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Through the looking glass

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This article is sponsored by Dominion.

The decision taken by the British Government to require the 14 British Overseas Territories (BOTs) to establish Public registers of the beneficial owners of Companies registered in these territories has so far created a divided reaction. The BOTs, have generally taken the view that it is grossly unfair for the UK Government to use ancient Constitutional rights to impose the new legislation whereas the Crown Dependencies who are not affected by this decision have unsurprisingly provided a more measured response. This is reflected by Deputy Gavin St Pier in statements very similar to those issued by Politicians in Jersey stating that ‘Guernsey will introduce a public register if that becomes the agreed global standard.’

Gavin St Pier’s words have I am sure been chosen carefully since the body that has the necessary authority to end this debate is The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) that has been the multinational framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum is the only international body endorsed by the G20 on issues of transparency and Exchange of Information for tax purposes.

So what does the Global Forum have to say on this issue. Well, paragraph 14 of the report of the Plenary Meeting of the Global Forum held in Cameroon in November 2017 states ‘The second round of peer reviews launched in 2016 reflects the latest developments in international tax transparency, including the requirement to have beneficial ownership information which strengthens the fight against anonymous shell companies and the use of legal arrangements to conceal ownership of identity.’ So reasonably one might expect, this issue should already have been dealt with. Unfortunately not it seems. The information sharing framework created by the Global Forum is designed as an exchange of information programme between Governments. Information exchanged is not available to the Public. So therein lies the problem. Public disclosure of beneficial ownership, despite what paragraph 14 might say, does not appear to have been clarified by the Global Forum, leaving it to Governments, pressure groups and other Organisations around the World to set the Public Agenda on this thorny subject.

Hopefully at this years Plenary Meeting of the Global Forum guidance will be provided on this issue that will feed through into legislation in all Countries that have adopted CRS. In the Plenary Meeting in Cameroon it was noted that ‘Some Members expressed concern that the ongoing EU listing process (referring to a proposed blacklisting of certain jurisdictions by the EU) is occurring outside the framework of the Global Forum… Statements like this would not I imagine encourage the Crown Dependencies to make further comment on this issue or to take any specific action as the Global Forum is clearly through these remarks reinforcing it’s mandate granted to it by the G20. The direction of travel, if one considers EU anti-money laundering Directives and bodies such as the EITI of which the UK is an important Member, would appear to favour a new regime creating a framework for Public Disclosure but when and in what form all stakeholders in this process will just have to wait and see what develops and whether the Global Forum will opine and then issue model legislation on this important issue.

To read more on this subject please visit: expertsinwealth.com/globalregisters

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The Value of Research: Skill, Capacity, and Opportunity

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This article is sponsored by S&P Dow Jones Indices.

How much should a portfolio manager be willing to pay for research? The question is of importance to any manager, but has become particularly pertinent since newly imposed European rules require that the costs of investment research—previously offered by many investment banks as an in-kind consideration in return for brokerage business—be unbundled from trading.

Unfortunately, attempts to determine a fair value for research in the most general circumstances are doomed to fail. Even if we only consider direct recommendations to buy or sell certain securities, the value of such recommendations to a portfolio manager will vary according to the absolute size of positions taken in response. Instead, we provide a framework for estimating relative research values across markets and constituents, under certain stylized (but reasonable) assumptions.

REPORT: The Value of Research: Skill, Capacity, and Opportunity

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Novel liquidity instruments need of the hour for Islamic financial institutions

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This content is by Marmore Mena Intelligence.

Islamic finance is still a relatively small part of the broader financial services industry. Compared to the conventional industry, Islamic finance lacks adequate liquidity instruments as Shariah restrictions limit the number of instruments that could be used for liquidity management. Islamic interbank and money markets also lack the volume and diversification of conventional markets leading to a sectoral disadvantage from the outset.

Review of 2018
Since 2015, there has been a reduction of liquidity in the banking systems in the Middle Eastern region, mainly due to reduced deposit inflows because of low oil prices and a high dependence on deposits from governments and their related entities. This situation has improved in 2018 after oil prices stabilized and governments issued large bonds and injected liquidity locally. However, the dearth of Islamic liquidity management instruments has been a challenge in Islamic banking ever since its inception. The instruments that meet both the industry’s needs and the stakeholders’ expectations are relatively few. The excess liquidity of Islamic banks limit their profitability potential and therefore their long-term viability, it also dampens the effect of monetary policy interventions in the financial markets by central banks.

