.m.f.i.a.NEWSLETTER NO. 3

Q2 2010

Malta Funds Industry Association

MALTA FUNDS INDUSTRY ASSOCIATION NEWSLETTER 3

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Chairman’s Note

Malta is rapidly gaining international recognition as abrand denoting excellence in financial services. Thisis evidenced by the increasing number of reputableinternational financial services operators who havediscovered the strengths that Malta has to offer andhave consequently set up their operation in Malta.

Undoubtedly, the driver of these strengths is led bythe presence of a well-trained and motivated workforce.However, the industry's growth is also being drivenby other equally important factors. These include thepresence of a comprehensive legal and regulatoryframework, as well as a competitive fiscal regimebacked up by over fifty double taxation agreements.To these, I would also add a sophisticated ICTinfrastructure, English as an official language, anenviable climate and Malta's unique strategic location- an EU country with a strong Mediterranean links.Moreover, the presence of a single efficient regulator,the Malta Financial Services Authority, which has builta reputation for being meticulous yet an accessiblesupervisory body, ensures that operators are fullycompliant with EU regulations which of course ispivotal to Malta's positioning as a reputable effective,stable and skilled jurisdiction.

Malta's thrust to position itself as an internationalfinancial services centre of repute, and the growthtraction in this regard is evidenced by the compellinggrowth statistics particularly those achieved by thefunds, insurance and banking sectors. Notably, Malta’sfund services industry is rapidly gaining recognitionas a fund domicile of choice. This is evidenced by theincreasing enquires on the regulatory framework forboth UCITS III funds and Professional Investor Fundsas well as the growing number of funds beingredomiciled to Malta from non EU jurisdictions. Sufficeto mention that over 2009, despite the challenginginternational market environment, 105 new funds wereauthorized by the MFSA and 20 new investmentservices licences were issued to new marketparticipants.

Malta is also earning a number of internationalaccolades. Just to mention a few, the EuropeanCommission's latest Internal Market Scoreboardpublished in January 2009 emphasised how Maltahas been quick to embrace the opportunities offeredby the EU single market. It ranked Malta in joint first

position out of all EU countries for the implementationof internal market directives, demonstrating bothMalta's efficiency in transposing European rules intodomestic law and that its economy is one of the mostintegrated in the Union. Moreover, according to TheGlobal Competitiveness Report 2009-2010 issued bythe World Economic Forum, Malta ranked 52 amongst133 economies, in the global competitiveness table.In this report, Malta was also ranked as having the13th soundest banking sector and again 13th in thefinancial sophistication category. Of interest was theCapGemini report prepared for the EuropeanCommission in 2009 which measured EuropeanEGovernment Services. Hereagain, Malta ranked 1st.

Within the context of the above and theinternationalisation of Malta's financial servicesindustry, the Association's main aim is to furtherstrengthen Malta's financial services brand througha comprehensive number of initiatives across variousmedia. In the process, the Association is harnessingvarious resources to include those of the industryoperators and practitioners, the regulator andGovernment such that the industry continues to growand prosper in the years ahead.

Kenneth FarrugiaChairman

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Re-Domiciliation of FundsJoseph CamilleriHead Business Development - Valletta Fund Services Limited

Malta’s eventual accession to the EU provided the“quality certification” that has put Malta, alongsideother EU jurisdictions, as an alternative EU domicilefor financial services.

The Malta Financial Services Authority’s (MFSA) wideranging regulatory platform spans across many facetsof the financial services sphere, from investmentservices to insurance business, to trust business andothers.

The growth Malta has experienced in the contributionto GDP by the financial services industry has beenmainly characterised over the past few years by thecaptive insurance and funds business. Thanks to thepresence of a robust yet flexible regulatory framework,(and a meticulous, yet approachable businessfriendlysingle regulator), Malta is attracting an increasingnumber of investment fund promoters, who arestructuring investment vehicles with varied investmentobjectives. They are investing in a myriad of assetclasses, and targeting diverse investors such as retail,quasi-retail, professional or institutional.

