CITI TRANSACTION SERVICES

Luxembourg
October 2008

Welcome

Jervis Smith
Managing Director, Global Head of Managed Funds & the Middle East, Financial Institutions Group, Citi

While the funds industry as a whole has not escaped from recent events some jurisdictions have fared better than others. Luxembourg, as a funds centre, has a strong story to tell and a bright future, despite seeing its assets under management slip from an all time high of over 2.1 trillion Euros a year ago to 1.9 trillion Euros in July 2008 - the level attained at the beginning of 2007.

Funds in Europe, in particular UCITS funds, have become a tremendously successful product and are globally distributed - and recognised. To date, Luxembourg's UCITS funds, and their implementation and regulation, have made a significant contribution to the Grand Duchy's success. In fact, Luxembourg made UCITS products are beginning to be recognised as the gold standard.

UCITS products have helped the region to diversify its investor base, making it less vulnerable to negative trends in Europe and while most European fund industries suffered net outflows in 2007, Luxembourg continued to show positive net sales of nearly 70 billion Euros as well as a rising number of new funds. In 2007, 700 new funds were launched - double that in 2006 - and for the first half of 2008 this figure was 350.

Now, the Grand Duchy must prove it is a true contender on the world stage by consolidating its strengths, enhancing its international relationships and rising above recent market events.

Focus on Luxembourg: the 'made in Luxembourg' brand goes global

Steve Bernat
Transfer Agency Product Head, Global Transaction Services, Citi

The Grand Duchy is now the leading hub for international fund distribution - and an increasingly important centre for funds aimed at the professional marketplace.

With close on 2 trillion Euros of funds domiciled in the Grand Duchy, Luxembourg today dominates the market among sponsors keen to use the European passport for fund distribution. At the last count, some three-quarters of all UCITS funds marketed cross-border were Luxembourg-domiciled.

Increasingly, however, the UCITS brand, with the 'made in Luxembourg' stamp has become truly global. Sponsors from more than 40 countries of origin now domicile their internationally distributed flagship funds in the Grand Duchy, making Luxembourg the leading hub for global fund distribution.

In addition, the authorities have been aggressively developing Luxembourg's legislation to make sure the region can continue to compete effectively in every area of the funds marketplace. Nothing demonstrates this better than the jump in the number of specialised investment funds (SIFs) launched in Luxembourg since the new legal framework for funds, aimed at the professional marketplace, became effective in February last year.

The Luxembourg authorities correctly identified a growing demand from family offices, private banks and sponsors in the alternative investments (AI) field for a lightly regulated onshore investment fund structure that could be flexibly adapted to any number of investment purposes and sold without restriction to high net worth individuals, professionals and institutions. The previous institutional fund law, dating back to 1991, had limited the sale of 'special funds' to institutional investors. Now they can be sold to anyone who qualifies as an 'informed investor'.

In the first 18 months after the rule change, the number of Luxembourg SIFs rose from 227 to 772. In contrast to UCITS funds, SIFs can invest in anything - from derivatives to wine or paintings. The changes have been hugely successful, particularly in the area of exotic investments.

The new law plays to Luxembourg's strengths. As a Continental platform, Luxembourg has always appealed to German, French and Italian fund sponsors. But it also has a very strong private banking business and many of these banks have been quick to use the new SIF structure. On top of that, Luxembourg has been very successful in the property business. As a low tax environment with a large number of double tax treaties, it is a very efficient domicile for property funds.

Citi's Luxembourg offering

As a top-five provider of fund administration services in Luxembourg, and with a comprehensive AI offering, Citi has been participating fully in the growth of the local funds market. All of the funds currently administered are on behalf of third parties and the number of different promoters served by our Luxembourg branch has doubled to 25 in the past four years.

Citi's range of clients is broad. It includes funds from the Far East, Middle East (including Shari'a funds) and other offshore centres, Greek pension funds and Europe's largest microfinance fund, EFSE, which is sponsored by the European Investment Fund.

In 2007, the Luxembourg team won the global custody, fund accounting and administration mandate for the 6 billion Euros Luxembourg state pension, the fonds de compensation du rgime gnral de pension, following an open tender. The win was testimony to the quality of our systems and service levels. With a highly experienced team, the Luxembourg operation is now the European centre of excellence for fund administration and earlier this year was appointed as Citi's securities pricing centre for Europe.

There has been a string of new client wins in the past year or so. These include new funds for Legg Mason and an international fund launch for the leading Korean fund group, Mirae. In the SIF marketplace, where we have been active from the start, our ability to offer an integrated package of services spanning fund administration, transfer agency, custody, prime brokerage and compliance monitoring was instrumental in winning the mandate for Nexum's Luxembourg-domiciled hedge fund.

Distributor support

Our ability to deliver international distribution support has been a key factor in recent client wins. In Luxembourg we have developed a new, global service model that can draw on any of Citi's other eight fund administration centres around the world and is tailored to the specific requirements of each client.

It can be applied to deliver local transaction support that takes on some or all of the local distributor's back office processes, going beyond the management of subscriptions and redemptions to encompass transfer agency support, the calculation of fees and commissions, and other processes.

The increasing importance of global distributor support reflects Luxembourg's heightened role as a hub for international retail fund distribution. UCITS has emerged as the only truly global fund product, and Citi has been at the forefront of developing new service models that meet the challenge of managing international distribution - and delivering them in a flexible manner.

It is testimony to its success in this area that 40 per cent of new fund sales processed at Citi Luxembourg now arise in Asia. At the same time, Luxembourg is also emerging as a leading centre for institutional and professional funds - an area where Citi's experience as a leading administrator of AI funds, together with a service offering that ranges from in-house prime brokerage to fiduciary services, give it the breadth of expertise to service the most demanding and exotic fund types.

Citi's international distribution model

The new model was first put in place for the Manulife Global Fund, a Luxembourg-domiciled fund primarily distributed to Asian retail clients. Manulife wanted cross-border servicing that would include local distributor support in Hong Kong with local language skills and an outsourcing capability that would allow it to retire its distributor back office systems. We set up a shareholder services operation in Hong Kong from scratch, implementing a common transfer agency system for both Hong Kong and Luxembourg whilst adding on distributor-specific functionality.

All data captured locally can be validated immediately in the Grand Duchy while our Hong Kong team took over the distributor back-office processes in a move that effectively took transfer agency into the distribution space. This has allowed ManuLife to retire its legacy system, save on headcount and start each day with up-to-date information, including all transaction data, net asset valuations (NAVs) and full status reports on shareholders and distributors.

Citi has also implemented a similar service model for Mirae, which selected Citi as its partner for the launch of its first Luxembourg based and Asia-distributed fund earlier this year. Ultimately, Citi's shared operating model hands clients a flexible, cross jurisdictional distribution model, with 24/7 support, to streamline processes and expand their fund range while continuing to reduce operational costs.