The Newsletter | SEPTEMBER 2012 - Luxembourg For Finance

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The Newsletter | SEPTEMBER 2012. Dossier East moving West. ThE ChInESE dImEnSIon. IT'S aLL In ThE namE. WE FEW, WE happY FEW,. WE band oF ...
The Newsletter | september 2012

Dossier East moving West the Chinese dimension It’s all in the name We few, we happy few, we band of brothers Japanese banks: worlds within worlds KPMG The time is ripe for reform

Brussels Confessions of a lobbyist

Insurance Solvency II

Music Rock me Amadeus

The time is ripe for reform

LFF: International investors perceive Luxembourg as a stable country. Has it suffered a lot from the Eurozone’s negative press?

Georges BOCK, Managing Partner, KPMG

If Luxembourg wants to remain competitive, it has to focus on high added value service industries and proceed to overdue structural reforms. This is the message of Georges Bock, who takes over the helm as managing partner of KPMG Luxembourg on October 1st. He is well aware of the country’s traditional strengths, but he also sends a message to political decision makers to undertake solid reform in order to prepare the country for coming generations.

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GB: The key success factor for us is the following: can we, as a small country, still find a growing region in the world that is willing to do major business with us? If China is doing well it doesn’t mean much to juggernaut countries like the US and Germany; but if we can manage to attract business from China, our economy prospers, even though the Euro­ zone is in turmoil. By the way, Luxembourg is number one in Europe when it comes to attracting Chinese foreign investments. Unfortunately, if you travel to regions like Asia or Latin America, they see the whole Eurozone as a catastrophe because of the bad news in the press. We, as Europeans, can weigh up the debate around the future of the Eurozone and measure its nuances, but from the outside, press coverage gives the impression that every country wants to leave the Eurozone. That is definitely not of help to Luxembourg.

LFF: Apart from its stability, what are the particular assets that make Luxembourg attractive to foreign companies and investors? GB: There is no one size fits all answer to the question. Let’s take the fund industry and the service sector that is linked to this industry, such as the structuring of investments in private equity, real estate and hedge funds for example. Around the fund industry there is an entire, highly efficient service industry infrastructure, which includes do­miciliation companies, accountants, auditors, lawyers and all the other financial sector professionals (PSF) that are needed in the framework of reporting, communication of data, etc.

Luxembourg has developed faster when it comes to specialised service providers, meeting every possible need of the industry. Foreign investors appreciate that they can buy a wide range of solutions that fit all their needs at competitive prices.

LFF: Why is Luxembourg competitive in this area? GB: First of all, because we have a government that cares about the investment fund industry and listens carefully to the needs of its practitioners. Secondly, Luxembourg has achieved critical mass due, historically, to its first mover advantage in adopting the UCITS Directives. Our success is certainly not due to tax reasons, because a lot of European counties don’t tax investment funds at all, while we have a minimal tax. Thirdly, we are a very attractive competence centre for promoters wishing to distribute investment funds globally. If all the laws around the world on fund distribution were to go up in smoke, one day, I believe that in Luxembourg we would be able to reconstruct a good part of it because we have people that are knowledgeable on every aspect of that business around the world. Last but not least, we have a regulator that has managed to preserve Luxembourg UCITS from major turmoil, thus providing the Luxembourg industry with a first class reputation around the globe, while remaining constantly open to innovation and new developments.

LFF: You recently said in an interview that Luxembourg was at a crossroads. What challenges does the country face? GB: A crisis is a catalyst for resolving long standing structural problems in a society. The crisis started in 2008 and a lot of people thought that after a short rainy period the

sun would come out again. That was short sighted. The government hasn’t been able to convince the population of Luxembourg that structural reforms in, for example, public budget, pension and the social security system need to be started to ensure that future generations still have the chance to be successful. One of the crucial questions to ask is whether this country can be reformed. If you asked me the question right now, I would be more likely to say no than yes. This crisis clearly shows that for the last twenty years Europe has lived beyond its means, because governments have spent more money than they had. In the long run, our attitude in Europe and in Luxembourg has to change in order to prepare a sustainable future for our children. Structural reforms are overdue.