Impressive and encouraging as it may be, the growthexperienced so far is turning to be an exponentialone; the industry is set on unusually sturdy foundationspaving the way for organic growth in the years ahead.The pattern is rather clear to identify. Following thefirst Professional Investor Funds (PIF’s) set up bymainly European based fund managers, the industryis experiencing the arrival of other fund managersnow setting up UCITS III schemes. The naturalprogression for this has been the setting up of fundmanagement companies in Malta alongside theinvestment vehicles with the presence of highly skilledpersonnel, a healthy legal and regulatory frameworkand an efficient fiscal regime for corporate entitiessetting up in Malta, being additional positivecontributors to these developments.

The recent market turmoil has been a major catalystfor many fund managers who have had to rethinktheir strategies in relation to the chosen domicile oftheir investment vehicles. Investors’ growingawareness of risk has motivated managers to seekout well regulated and reputable jurisdictions, wherethe extent of regulatory oversight provided greaterpeace of mind to investors. Thus the need to identify

a cost effective, business friendly, reputable andregulated jurisdiction where to set up investment fundshas today become high on the agenda of many fundmanagers.

The planned EU directive regulating alternativeinvestment schemes (a “cleaner” phrase for the“hateful” hedge funds), or as it is known AIFM(Alternative Investment Fund Managers Directive),has sent strong signals to fund managers of non-retailinvestment schemes that are promoted to EU nationalsand residents. The nature of the directive’s draft sofar, has led to fund managers promoting theirinvestment funds in Europe to reconsider their nonEU domicile status in search of jurisdictions featuringa strong legal and regulatory framework.

Within this context, a number of funds are seeking tore-domicile their platforms to Europe with Malta beinga very strong contender by way of the presence ofthe Continuation of Companies Act; a legislation thatcaters for the re-domiciliation of companies (and thustoo their “continuation”) from one country to another.

Malta’s reputation in the financial sphere in the contextof the EU has gained momentum, and albeit tiny,when compared to the likes of Luxembourg or Dublin,has today become an option insofar as EU jurisdictionsare concerned. The extent of business that hasmaterialized so far and the increasing level of enquiriesbeing received for redomiciliation to Malta is an excitingdevelopment and augurs well for the growth of theindustry going forward.

The recent market turmoil

has been a major catalyst

for many fund managers

who have had to rethink

their strategies in relation to

the chosen domicile of

their investment vehicle

MALTA FUNDS INDUSTRY ASSOCIATION NEWSLETTER 3

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Malta - a flourishing domicile for hedge fundsCharles AzzopardiManaging Director - HSBC Securities Malta Limited

Malta is becoming increasingly attractive as a funddomicile and it has been making significant strides inestablishing itself as a prime onshore domicile. Theturning point has been, undoubtedly, Malta’s accessionto the European Union in 2004 and since that pointthe interest in Malta has increased considerably; wehave seen a strong and sustained inflow of bothinvestment funds and fund managers relocating here.

If one were to examine the underlying reasons forthis positive trend, this is due primarily to the robustregulatory framework that is in place. More importantly,behind this framework there is a regulator, MaltaFinancial Services Authority (MFSA), whose mainfocus is the protection of the investor. The MFSA isproactive and pragmatic in its regulatory approach.The regulator also adopts a policy of seekingconsultation from major industry bodies as part of thelegislative process and it provides constructivefeedback on the issues raised by them. Relationsbetween industry players and the MFSA are healthy;the MFSA is generally viewed as approachable andwilling to discuss any issues that arise within a relativelyshort time-frame.

The main statute that regulates the funds industry isthe Investment Services Act 1994 and subsidiarylegislation that is issued by the Minister of Finance inconsultation with the MFSA. This Act provides for thesetting up of UCITS and non-UCITS Retail Funds aswell as Professional Investor Funds (“PIFs”).

The MFSA has the power to issue Investment ServicesRules regulating, amongst others, hedge funds, privateequity funds, property funds and other funds thatpursue alternative investment strategies. In this respectthe MFSA has issued Investment Services Rules forProfessional Investor Funds. These Rules providethe regulatory framework for the alternative type fundsreferred to above.

