CBB issues new regulatory framework on collective investment undertakings

The new rules, which come into effect from the beginning of June 2007, provide for the full range of investment funds catering to various categories of investors.

The new framework, which updates existing regulatory instruments governing mutual funds, includes Bahrain's first-ever rules allowing CIUs targeting professional investors. These will allow a more diversified range of CIUs, including hedge funds, derivatives and other alternative investment vehicles, to be domiciled and offered in Bahrain, broadening the range of products available in the market.

"The new CIU regulatory framework is comprehensive, taking into account the most recent product innovations and demand for more sophisticated financial instruments,"

said Mr. Abdul Rahman Al Baker, Executive Director, Financial Institutions Supervision, at the CBB.

He was speaking today at a CBB press conference at which the new CIU regulatory framework was unveiled.

Existing CBB regulations, first issued in 1992, were largely aimed at retail investors, Mr. Al Baker pointed out. Since then however, the financial landscape has undergone a sea change, with the use of complex financial instruments becoming increasingly prolific.

The CBB's CIU regulatory framework, thus, provides for the authorization of two types of CIU:

i) Retail CIUs, which may be sold to anyone but are subject to various requirements aimed at investor protection, such as restrictions on types of assets that may be held in the CIU and various limits on concentration risks; and
ii) Expert CIUs, which are subject to a minimum US$10,000 investment rule, and may only be sold to expert investors (as verified by the institution selling the CIU, and defined in the rules - one criterion being the investor must have financial assets of US$100,000 or more to invest). Expert CIU are also regulated, but may fully invest in a wider range of assets (including real estate and commodities), and are subject to fewer risk concentration requirements.

CIUs registered under these two categories will attract appropriate supervisory oversight from the CBB.

A third category, 'Exempt CIU', will be subject only to certain requirements since these may only be sold to a restricted investor base (those able to make a minimum investment of US$100,000, and with at least US$1 million in financial assets, and subject to verification by the institution selling the product that the investor fully understands the risks involved). The exempt CIU rules will allow hedge funds and other higher risk alternative investment vehicles to be legally domiciled and/or sold in Bahrain.

"The provision of the new 'Exempt' category will significantly facilitate the development and establishment of locally domiciled instruments totally different from plain vanilla products," said Mr. Mohammed Ayman Al Tajer, Director, Financial Institutions Supervision, at the CBB.

This should spawn a home-grown industry of hedge funds and other alternative investment vehicles, which have traditionally been domiciled outside the region.

"We see this as a big growth market given the growing demand for regionally-focused investments, particularly from high net worth individuals and regional institutions, who are becoming increasingly sophisticated in their understanding of the financial risks arising from these new types of transactions," said Mr. Al Tajer.

The CIU regulatory framework also provides for overseas domiciled CIU (whether retail or expert), to avoid supervisory duplication. Those overseas schemes that qualify are only required to register with the CBB, prior to being marketed in Bahrain.

Special provisions have also been included for schemes that comply with Islamic principles.

The new CIU regulatory framework will further reinforce Bahrain's leadership as a financial centre and as the region's funds centre. At 2006-end, the number of funds authorized by the CBB stood at over 2,000, with over US$9 billion in funds under management. Most of these are overseas-domiciled funds, but Bahrain leads the region in having 102 locally-domiciled funds, of which 40 are Shari'a-compliant schemes.

The new requirements comprise Module CIU of the CBB Capital Markets Rulebook, which will constitute Volume 6 of the CBB Rulebook. Volume 6, currently under development, is expected to be completed by end-2007.