LFF: So far, the 27 EU Member States have not reached an agreement on giving a mandate to the European Commission to open negotiations with so-called third countries on the taxation on savings income. What would an automatic exchange of information mean for the Luxembourg financial centre? GB: First of all the debate is mainly of relevance to the Private Banking industry, while other banking activities and the fund industry are not really concerned. It is also important to point out that Luxembourg banks already offer automatic exchange of information to customers on request. Our three neighbouring countries France, Belgium and Germany all apply a flat rate withholding tax system that gives their residents reasonable protection against banks communicating personal data around. However, as soon as the same individuals cross the border, they would have to suffer automatic exchange. This is a far cry from equal treatment; it is discrimination by the system. As long as this situation persists, I do not feel comfortable with the automatic exchange of information, because the same rules are not applied everywhere. As long as we ensure a level playing field in the domestic and cross border markets, I remain optimistic for the financial centre.

LFF: Should Luxembourg join the countries willing to sign a bilateral agreement with the US to exchange FATCA information? GB: Qualified intermediary (Q.I.) was the first generation of FATCA. Right from the start, Luxembourg understood the key messages of the Q.I. regime: the US was moving in the direction of making sure that it collected information about US taxpayers. If we didn’t have these huge implementation costs, FATCA would be close to a non-event. It is the industry, and to a certain degree the non-US customers, that will have to pay for US compliance. Though FATCA will not drive Luxembourg out of business, it is an important issue for us because we have an international financial centre. We cannot afford to be a black spot on the FATCA map. An intergovernmental agreement could help to make sure that Luxembourg is recognised for playing its role.

small country like Luxembourg and that the government will help its industry by clearing up, in bilateral negotiations, a number of complex issues that exist in a financial centre like ours that serves the world.

LFF: In international media reports, Luxembourg is, from time to time, represented as a tax stealer. Where do these clichés come from? GB: In the European Union and elsewhere around the world there exists the principle of the free establishment of business. It is clear that these rules, which are complicated, are not easy for the average citizen to understand. It is easier to understand that if the state has huge budget deficits and a colossal public debt, then you need to find a scapegoat. It is always more popular to make somebody else responsible for your shortcomings than to admit one’s own mistakes, so that is where the clichés on Luxembourg come from.

LFF: Is the government in charge of FATCA implementation, or the finance industry?

The climate on international taxation becomes rougher at times when there are a lot of governments with debt and deficits.

GB: Both have to play their part. For the Government, the main question is whether Luxembourg should proceed to the signature of an intergovernmental agreement. If we can really be sure that implementation costs will decrease by adopting such an agreement, then the Luxembourg authorities will sign a bilateral agreement with the US. I am optimistic that there is something in it for a

Luxembourg does nothing other than apply EU directives and that is, by the way, not optional as the European court of Justice constantly reminds certain EU Member States. Participation exemptions, for instance, that are based on EU-directives, were not created to produce tax holidays but to avoid double taxation. Saying that we are stealing money maybe sells well, but makes no sense. CW

Georges Bock’s appointment as new Managing Partner of KPMG Luxembourg will be effective from 1 October, 2012. He started with KPMG in 1991 as auditor and has been a Partner with the firm for 12 years. Mr Bock has led the tax department since 2009. He has been Global Chairman of the KPMG Funds Tax Network since 2007.

Confessions of a lobbyist

Antoine Kremer is Head of the EU Representative Office of ABBL (The Luxembourg Bankers’ Association) and ALFI (Association of the Luxembourg Fund Industry) in Brussels. Together with a colleague, he represents Luxembourg’s financial industry. "The European Commission appreciates lobbying in its pure form as very useful, because the Commission has a limited number of employees who cannot always know what’s happening on the ground. Thus, they are happy to have practitioners who are doing this job every day and know what’s going on", explains Kremer. "Lobbying is not only reserved for industry – the private sector, consumer associations and NGOs – everybody does it."

Antoine Kremer, Head of the EU Representative Office, ABBL

According to the definition of the European Commission, lobbying means interest representation, be it governmental, economic, private or unspecified interests. A lobbyist has to be open-minded and sociable, maintain good contacts with people and have a feeling for politics – surely the most crucial quality for a man or woman working in this profession.

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Lobbyists have to subscribe to the EU transparency register in order to get an access badge to the European Parliament. At the same time, they sign a code of conduct that condemns bribery and aggressive methods. ABBL and ALFI were two of the first associations to subscribe to the register, where the amount of money invested in lobbying and fields of interest are listed, among other things. Around 5,500 lobbyists have already subscribed. As non-profit organisations, ABBL and ALFI do not have substantial budgets at their disposal. Only one other Luxembourg association is represented in Brussels. Fedil, the Luxembourg Business Federation, lobbies for the interests of the industry and construction sectors and service providers to those companies.

