Gibraltar targets ILS funds with Exchange-Traded Instruments

The Gibraltar Stock Exchange (GSX) plans to allow the listing of Exchange-Traded Instruments (ETI’s) from December 2015. ETI’s, based on special purpose vehicles, can be backed by alternative investments, making them suitable for ILS funds looking for an exchange listing.

These Exchange-Traded Instruments expand the ability of the Gibraltar Stock Exchange (GSX) to offer listing services to fund managers, also bringing the ability to passport into the EU to fund managers from other outside the region.

Michael Ashton, Senior Executive at Gibraltar Finance, told Artemis; “Gibraltar’s new stock exchange, GSX, is working closely with Gibraltar Finance to support Gibraltar’s ILS ambitions with innovative new products for the ILS sector. GSX expects to be able to list Exchange Traded Investments (ETIs) by year end.”

Gibraltar has been working steadily to provide a domicile that is attractive to insurance-linked securities (ILS) issuers, managers and investors, bringing regulation on-line to support catastrophe bonds, collateralised reinsurance and other ILS instruments.

On the back of these efforts, the first ILS transaction to be domiciled in Gibraltar was completed earlier this year, when lottery provider Lottoland entered into a collateralised reinsurance deal there in April.

ETI’s are a type of exchange listed security with the underlying being an alternative investment strategy. The ETI therefore allows investors access, in a simple and transparent manner, to the performance of the underlying alternative investment portfolio.

So, differently to an exchange traded fund (ETF), an ETI involves a securities wrapper which can be linked to any alternative investment strategy, which once listed could be made tradable and can be accessed via the exchange they are listed on. The ETI listing is also suitable for closed-ended funds and derivatives investments.

They sound well-suited to the ILS fund world, given the portfolio of underlying assets often already lies in a special purpose type vehicle, or a segregated account, type of structure.

Securitising that portfolio into an instrument for listing on an exchange, which is often achieved via something like a performance bond in ETI’s, could broaden access to a fund, increasing marketing opportunities for an ILS manager, as well as increase liquidity opportunities via exchange transparency and in the future trading itself.

It’s important to note here that, as far as Artemis is aware, the GSX is not a trading exchange yet, but would like to be so in the future.

Nick Cowan, Managing Director of the GSX, said that the ETI’s can give small to medium fund managers a footprint into the EU. The GSX aims to make ETI’s quick to market, more flexible and more economical for fund managers to establish as well.

Cowan said that the ETI’s would give fund managers an economical way to test out their strategies in the EU, providing a bridge to enter the market without the full costs of re-domiciling until they’ve tested the waters.

For an offshore ILS manager an ETI listing at the GSX could provide them with a simpler way to access European investors using the passport.

“As ETIs listed on GSX with approved prospectuses qualify for EU passporting, ETIs have the potential to transform the promotion of ILS funds and securities within the European Union and to expand the investor base for ILS funds domiciled both within and outside the EU,” Ashton explained to Artemis.

It’s another positive step for Gibraltar as it continues to look to become a European domicile for the alternative investments market. The ILS use-case is a clear draw to this market, which alongside Gibraltar’s work to domicile ILS vehicles will further increase the attractiveness of its regulatory environment.

Whether ILS fund managers will see this as a viable way to passport into the EU is yet to be seen, but it’s another option for them. It will be particularly interesting to see what uptake there could be in future once the GSX has a trading platform.

Ashton also told Artemis that the GSX will look to list catastrophe bonds, private cat bonds, sidecars and collateralised reinsurance on the exchange in the future as well.