Maltese legislation allows for a fund to be set up undera number of legal forms such as an investmentcompany with fixed or variable share capital (SICAVor INVCO), a limited partnership, a unit trust or amutual fund. Important to note here that segregatedcell structures can be used by PIFs - it is possible toset up an umbrella SICAV (one company) with anumber of sub-funds where the assets and liabilities

of one sub fund are separate (and more importantly)ring fenced from those of another sub fund within thesame SICAV. It follows therefore that should a sub-fund become insolvent, the assets of the other sub-funds within the same umbrella structure may not beutilised to meet these obligations.

PIFs must be authorised by the MFSA. The processand documentation requirements are very clearlyexplained by the MFSA on their websitewww.mfsa.com.mt. The MFSA would typicallyencourage consultation prior to the submission of anapplication for a licence. The time to market is efficient,always depending on the timely and accuratesubmission of documentation. Typically this wouldtranslate into a 4-6 week from the date of filing tocompletion.

The PIFs regulatory framework allows for three typesof funds - Experienced Investor Funds, QualifyingInvestor Funds and Extraordinary Investor Funds.

Experienced Investor Fund

The Experienced Investor Fund is a PIF available toinvestors who can meet the criteria of an ExperiencedInvestor and imposes a minimum investment amountof €10,000. The Experienced Investor Fund regimecontains a number of investment restrictions whichinclude:

• Direct borrowing for investment purposes andleverage via the use of derivatives is restricted to100% of NAV;

• The Fund may invest up to 20% of its total assetsin securities issued by the same body and up to30% of its assets in money market instrumentsissued by the same body (although there are someexceptions to this rule); and

• The Fund may invest up to a maximum of 35% ofits total assets in deposits with a single body.

The Experienced Investor Fund is subject to theoversight of the custodian which is required to monitorthe fund and ensure that investment restrictions areadhered to.

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Qualifying Investor Fund

Qualifying Investor Funds tend to be the most commonand practical approach for a fund sponsor seekingthe widest flexibility in terms of investment strategies.Understandably these types of PIFs can only bepromoted to investors who have a higher degree offinancial sophistication than Experienced Investorsand the entry level to these funds is consequentlymuch higher, at €75,000. There are also other criteriawhich an investor needs to satisfy to certify himselfas a Qualifying Investor and, in turn, to invest in aQualifying Investor Fund. These funds may also enterinto OTC agreements and take short positions. Insummary, when a fund is promoted exclusively toQualifying Investors and the investment objectives,investment policies and investment restrictions, if any,are clear and well disclosed in the Fund’s OfferingMemorandum, then there would normally be limitedscope for intervention by the regulator.

Extraordinary Investor Fund

The Extraordinary PIF is similar in nature to theQualifying Investor Fund and it, too, lends itself as asuitable vehicle for a number of strategies. The mostimportant difference between these two categories ofPIFs is that the Extraordinary Investor Fund has asignificantly higher entry level at €750,000 and it doesnot need to publish an Offering Memorandum: aMarketing Document would suffice.

From a taxation point of view, a fund that has 15 percent or more of its assets situated outside Malta isexempt from Maltese tax on all its investment income(which includes realised capital gains - except forincome arising from immovable property situated inMalta, if any). Likewise distributions to non residentinvestors are exempt from Maltese tax. In so far asValue Added Tax is concerned, investment funds areexempt from the tax on “services that are core andessential for the running of a scheme.” Please notethat this information is correct as at time of writing(February 2010) and is based on current tax law andpractice which may be subject to change in future.

Apart from the flexible regulatory regime describedabove, a number of other factors contribute to Malta’ssuccess and attractiveness as a fund domicile. Nodoubt, the availability of well established serviceproviders and a skilled workforce as well as theMaltese ingrained work ethos of having business doneplay an important role. Similarly I would mention costeffectiveness which compares very favourably tojurisdictions within and outside the EU. Clearly Maltaremains well poised to benefit for further growth aswe see the hedge fund industry recover and regainlost ground.

Malta is becoming increasingly attractive as a fund domicile

and it has been making significant strides in establishing itself

as a prime onshore domicile.

