 2003. It is unclear how many intermediaries will fall to be supervised under it—existing intermediaries have until January 2004 to apply for a license. The six broker members of the stock exchange will now be regulated by CIMA rather than the Exchange. In addition, less than ten other firms (most of which are affiliated to banks) will initially fall to be regulated under the Law, as far as can be ascertained. These firms are largely asset managers and their customer base seems to be exclusively institutions and high net worth individuals (e.g., financial institutions, trust companies, mutual funds etc.) A market does not exist on the Islands for retail intermediary business.

General preconditions for effective securities regulation

36. In broad terms, the supervisory regime reflects those of developed countries. It is influenced by EU legislation and rules, given the Islands’ connection with the United Kingdom. A sound legal, taxation and accounting framework appears to be in place in the Islands.

Principle-by principle assessment

37. The IOSCO Principles were assessed in accordance with the Methodology for Assessing Implementation of IOSCO Objectives and Principles of Securities Regulation, taking into account the particular circumstances of the Cayman Islands Markets.

38. A Principle will be considered implemented whenever all assessment criteria are generally met without any material deficiencies. The Principles acknowledge that there are often several ways for countries to implement the Principles. A Principle will be considered to be broadly implemented whenever only minor shortcomings are found, which do not raise major concerns and when corrective actions to achieve full implementation with the Principle are scheduled and are realistically achievable within a short period of time. A Principle will be considered partly implemented whenever significant shortcomings are found, and the authorities have not implemented one or more assessment criteria. A Principle will be considered not implemented whenever major and material shortcomings are found in adhering with the assessment criteria. A Principle will be considered not applicable whenever it does not apply given the structural and institutional conditions.

39. Regulator (Principles 1–5)—The regulatory responsibilities of the Monetary Authority are clearly set down in various pieces of legislation and it applies them in a clear consistent manner. While in broad terms CIMA operates independently, there are a number of provisions in the Laws and Regulations, generally involving the power of the Governor, which could compromise this independence. It is recommended that these be deleted. The securities division suffers from a very serious deficit in staff numbers. While recruitment is underway, it will take some time for a cohesive and effective division to emerge.

40. Self-regulatory organizations (Principles 6–7)—The Stock Exchange has the sole right to operate one or more exchanges in the Cayman Islands. Currently there is only one exchange—the CSX—and it confines its activities to listing only (i.e., no trading is transacted). It is responsible for ensuring compliance by its broker members with its membership rules. It is supervised by the Stock Exchange Authority, which is a statutory body independent of CIMA. There are convincing arguments for CIMA to become its regulator.

41. Inspections, investigations and enforcement (Principles 8–10)—CIMA has sufficiently broad powers to carry out inspections, investigations and enforcement. However, power to carry out inspections of mutual fund administrators should be explicit in the Mutual Funds Law rather than relying on a general provision in the Monetary Authority Law. CIMA should also consider receiving additional information (e.g., half-yearly management accounts) from all licensees as an additional means of early detection of difficulties.

42. Information sharing and cooperation (Principles 11–13)—There is provision for the sharing of information with overseas regulators. However, these provisions contain clauses which introduce an element of subjectivity into deciding on whether information should be passed on to the overseas regulator. Also, for non-routine requests from overseas regulators, the advise of the Financial Secretary and the Attorney must be sought. Memoranda of understanding are permitted but only with the permission of the Governor and currently they are restricted to requests to assist the overseas regulator to supervise on a consolidated basis.

43. Issuers (Principles 14–16)—The listing rules of the Stock Exchange provide for full, accurate and timely disclosure of financial results and other information that is material to investors’ decisions. It also provides that all holders of securities in a company are treated in a fair and equitable manner. Accounting and auditing standards are in line with best international practice.

44. Collective Investment Schemes (Principles 17–20)—The supervisory regime for collective investment scheme is designed to accommodate funds that are targeted at sophisticated/ institutional investors and indeed the overwhelming majority of funds, many of them hedge funds, are targeted at that market. In addition to administered funds for which a licensed mutual fund administrator provides a principal office, there are two broad categories of funds—registered funds which carry a minimum subscription of US$50,000 and licensed funds which have no minimum subscription and, in theory at least, are open to the general public. For such funds, the current regime is inadequate. There is an absence of standard consumer protection requirements (e.g., segregation of client assets). In practice, many of these requirements will be included in fund offer documents. Nonetheless, it is recommended that CIMA introduce formal consumer protection requirements in respect of funds that are open to the general public. Also, it is recommended that CIMA revise upwards the threshold of US$50,000 (which was fixed in 1993) for registered funds to reflect international norms in this area. In general, the Mutual Funds Law is in need of overhaul, particularly when compared to the Securities Investment business Law. It will be noted that throughout this report, several recommendations suggest the inclusion in the Mutuals Fund Law of provisions similar to those in the Securities Investment Business Law.

45. Market Intermediaries (Principles 21–24)—The Securities Investment Law Act, which came into effect in July 2003, brought market intermediaries within the supervisory framework for the first time. It is a solid piece of legislation and should provide a sound basis for the effective supervision of intermediaries provided it has adequate and well trained staff to operate it. One provision of the Law is undesirable—Section 19 provides that if an auditor, either in the course of carrying out an audit or in carrying out a special audit on the licensee’s anti-money systems and procedures, becomes aware of serious shortcomings, he must immediately give written notice to CIMA and the licensee of his knowledge or believe giving reasons therefore. The fact that the licensee is receiving knowledge at the same time as CIMA could compromise the ability of CIMA to take corrective action and in the case of an anti-money laundering audit could amount to tipping off. Accordingly, the Law should be amended to provide for the receipt of such reports by CIMA only

46. Principles for the Secondary Market (Principles 25–30)—As the Stock Exchange does not engage in trading this section is not applicable.

B. Detailed Assessment

Table 2.1.

Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation

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Table 2.2.

Summary Observance of the IOSCO Objectives and Principles of Securities Regulation

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C. Recommended Actions and Authorities’ Response to the Assessment

Recommended actions

Table 2.3.

Recommended Plan of Actions to Improve Observance of the IOSCO Objectives and Principles of Securities Regulation

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