Bermuda’s AIFMD ambitions to assist ILS fund access to Europe

Bermuda is seeking to ready itself to be considered as a “third-country,” or non-European Union, with passport rights under the Alternative Investment Fund Managers Directive (AIFMD), a move which would benefit local ILS funds and managers.

If a jurisdiction can be approved with third-country equivalence under AIFMD, it would enable non-EU fund managers covered by the passport, so registered in Bermuda, to register in one EU member state and to market their funds more freely in other EU states.

This would bring benefits to the insurance-linked security (ILS) market in Bermuda, with a number of dedicated investment managers in the space located there and some of the islands reinsurance firms also offering ILS funds, or reinsurance sidecar investment structures.

In order to ready itself for this possibility Bermuda’s regulator and government, supported by industry stakeholders and the Bermuda Business Development Agency (BDA), has lined up new legislation which if approved would lay the foundations for the AIFMD passport.

Newly drafted amendments to the Investment Business Act (IBA) are designed to place Bermuda in a favourable situation to be considered as a location with an AIFMD passport. It’s not the only domicile seeking this passport, the Cayman Islands which also has an ILS focus is seeking this status as well.

The European Securities Market Authority (ESMA) is thought ready to decide on the 22nd of July on whether to relax the EU fund management market. ESMA is expected to announce a list of jurisdictions that should be considered by the European Commission (EC) for extension of passport rights in the funds business under AIFMD and Bermuda wants to be one of those.

Bermuda is already home to nearly 900 investment and hedge funds overseen by the Bermuda Monetary Authority (BMA). With a number of insurance-linked securities (ILS) fund managers making Bermuda their home and many others using Bermuda as a domicile for transactional purposes, an AIFMD passport would benefit the ILS sector as well.

ILS fund managers registered or located in Bermuda would benefit from the ability to register in the EU and more broadly market their ILS and reinsurance linked funds to investors there.

It could also be beneficial for ILS managers and reinsurance firms from other locations, such as the U.S., who already base their transaction and sometimes fund structures in Bermuda and who would want to gain greater access to the European markets for fund-raising and marketing.

BDA CEO Ross Webber commented; “There are procedural unknowns at this point, and it may be a phased process, but we anticipate Bermuda will now be seen to have a sufficiently rigorous and well-resourced structure for fund managers located in our jurisdiction to operate in line with European rules and requirements. Our hope is that these legislative updates will put us in good standing for favourable AIFMD passport consideration by ESMA and the European Commission.”

The Bermuda Cabinet approved the legislative amendments in principle last week. The changes strengthen the framework that governs the Bermuda investment fund industry, enabling an investment manager to be licensed as an Alternative Investment Fund Manager (AIFM) as defined by the AIFMD. Bermuda expects to also address other specific articles from AIFMD after the ESMA announcement.

“Bermuda has taken a careful, well thought-out approach to drafting the needed legislation, and we will take into account all the details of ESMA’s announcement and fine-tune our measures as appropriate, depending on the final EC decision within the subsequent three-month period,” said BMA CEO Jeremy Cox.

Cox also said that the legislative update would ensure that “Bermuda-based alternative investment fund managers who opt in under the new regime meet an equivalent range of regulatory supervision standards as set out under AIFMD requirements.”

“The amendments will supplement the present licensing and regulatory provisions which apply to any manager issued an investment business licence by the BMA,” Cox said. “But under the amendments, alternative investment fund managers may choose to come under the AIFMD-equivalent regulatory provisions if they wish to market their funds in Europe.”

“Our collaborative view is that investors located in the European Union stand to benefit significantly from inclusion of Bermuda under the AIFM directive, because it offers opportunities to place their capital with well-supervised fund managers outside their own region,” added BDA Business Development Manager Sean Moran. “It also shows recognition of requirements and standards which the EU has initiated in this area. We trust the EC will recognise Bermuda’s robust regulatory credentials and our long legacy of compliance and transparency that set us apart from many other jurisdictions.”

Artemis asked Moran for some thoughts on the AIFMD ambitions with specific reference to Bermuda’s insurance-linked securities (ILS) market.

He explained; “Bermuda’s campaign for third country passport approval under the AIFMD hinges on its ability to properly regulate its locally based alternative investment fund managers to the same standard as they would be regulated in the EU.  Our regulator, the BMA, has a proven track record in supervising the local asset management and re/insurance markets, and we feel that this, together with the enabling legislation that the BMA has drafted, position us well for consideration by ESMA and the European Commission.

“At the end of the day, our focus on compliance with AIFMD is primarily to ensure that Bermuda is recognised by the EU as having the proper regulations and standards in force.  This recognition will be important for European investors who want to have access to the best fund managers that the global market has to offer. Bermuda is a leader in the ILS space, and we feel that giving EU investors the ability to invest with our best-in-class ILS managers will ultimately benefit those investors and be a win for the EU.”

The AIFMD passport is expected to be awarded to the first jurisdictions by October 15th at the earliest.