The onset of Basel III liquidity coverage requirements is likely to exacerbate the problem as Islamic banks will need to maintain high quality short-term liquid assets. As a result, Islamic banks, which are concentrated in the Middle East, hold 8.8% of their assets in cash and equivalents and 9.8% of their assets in placements at other financial institutions. Currently, Islamic banks place liquid funds through short-term instruments such as commodity Murabahah that are non-tradable on secondary markets — Shariah rules prohibit trading on receivables. Moreover, stakeholders typically view these inflexible instruments as artificial replications of interest based transactions. Alternative instruments are gauged against three criteria: whether they are as cost-effective as commodity Murabahah, whether they offer the same or enhanced flexibility and liquidity, and whether they offer sufficient scale to meet the current and anticipated future needs.

Preview of 2019
New strategies to meet the liquidity management needs of Islamic banks and Islamic windows at conventional banks are being developed. These products — including National Bonds’ Sukuk Trading Platform addresses both the operational needs of Islamic banks and preferences of their customers and external stakeholders. In liquidity management, it has the potential to be both flexible and authentic, offering an investment destination for surplus funds or a tool with which financial institutions and central banks can look to as a model for providing liquidity to banks when needed. Islamic banks will shift toward Islamic liquidity management instruments that increase their ability to place more of their surplus liquidity with other banks or with the central bank.
Closer integration may also lead to increasing Sukuk issuance, which could reduce Takaful operators’ exposure to riskier real estate and equities investments or help banks manage their liquidity. Sukuk could also provide investment funds with additional fixed-income revenue, and encourage a shift toward more profit-and-loss sharing instruments. In addition, Islamic banks could start offering Takaful products more systematically if the relevant regulation is in place.

Standalone Islamic banks will have to look to government Islamic T-bills, or other instruments to place most of their surplus liquidity. Some of the remainder will be held on balance sheets as cash in order to manage unexpected shocks because of a smaller set of central bank instruments. A portion of the assets they hold today as cash will be shifted to interbank placements in order to generate yields. However, given the cyclicality of excess liquidity in GCC banks, there will probably be a continued reliance on commodity Murabahah, which amounts to an effective outsourcing of some of the cash management responsibilities at Islamic banks to Islamic windows, which have a deeper set of options and more access to international liquidity management instruments.

Conclusion
Islamic liquidity management instruments are still at their infancy, and the main challenge is in providing liquidity management tools that can compete with conventional ones. Therefore, Islamic financial institutions should invest more in product development. In particular, as Islamic finance grows, the problem of liquidity will grow bigger, as central bank support would become expensive particularly for larger institutions.

Although a variety of approaches have been adopted in different jurisdictions, much work remains to be done to diversify the mix of available options for Islamic banks to manage their short to medium-term liquidity. Further, the divergence in Shariah interpretations across different jurisdictions has so far stifled a truly global approach toward tackling this issue. In this regard, the setting up of organizations providing Shariah standards such as AAOIFI and the IFSB are playing an important role in bridging this gap. Liquidity management continues to remain at the core of the issue that regulators need to address to ensure the healthy growth and development of the Islamic banking sector.

View the full briefing at Marmore Mena Intelligence.

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The Month That Was – Equities off to a flying start in 2019

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GCC equity markets greeted its investors in celebratory fashion, recording its highest monthly gains in over two years. Investor sentiment was bullish, as the influx of foreign funds, uptick in oil prices and expansionary budget policies are all expected to support corporate earnings growth in 2019. The story was no different in the global markets, as equities continued to be the flavour of the month among investors. The U.S. and Emerging Markets witnessed a reversal in fortunes, putting the misery of 2018 behind them. A recovery in oil prices was also underway, as U.S and China take steps to resolve the trade dispute while Saudi Arabia affirms its commitment to avoid a supply glut.

We see the following three issues as key developments during the month of January:

GCC State Budgets 2019 – Still in expansionary mode: Indications from GCC countries largely seem to suggest that they are gearing up for another year characterized by spending to revive economic growth. Development of non-oil sectors continues to be the common theme among GCC budgets, as GCC economies remain upbeat regarding revenue inflows, with oil prices projected to increase in 2019.

View the full briefing at Marmore Mena Intelligence.

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