The lawmakers and regulators in the Dubai International Financial Centre (DIFC) have established a strong legal and regulatory framework for those wishing to establish, manage and offer collective investment funds in or from the DIFC. In developing this framework, the DIFC authority and Dubai Financial Services Authority (DFSA) have borrowed from other jurisdictions. The result is legal vehicles and arrangements and regulatory requirements that are familiar to those operating in jurisdictions such as the United Kingdom, Hong Kong and Singapore.
The DFSA has continued this trend by issuing Consultation Paper No. 102: Property Funds and Money Market Funds (CP 102). The DFSA is seeking to amend its regime for property funds to address various issues set out below. The DFSA funds regime does not, at present, provide explicitly for Money Market Funds (MMFs). The DFSA is seeking to adopt an MMF regime highlighting particular issues on which it is asking for comment.
CP 102 raises the following issues for comment:
- for property funds: appointment of an eligible custodian; borrowing limits; affected person transactions; valuation requirements; and listing requirements for property related assets; and
- for MMFs: issues due to similarities between constant net asset value funds and bank deposits; liquidity, market and credit risks associated with MMFs; use of credit ratings; Islamic MMFs; disclosure needs of investors; and distribution of foreign MMFs by DFSA authorised firms.
The deadline for providing comments on the proposals is 28 August 2015.
Appointment of an eligible custodian
The DFSA proposes that public property funds be permitted to have self-custody of the real property that form part of the fund assets provided systems and controls are put in place to ensure the safe custody of that real property. it is also proposing to amend the list of criteria for who can be appointed as a custodian. This includes, for example, a new provision which entities in the United Arab Emirates outside the DIFC can provide these services and removing the requirement for a legal entity to be subject to ‘a minimum capital requirement of $4 million and having had surplus revenue over expenditure for the preceding two financial years.
The DFSA proposes aligning the current borrowing limits for public property funds (and Real Estate Investment Trusts (REITs), including Islamic REITs) and set then at 50% of gross asset value (GAV). The DFSA explains that moving to a GAV measure would be more in line with other jurisdictions and widespread market practice.
Affected person transactions
The DFSA proposes to change the term “affected person” to “related party” and including a prohibition for a unit holder who is a related party and a unit holder who is an associate of a related party from voting in a resolution to permit a related party transaction. The DFSA is also proposing to change the threshold for prior approval required of unit holders for related party transactions over 5% of the most recent net asset value (“NAV”) to resolution. For exempt property finds the DFSA proposes to remove the related party transaction requirements save that any transactions would still have to be on normal commercial terms and disclosed in the relevant disclosure documents.
The DFSA proposes that a fund manager of the public or exempt property fund should continue to go out to tender ever five years for a new valuer, but if, after the tender process, they wish to appoint the same valuation company to carry out the valuation function, they must then, in the next interim or annual report, specify the reasons for the re-appointment and the evidence supporting those reasons.
Listing requirements for property related assets
The DFSA proposes allowing a public property fund to invest in non-traded and non-listed property related assets provided there is review and approval by the investment committee of the fund. For exempt property funds, it proposes to allow investment in non-traded and non-listed property related assets. This investment intention is to be disclosed in the fund’s constitutional documents and also to be disclosed in the relevant disclosure documents.
Money Market Funds
Issues due to similarities between constant NAV Funds and bank deposits - In line with the International Organization of Securities Commissions (IOSCO) recommendation that regulatory regimes explicitly define MMFs so that they can be easily identified, the DFSA proposes that MMFs are added to the list of specialist fund in its rulebook and a MMF definition in line with the IOSCO definition be adopted. It also proposes that the Funds regime should not allow MMFs to be established as constant NAV Funds, so that any MMF established in the DIFC operates as a Variable NAV Fund. The DFSA explains that the benefit of this approach is that it mitigates the systemic and financial stability concerns which the Financial Stability Board and IOSCO have highlighted in relation to MMFs, while at the same time allowing the industry to develop MMFs if it wishes.
Liquidity, market and credit risks associated with MMFs
The DFSA proposes, in line with the IOSCO recommendations, and regimes in the EU, Hong Kong and Singapore, that MMFs under the DIFC regime are subject to the investment restrictions that a MMF may only invest in high quality deposits and debt instruments with related investment and concentration restriction.
Use of credit ratings
The DFSA proposes that in addition to due diligence requirements., requirements are introduced to ensure that fund managers of MMFs do not mechanically rely on external credit ratings, but undertake appropriate due diligence relating to underlying investments of the Fund.
The DFSA does not intend to specify in great detail what investments an Islamic MMF could invest in. Rather, it proposes to apply the same general framework as is proposed for non-Islamic MMFs. Consistent with its normal approach, the Shari’ah compliance of the actual investments invested in would be a matter for the Shari’ah board of such a fund.
Disclosure needs of investors
The DFSA proposes additional prospectus disclosure requirements for MMFs, including: a risk warning clearly explaining that the nature of an investment in a fund is different to that of a deposit and that the principal value may fluctuate; and a risk warning that the investor will not have the safety of a capital guarantee, unless there is a firm commitment from the sponsor to provide support.
Distribution of non-DIFC MMFs by DFSA authorised firms
The DFSA proposes that the disclosure requirements noted above are also applied in the case of distribution of any non-DIFC MMF which falls within the proposed definition of an MMF in the same manner as they would in the case of a DIFC MMF.