MALTA FUNDS INDUSTRY ASSOCIATION NEWSLETTER 3

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PROFESSIONAL INVESTOR FUNDS

Experienced Qualifying ExtraordinaryInvestor Fund Investor Fund Investor Fund

Minimum investment €10k €75k €750k

Eligibility Criteria Must satisfy the Must satisfy the Must satisfy thefor Investors definition of definition of definition of

Experienced Investor Qualifying Investor Extraordinary Investor

Investment Restrictions Certain investmentrestrictions apply None None

Leverage 100% of NAV No restrictions unless No restrictions(Unlimited for fund invests inliquidity purposes) immovable property

MFSA response on 7 business days 7 business days 3 business daysproposed Fund Structure

Fit and proper test Compulsory Compulsory Compulsory

Offering Memorandum Minimum Minimum Marketing documentrequirements requirements will sufficeprescribed prescribed

Financial Statements Annual Annual Annualand Statutory Reporting

Manager Optional if there is Optional if there is Optional if there iscompetence within competence within competence withinboard of fund board of fund board of fund

Advisor Optional Optional Optional

Custodian/Prime Broker Compulsory, Optional, Optional,assuming also a merely required to merely required tomonitoring role implement proper implement proper

safe-custody safe-custodyarrangements arrangements

Local Representative Required where all Required where all Required where allthe service providers the service providers the service providersof the PIF are based of the PIF are based of the PIF are basedoutside Malta outside Malta outside Malta

Independent Director Mandatory Mandatory Mandatoryfrom Managerand Custodian

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Collective Investment SchemeLicences issuedJanuary - March 2010

PROFESSIONAL INVESTOR FUNDS

• Additional Collective Investment Scheme licences issued to Altma Funds SICAV plc in respect of two sub-funds. This fund is a Professional Investor Fund targeting Qualifying Investors.

• Additional Collective Investment Scheme licences issued to NBCG Fund SICAV plc in respect of four sub-funds. This fund is a Professional Investor Fund targeting Qualifying Investors.

• Additional Collective Investment Scheme licences issued to Novium Opportunity Umbrella SICAV in respectof one sub-fund. This fund is a Professional Investor Fund targeting Qualifying Investors.

• Collective Investment Scheme licence issued to InvestInvent Funds SICAV plc in respect of two sub-funds.This fund is a Professional Investor Fund targeting Qualifying Investors.

• Collective Investment Scheme licence issued to Privaxis Umbrella Fund SICAV plc in respect of one sub-fund. This fund is a Professional Investor Fund targeting Qualifying Investors.

• Collective Investment Scheme licence issued to Active Investments SICAV plc in respect of one sub-fund.This fund is a Professional Investor Fund targeting Qualifying Investors.

• Collective Investment Scheme licence issued to PrimValue (Malta) SICAV plc in respect of one sub-fund.This fund is a Professional Investor Fund targeting Qualifying Investors.

MALTA FUNDS INDUSTRY ASSOCIATION NEWSLETTER 3

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MFSA issues Shariah Fund Guidance Note

The MFSA has published a Guidance Note for ShariahCompliant Funds. The document explains how thelegal and regulatory framework established under theInvestment Services Act would apply to Shariah-compliant funds established under Maltese law.

The MFSA stated that Malta’s principles-basedregulatory regime lays emphasis on the disclosure ofall information that the investor needs to know beforetaking the investment decision and on the transparencyof investment management process itself. This allowsa high degree of freedom on the choice of investmentstrategies and asset allocation policies adopted byinvestment funds, subject to conditions that varyaccording to the level of experience and investmentexpertise of the target investor.

On this basis, the Guidance Note establishes that,whether set up as Professional Investor Funds, UCITSor non-UCITS Retail Funds, Shariah Funds may beregulated in the same manner as non-Shariah Funds.The level of disclosure and the applicable conditionswould be the same as those that are applicable tothe respective category of retail or professional funds.The Guidance Note therefore requires that fundspresenting themselves as Shariah compliant arerequired to disclose all the relevant details in this

respect in the fund prospectus or offering documentas well as in their financial statements as part of theirongoing obligations.

