Bahrain Finalises New Hedge Fund Rules

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

13 April 2007

The Central Bank of Bahrain (CBB) is finalising new regulations that will support the development of a regional industry of hedge funds, derivatives and other alternative investment instruments.

Requirements for the registration of such higher risk and volatile instruments in Bahrain are contained in a new regulatory framework for collective investment undertakings (CIUs), which the CBB plans to issue later this month.

The new framework, which updates regulations governing mutual funds, will also introduce Bahrain’s first-ever rules allowing CIUs targeting professional investors. It will permit exempt schemes subject only to limited regulation (such as hedge funds), but which may only be sold to a high net worth institutional and investor base.

The new requirements will comprise Module CU 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.

“The CIU regulations address a critical, growing and highly dynamic segment of Bahrain’s financial sector, the funds industry,” explained Abdul Rahman Al Baker, Executive Director, Financial Institutions Supervision, at the CBB, whose responsibilities include the supervision of CIUs.

At present, Bahrain has over 2,000 authorised funds, including over 100 locally domiciled funds. The new CIU regulations will further enhance and develop the market, by allowing a much broader range of CIU to be domiciled and offered in Bahrain, all within a credible regulatory framework.

The new framework will create a new category of ‘Exempt’ schemes. These schemes will be required only to register with the CBB, rather than being authorized, and will not be subject to on-going supervision. They will furthermore not be regulated, but 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 rules for Exempt schemes will allow hedge funds and other higher risk alternative investment vehicles to be legally domiciled and/or sold in Bahrain, within an appropriate regime that recognizes the sophistication of this limited investor base.

“This new category will significantly facilitate the development of products totally different from plain vanilla products and aimed at professional investors, who are high net worth individuals or institutions,” said Al Baker.

“Currently, Middle East investors have to look overseas for such products. The CBB regulations, however, will enable regional access to such instruments," he concluded.

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