Due to the CSSF's latest endeavour to render its market place attractive for hedge fund promoters, the huge success of Luxembourg 's fund industry will further aspire.
Although Luxembourg has already encountered a certain success with the listing of hedge funds on the Luxembourg Stock Exchange and the administration of hedge funds out of Luxembourg, the introduction of the law on specialised investment funds ("SIFs") in February 2007 which inter alia introduced a fund type that does not require a sponsor was a big step in the right direction.
Now, the Luxembourg supervisory authority (the "CSSF") has through its new Circular 08\372 (the "Circular") clarified the interaction between the prime broker and the SIF's Luxembourg custodian (the "Custodian"). Prime brokers are essential to SIFs that implement a hedge fund type strategy or that make use of derivatives. By setting 4 simple guidelines, the Circular should facilitate the use of prime brokers by SIFs:
1. Acceptance of the prime broker by the Custodian
The Custodian must accept the SIF's choice by ensuring that the prime broker is a financial institution submitted to a regulation equivalent to that provided for by EU Law and that it is recognised and specialises in these type of transactions.
2. Relationship between the prime broker and the Custodian
The Custodian has the right to information regarding the value and type of the SIF's assets. It must also have access to the assets that are entrusted to the prime broker.
The contractual relationship between the SIF and the prime broker or between the Custodian and the prime broker will contain the required procedures to that effect.
According to the Circular, the Custodian needs not to know the correspondents to which the prime broker has entrusted the SIF's assets.
3. General administration tasks
In the case of a SIF having the form of a common fund, the prime broker might be contractually required to carry out all operations concerning the day-to-day administration of the SIF's assets.
The sales documents of a SIF using a prime broker must contain an accurate description of the implications of such use and the related risks.
This piece of regulatory guidance will as sure as eggs is eggs allow the Luxembourg fund industry to be known other than just for UCITS.
It will be interesting to see whether and how these guidelines will be applied to the other types of Luxembourg funds.