santiago gapp for sovereign wealth funds
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SOVERIGN WEALTH FUNDSGenerally Accepted Principles and Practices
Santiago Principles
Prepared By:Sharjeel Butt
Senior Manager AuditProfessional Services Unit
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Contents Background of IWG SWF Guiding Objectives
Purpose Nature Structure
Discussion on the GAPP- Santiago Principles
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Background of IWG - SWF The International Working Group of Sovereign
Wealth Funds (IWG) was established at a meeting of countries with SWFs on April 30–May 1, 2008, in Washington, D.C.
In the meeting, it was agreed that the IWG would initiate the process, facilitated and coordinated by the International Monetary Fund (IMF)
The IWG comprises 26 IMF member countries with SWFs. The IWG met on three occasions—in Washington, D.C., Singapore, and Santiago (Chile)—to identify and draft a set of generally accepted principles and practices (GAPP) that properly reflects their investment practices and objectives, and agreed on the Santiago Principles at its third meeting.
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Member Countries Australia, Azerbaijan, Bahrain, Botswana,
Canada, Chile, China, Equatorial Guinea, Islamic Republic of Iran, Ireland, Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad and Tobago, the United Arab Emirates, and the United States.
Permanent observers of the IWG are Oman, Saudi Arabia, Vietnam, the OECD, and the World Bank
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Guiding Objectives
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Purpose The purpose of the GAPP is to identify a
framework of generally accepted principles and practices that properly reflect appropriate governance and accountability arrangements as well as the conduct of investment practices by SWFs on a prudent and sound basis.
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Nature The GAPP is a voluntary set of principles and
practices that the members of the IWG support and either have implemented or aspire to implement.
The GAPP denotes general practices and principles, which are potentially achievable by countries at all levels of economic development.
The GAPP is subject to provisions of intergovernmental agreements, and legal and regulatory requirements
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StructureKey Areas Sub Areas Principles
A. Legal Framework, Objectives and coordination with Macro economic Policies
Legal Basis and Forms Objectives an Macro economic linkages Funding and withdrawal rules Statistics compilation and reporting
Principle 1 Principle 2 and 3
Principle 4
Principle 5
B. Institutional Framework and Governance Structure
Governance Framework Accountability Assurance of Integrity of operations
Principle 6, 7, 8, and 9Principle 10, 11 and 12Principle 13, 14, 15, 16 and 17
C. Investment and Risk management Framework
Investment Policy Risk management and performance measurement GAPP Implementation
Principle 18, 19, 20 and 21Principle 22 and 23
Principle 24
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A. Legal Framework, Objectives & coordination with Macro economic
Policies Legal Basis and Forms
Objectives an Macro economic linkages Funding and withdrawal rules
Statistics compilation and reporting
04/13/2310 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Legal Framework
04/13/2312 Sovereign Wealth Funds – Santiago Principles
Legal Basis and Structure Establishment of the SWF should be clearly
authorized under domestic law Legal structure should include clear mandate
for the manager to invest the SWF’s assets and conduct all related transaction
The beneficial and legal owners of the SWFs assets should be legally clear
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GAPP Principle
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Policy Purposes SWF are created by governments for the
Varity of policy purposes Stabilization funds – where the primary
objective is to insulate the budget and the economy against commodity price swings
Saving funds – for future generations (Superannuation, retirement etc)
Reserve funds – increase the return on assets
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GAPP Principle
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GAPP Principle
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Typical sources of Funding/WithdrawalsFunding WithdrawsMineral royaltiesPrivatization receiptsGeneral fiscal surplusBalance of payment surplusForeign exchange interventionReturns on investmentsDivestment proceedBorrowing from market
Own operating expensesGovernment general expenditureBudgeted projectsState emergency needs
Funding and withdrawal rules are specific to the type of funds: Stabilization funds
Funding - revenue contingent deposit rule Withdrawals – Budget deficit or commodity price drops
Saving / Reserve funds Funding - Government budget surplus Withdrawals – As per budget expenditure on projects
Some SWF keep their capital and returns while some pay out targeted dividends
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GAPP Principle
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Reliance & cooperation Policymakers in general rely on
macroeconomic data sets that are accurately compiled and disseminated by the national agencies
Cooperation in data reporting primarily involves the owner, or—depending on national arrangement—the SWF, transmitting timely SWF data of good quality and relevant scope to the appropriate national agencies, using modalities of data transmission agreed with those national agencies.