The Guidance Note also explains the role of theShariah Advisory Board in relation to that of the fundmanager to ensure that the financial soundness ofthe manager’s decisions is not conditioned by non-financial considerations. It is however also themanager’s responsibility to ensure that the fundactually does satisfy the relevant Shariah principlesand requirements as disclosed in the offeringdocument.

The Guidance Note may be downloaded from theMFSA website: www.mfsa.com.mt

Shariah Funds

may be regulated

in the same manner

as non-Shariah Funds

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MFSA signs a memorandum ofunderstanding with the China SecuritiesRegulatory Commission

On the 26th January 2010 the Malta Financial ServicesAuthority (“MFSA”) and the China Securities RegulationCommission (“CSRC”) signed a Memorandum ofUnderstanding to protect and promote the developmentof the securities markets by providing a frameworkfor co-operation, increased mutual understanding andthe exchange of information, to the extent permittedby the laws and regulations in force in Malta and thePeople’s Republic of China.

As a result, Chinese Qualified Domestic InstitutionalInvestors (“QDII”) are now able to invest on behalf ofChinese investors into Malta domiciled investmentfunds. The QDII scheme permits Chinese domiciledinvestors to invest in foreign securities markets viacertain fund management institutions, insurancecompanies, securities companies and other assetmanagement institutions which have been approvedby the CSRC as QDII's. The QDII scheme allowsChinese domiciled institutions and residents to investwith Chinese commercial banks and these entitiesthen invest in overseas financial products.

Companies licensed by the MFSA will also be ableto access the Chinese Qualified Foreign InstitutionalInvestor ("QFII") status and invest directly in China.The QFII scheme permits qualified foreign investorsto invest in the China A share market under certainforeign exchange flow and disclosure requirements.The investment scope of a QFII extends to treasurybonds, convertible bonds, corporate bonds, warrantsand other financial products approved by the CSRC.

Chinese Qualified Domestic

Institutional Investors are now

able to invest on behalf of

Chinese investors into Malta

domiciled investment funds.

MALTA FUNDS INDUSTRY ASSOCIATION NEWSLETTER 3

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Industry Statistics

FUNDS DOMICILED IN MALTAin number (Retail vs PIFs)

NU

MB

ER

OF

FU

ND

S

FUNDS DOMICILED IN MALTAin value (Retail vs PIFs)

VA

LU

E O

F F

UN

DS

IN €

MIL

LIO

N

0

50

100

150

200

250

300

350

DEC 2003 DEC 2004 DEC 2005 DEC 2006 DEC 2007 DEC 2008 DEC 2009

PIFs RETAIL TOTAL

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

DEC 2003 DEC 2004 DEC 2005 DEC 2006 DEC 2007 DEC 2008 DEC 2009

PIFs RETAIL TOTAL

QUARTER 2 - 2010

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Members’ Directory

MANAGERS

APS BankGlobalCapital p.l.c.HSBC Global Asset Management (Malta) LimitedLombard Asset Managers LimitedValletta Fund Management Limited

ADMINISTRATORS

Apex Fund Services (Malta) LimitedCalamatta Cuschieri & Co LtdCustom House Global Fund Services LtdHSBC Securities Services (Malta) LimitedPraxis Fund Services (Malta) LimitedSGGG Fexco Fund Services (Malta) LimitedTMF FundAdministrators (Malta) LimitedValletta Fund Services Limited

CUSTODIANS

HSBC Bank Malta p.l.c.Bank of Valletta p.l.c.Sparkasse Bank Malta p.l.c.

AFFILIATES

Barclays International Investments (Malta) LtdCrystal Finance Investments LtdGrowth Investments LimitedIsland Financial Services LimitedJesmond Mizzi Financial Services LimitedM.Z. Investment Services Limited

For details on how to become a member please visithttp://mfia.org.mt/member2.html

www.mfia.org.mt

• 116 Archbishop Street, Valletta VLT 1444 - Malta.

• Telephone: 356 25975100

• Facsimile: 356 25975190