Antoine Kremer’s work can be divided into three parts. Working on different dossiers, he does the groundwork before a particular issue becomes relevant. "The first part is cultivating the social network and maintaining the network to the European Commission, the Parliament, the Council and to the authorities, like EBA (European Banking Authority), ESMA (European Securities and Markets Authority), EBF (European Banking Federation) and EFAMA (European Fund and Asset Management Association). The second part is monitoring. What is happening and what are the next projects the Commission is preparing or is planning to prepare in the near future? If a legislative procedure has been initiated, we observe what is happening where. In which direction does the dossier go? Are we on the right track or do we have to become increasingly active on a certain point? The third phase is pure lobbying. We talk to the officials in the Commission and the delegates or collaborators of the European Parliament and the Council."

"Lobbying is not only reserved for industry – the private sector, consumer associations and NGOs – everybody does it." In the Council, Kremer’s first contact is the Luxembourg government, but also the other countries whose interests are structured similarly to Luxembourg’s. These are mainly small countries. However, the big member states are crucial too, because of their voting power, which gives them incomparably more influence. In terms of voting weight, the Grand Duchy, for instance, has four votes in the Council while Germany, as the largest

member state, has 29. Last but not least, the Council’s presidency has to be contacted. "As a small country with few voices, we try to convince with arguments, because this is the only possibility we have, to explain why what we propose is best." The working groups and committees of the two associations act as mediators for the needs of the Luxembourg financial centre. "My contact persons are colleagues in our Luxembourg headquarters. They are in direct contact with the association’s members." Luxembourg is widely known as the country with short communication paths. Kremer can sometimes benefit from the Luxembourg business mentality: "If I need a decision within a day, because a dossier has just arrived in the European Parliament, I consult the matter directly with the chairman of the related committee. But these are exceptional cases". On the European level, this is of course more complicated, but Kremer reveals that quick decisions can be taken here, too, if needed.

"As a small country with few voices, we try to convince with arguments, because this is the only possibility we have, to explain why what we propose is best." Currently, everyone’s primary concern is the set of regulatory measures taken to strengthen the stability of European and worldwide markets. "There are pieces of legislation that

have a direct impact on Luxembourg, even more direct than the directives that have been implemented in the past. Currently, our financial industry works well in this environment. However, you have to keep a close eye on how the environment changes and adapt quickly, before the whole thing is already old news; that is why monitoring is so important. We always try to represent a position that takes into account the interests of Luxembourg, but that is justifiable on the European level as well. Up to now, we have managed this balancing act quite well."

"The member states have fewer funds and less tax revenues. Everybody wants to get a bigger slice of the cake." As a consequence of the current economic situation, the tone between member states has become harsher: "The member states have fewer funds and less tax revenues. Everybody wants to get a bigger slice of the cake." Despite these circumstances, Antoine Kremer is satisfied with what he has achieved so far. Though the atmosphere has changed, Kremer is not changing his style. "Aggressive lobbying is an absolute no-go and counterproductive. We saw this with AIFMD. Aggressive lobbying was useless then. European parliamentarians, who had always lent an ear to the lobbyists, became angry. Another no-go is bringing certain issues to the press in order to push the process. We work with what we have; in this regard, I am very pragmatic." EK

"The European Commission appreciates lobbying in its pure form as very useful, because the Commission has a limited number of employees who cannot always know what’s happening on the ground. Thus, they are happy to have practitioners who are doing this job every day and know what’s going on."

East moving West | the Chinese dimension

Dossier East moving West the Chinese dimension Many Asian economies are growing, and there are huge opportunities in the local financial markets. Not surprisingly, Asian asset managers have plans to expand in their region and beyond. In an interview with LFF, Michael Ferguson, Partner and Asset Management Leader at Ernst & Young Luxembourg, speaks about these plans, the role of Hong Kong and communication between regulators.

LFF: What do you think about Asian fund markets in general? MF: Asia is very diverse. You have the large, mature markets, domestically focused, such as Japan and Australia. Then you have the outwardlooking hubs such as Hong Kong and Singapore; lastly, there are the emerging giants of India and mainland China. If you look at the fact that these economies are growing significantly and there is obviously a growing middle class, you can see that there is going to be a need to save for future pensions, health and education. We believe that the fund industry will be the basis for those future savings.