04/13/2320 Sovereign Wealth Funds – Santiago Principles
B. Institutional Framework and Governance Structure
Governance Framework Accountability
Assurance of Integrity of operations
04/13/2321 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Division of Roles The governance structure should be set out in the
SWF’s legal framework. It should ensure appropriate and effective division of
Oversight, Decision making, and Operational responsibilities.
Separate legal entities - have a governance structure that clearly differentiates an owner, a governing body, and management of the SWF.
Pools of assets (without separate legal personality), - the owner may exercise the functions of the governing body(ies) through one or more of its organizational units. In such cases it is important that there be a clear distinction between the owner/governing body(ies) and the agency responsible for the operational management of the SWF.
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GAPP Principle
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Role and Reporting Framework Roles
SWFs Objectives Broad policy purpose, Investment mandate and Acceptable level of risk
Oversight responsibilities as per the legal structure Reporting framework in place
SWFs performance Financial situation Risk management
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GAPP Principle
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Responsibilities of the Governing Body The governing body(ies) of the SWF sets the
strategy and policies aimed at achieving the SWF’s objectives and is ultimately responsible for the SWF’s performance Deciding how to implement such strategies; Delegating responsibilities and setting up
committees as deemed necessary; and Where the SWF is a separate legal entity,
appointing and removing the SWF management (including the CEO and/or the managers).
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GAPP Principle
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Mechanisms–Operational Independence A range of mechanisms could be employed to
ensure the operational independence of the SWF’s management: Vesting responsibility for the SWF’s management in a
separate entity headed by a governing body with clearly defined responsibility for implementing the broad investment mandate established by the government;
Providing extensive powers to the chief executive and senior managers where the SWF’s governing body(ies) is not independent;
Vesting responsibility for operational management in the hands of the central bank or statutory agency; or
Contracting out responsibility for making individual investment decisions to external service providers on a fee-for-service basis.
04/13/2329 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Accountability The owner is accountable, to the legislature or
the public, for the SWF’s approved objectives. For SWF with separate legal entities - the
governing body(ies) is accountable to the owner, and management is accountable to the governing body(ies) for the SWF’s operations, including its investment performance.
For SWFs without separate legal identity - the entity responsible for operational management is accountable to the owner
04/13/2331 Sovereign Wealth Funds – Santiago Principles
Accountability Framework Access to accurate, timely, and relevant
information is essential to an effective accountability framework
Developing appropriate evaluation methods could facilitate the monitoring by owners and governing body(ies), or both as the case may be, of the performance of SWF managers in achieving their objectives
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GAPP Principle
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Annual Report / Financial Statements The annual report and the financial
statements should present the performance of the SWF’s assets and liabilities and be based on a reliable and consistent accounting system Include information on contingent liabilities and off
balance sheet transactions Prepared according to international financial
reporting standards or equivalent national accounting standards
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GAPP Principle
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Internal / External Reviews Internal Audit - The SWF’s activities, finances,
accounting and operational systems, and controls should be internally audited on a regular basis.
External Audit - The SWF’s financial statements should be subject to an annual independent external audit in line with international standards, or equivalent national auditing standards The external auditor should be subject to strict
qualification and suitability standards, and the selection process for commercial auditor should be transparent, independent, and free from political interference
04/13/2336 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Professional and Ethical Standards To ensure the soundness and integrity of the
SWF’s operations, members of the governing body(ies), managers, and staff should be appropriately qualified and well-trained, and should be subject to minimum professional standards. To the extent applicable, the governing body(ies) should Require establishment of a code of conduct for all
members of the governing body(ies), management, and staff, including compliance programs.
Be subject to conflicts of interest guidelines, and rules. Get adequate legal protection for members of the
governing body(ies), management, and staff
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GAPP Principle
04/13/2339 Sovereign Wealth Funds – Santiago Principles
Outsourced Arrangements To ensure good governance and efficient use
of resources, it is important that the SWF, its owners, or the entities in charge of the SWF’s operational management establish clear rules and procedures for dealing with third parties Commercial fund managers Custodians, External service providers.
