The Cayman Islands Monetary Authority has announced that the Cayman funds industry – the backbone of the jurisdiction's financial services sector – remains largely unaffected by the collapse of hedge funds controlled by Bernard L. Madoff, an event which has sent further unwelcome ripples around the global financial system.
"The Cayman Islands Monetary Authority (CIMA) has been following the developments relating to charges of massive investment fraud brought in the USA against investment broker and former Nasdaq Stock Exchange Chairman Bernard Madoff," the regulator said in a statement. However, after checking its records and database of funds, CIMA claimed to have found "no evidence so far that Mr Bernard Madoff or any Madoff company is providing direct services to any Cayman Islands-regulated fund." Scrutiny of the Cayman Companies Registry also found that no Madoff-related entity incorporated in the Cayman Islands.
However, CIMA anticipates that, given that Madoff's investment funds include banking and other institutions across Europe, the UK and the US, there could be a number of Cayman-regulated funds, as well as other institutions, that have made investments into the Madoff funds and which, therefore, could be impacted.
To date, CIMA has received confirmation from one Cayman fund administrator that one of its regulated funds had significant investment in the Madoff funds. One bank has also confirmed that it had significant exposure to the Madoff funds - a Class B affiliate bank that does not conduct any domestic business.
CIMA said that it is continuing to investigate whether there are any other CIMA-regulated institutions that have exposure to Madoff's funds and will work with regulated entities that may be impacted.
"CIMA has always urged investors to do their due diligence before investing, and on an ongoing basis. This case provides another example of why it is necessary to do so, as it is apparent that many of Madoff's investors missed relevant red flags," the Authority noted.
The statement added that CIMA intends to cooperate with the main US financial regulator, the Securities and Exchange Commission (SEC), in its investigation into Madoff and his funds.
However, while the Cayman Islands seems to have escaped much of the fall-out from the Madoff affair, it anticipates that the wider global economic downturn coupled with the lack of confidence in the financial markets will have an adverse impact on the Cayman Islands' ability to attract new hedge funds.
"Worldwide, the funds industry continues to struggle to attract new capital, to maintain investor confidence and keep the high level of redemption requests from investors at bay. The Madoff scandal will undoubtedly shake the industry even further," CIMA observed.
CIMA has seen less fund authorizations between July and November this year (586 funds authorized) compared to the same period in 2007 (820 authorized). At the same time, there were more terminations between July and November this year (311 terminations) than for the same period last year (219 terminations).
The regulator maintained that the level of terminations, which averaged 60 per month between July and November this year, is still low when compared to the overall number of active Cayman Islands-authorized funds, which remains at over 10,000. Nonetheless, CIMA anticipates the numbers of terminations in December and January to increase substantially, although it noted that these two months are the ones in which funds traditionally terminate.
According to the Authority, steps that regulated funds have been taking to manage their liquidity problems include suspending redemptions and/or the calculation of net asset values (NAV). To date, CIMA is aware of 67 funds that have suspended redemptions, 44 funds that have suspended their NAV calculation, and two funds that have been forced into court ordered liquidation.
"A positive sign is that three funds that had formerly suspended redemptions have now lifted their suspensions," CIMA said.
Madoff is currently under house arrest in the United States after being charged by the US authorities of running the largest Ponzi scheme in history. It is believed that the fraud could run as high as USD50bn.
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