04/13/2340 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
04/13/2341 Sovereign Wealth Funds – Santiago Principles
Regulatory Compliance SWF should
Abide by any national securities laws, including disclosure requirements and market integrity rules addressing insider trading and market manipulation;
Provide disclosure to local regulators, upon request and in confidence, of financial and non-financial information as required by applicable laws and regulation;
Where required by applicable law or regulation, be subject to local regulators, and cooperate with investigations and comply with regulatory actions initiated by local regulators or other relevant authorities;
Abide by any anti-monopoly rules; and Comply with all applicable tax rules
04/13/2342 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Disclosures Public disclosure of the objectives and
governance framework of the SWF promotes a clear understanding of what the SWF seeks to achieve and of the division of responsibilities to provide assurance that investment decisions are made on an independent basis without political interference.
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GAPP Principle
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Information & Disclosures The financial information would normally be
asset allocation, benchmarks where relevant, and rates of return over appropriate historical
periods consistent with investment horizons. Disclosure of these items will help to give
guidance on risk appetite.
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C. Investment and Risk management Framework
Investment Policy Risk management and performance measurement
GAPP Implementation
04/13/2347 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Investment Policy The investment policy should set out how to
achieve the SWF’s defined objectives using the investment strategy as set by its owner or its governing body(ies).
By defining the investment policy, the SWF commits to a disciplined investment plan.
The investment policy also guides the SWF in implementing activities risk tolerance, investment monitoring procedures
The investment policy, including the strategic asset allocation, should draw upon appropriate portfolio management principles
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Investment Policy The strategic asset allocation is typically
embodied in a benchmark portfolio, and determined by the SWF’s policy purpose, liability profile, horizon over which expected returns and risk are defined, and characteristics of different asset classes.
The investment policy normally defines permissible asset classes and gives guidance on concentration risk with regard to individual holdings, liquidity, and geographical and sectoral concentration.
04/13/2350 Sovereign Wealth Funds – Santiago Principles
External Managers An SWF may use external managers because they may
(i) have skills and established systems for undertaking investment activities in specialized instruments and markets for which the SWF does not have a capability; and
(ii) assist SWFs in managing or reducing the costs of maintaining an asset management operation in a particular market or instrument.
SWFs carefully select reputable and creditworthy investment managers and enter into written investment management agreements. Such agreements typically provide for Specification of an investment mandate; An agreed understanding of expected performance and
investment risk—including tracking errors— reports, and fees; and
A clear undertaking by the investment manager of any promised particular investment methodology or a team to whom historical performance may have been attributed
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Disclosures The description could include
qualitative statements on the investment style (e.g., active/passive, financial/strategic) or investment themes,
the investment objectives, the investment horizon, and the strategic asset allocation.
04/13/2352 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
04/13/2353 Sovereign Wealth Funds – Santiago Principles
Disclosure It is a core principle that SWFs’ overarching
objective is to maximize risk-adjusted financial returns, given the risk tolerance level of the owner
Reasons and factors should be publicly disclosed Some SWFs may exclude certain investments for
various reasons, including legally binding international sanctions and social, ethical, or religious reasons.,
Some SWFs may address social, environmental, or other factors in their investment policy.
04/13/2354 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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GAPP Principle
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Importance of voting right SWFs’ demonstrated ability to contribute to
the stability of global financial markets results in part from their ability to invest on a long term, patient basis.
The exercise of voting rights is seen to be important by some SWFs for their capacity to hold assets and preserve
value rather than becoming a forced seller. as a mechanism for keeping the management of a
company accountable to the shareholders, and thus contributing to good corporate governance and a sound allocation of resources.
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GAPP Principle
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Risk Management Procedures
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Risk Categories
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Disclosure – Risk Management Public disclosure of the SWF’s general
approach to its risk management policies and key actions related to governance and the soundness of its operations reassures that the SWF, its governing body(ies), or management adheres to a high standard of managing operational, regulatory, and reputational risks
04/13/2361 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
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Measurement and Reporting Accurate and consistent measurement and
reporting of investments and investment performance enables the managers of an SWF to make well-informed judgments about their investments important for back testing of risk measurement
models assessing how well managers are keeping to their
defined objectives assured of the sound measurement of the
underlying data.
04/13/2363 Sovereign Wealth Funds – Santiago Principles
GAPP Principle
04/13/2364 Sovereign Wealth Funds – Santiago Principles
Review and Disclosure SWF or its owner or governing body(ies) on
behalf of the SWF to use the GAPP to review the SWF’s existing arrangements and assess its ongoing implementation on a regular basis, with the results reported to its owner or governing body(ies)
The owner or the governing body(ies) may choose to publicly disclose the assessment to the extent it believes such disclosure is consistent with applicable laws and/or regulations and may contribute to stability in international financial markets and enhance trust in recipient countries
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