LFF: International asset managers have different levels of engagement in Asia. How about the local asset managers? Do you think that they, too, are eager to expand in their own region? MF: Asian asset managers are aware of the huge potential in their local markets but they lack diversity of product and some sophisticated know-how. They have deep knowledge of the local Asian markets, but once you leave Asia, the depth and breadth of knowledge is somewhat more limited. As a result, we have seen several local Chinese, Indian and Singaporean asset managers set up products in places like Luxembourg, with the view of bringing their local Asian expertise to Europe and trying then to sell that product here in Europe and beyond – in Latin America and the Middle East.

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LFF: What are the main factors driving the Chinese asset managers to expand abroad? LFF: Given of the challenges of increasing crossborder sales in Asia Pacific, what distribution strategies do you expect will emerge? MF: We see a number of different approaches. We see the banks continuing to play a role; we also see the arrival of cross-border focused platforms, similar to the independent platforms you see here in Europe. When you think about the cross-border challenges, you see what I call bilateral arrangements between individual countries more and more. For example, Hong Kong allows Singapore funds and vice versa. We also see what I would describe as UCITS-type local regulation in Asia, meaning that they will take the best of the different UCITS platforms here in Europe and create something similar in Asia. An Asian UCITS would be desirable for local Asian markets. However, given the fact that they are so diverse, it is going to take a very long time for that to become a reality.

LFF: How do these asset managers develop their access to the Chinese markets? MF: At the moment, there is a focus on fixed-income with a lot of investment in the so-called RMB bonds, which have experienced quite big growth over the last two years. The other areas that are growing in importance are exchange-traded funds (ETFs) and real estate; Chinese people, in particular, like to invest in real estate. There is obviously some concern around a potential bubble in that sector, but it is still attracting amazing amounts of money. The other area that is growing significantly is private equity. In many cases, they are joint ventures between local Chinese asset managers and European or American players. Asian asset managers are bringing the local connectivity and market knowledge; the foreign asset managers are bringing more technical know-how and the infrastructure needed in order to reach this, broader and deeper market.

LFF: From an asset management perspective, what role does Hong Kong play as a bridge between mainland China and the outside world? MF: In my experience, you don’t really see local Chinese asset managers come directly from China to Europe to invest. It is more what I would call a "stepping-stone approach". First they go to Hong Kong, get regulated with the SFC and begin operating there. They become familiar with a more international, Western-focused world, build up a certain level of know-how and then they use Hong Kong and their locally-regulated entities to look outwards. First, they expand into the broader Asian markets such as Singapore and Taiwan; and particularly, over the last few years, they have been using Hong Kong as their launching pad into Western Europe. That is the pattern that I have seen them adopt when they come to places like Luxembourg.

MF: There are a few reasons. Diversification is one of them. If you are a Chinese asset manager you are only focused on Chinese asset classes and Chinese investors. There is a certain level of pressure or guidance, call it what you will, from a political point of view for you to diversify. The other key driver is know-how. There is an appetite to gain knowledge and know-how, then to see how that can be used, either for further expansion in new markets, or to take that knowledge and know-how back to their local markets.

LFF: What role can Luxembourg and Europe play in order to attract Chinese investors and Chinese financial institutions? MF: We need to be conscious, when changing regulations around the fund industry, of what the impact will be not only on the European Union but also on regions like Asia. So there needs to be greater communication with the Asian regulators on some of the regulatory changes that have occurred in the fund industry over recent years. But you will not be successful by trying to do things from here. You have to be physically present in Asia, and not only once a year. If you look at the agenda of the Luxembourg Investment Fund Association (ALFI), you will see that we have taken some steps in that respect with many, many road trips. We engaged with the regulators and the main actors and we opened up an office. We need to continue to focus on and build on that relationship and enhance it. We also want to make sure that, given everything that has happened since the beginning of the crisis in 2008, investor protection is at the forefront. We also need to be conscious about cost. We can have regulatory changes, but we must make sure that they have some real added value – that it is not regulation for the sake of regulation. CW

East moving West | It’s all in the name

"Recalling the events of the early 1970s, Luxembourg was rapidly growing as a financial centre. The Soviet Union, in turn, was developing its banking presence in Europe and was represented in almost all major European cities, with the exception of the Benelux countries. Hence, opening a bank in Luxembourg was an obvious decision." Sergey Ladygin, Head of Customer Desk at EWUB explains.

Dossier East moving West It’s all in the name East West United Bank S.A. - also known by its acronym EWUB - is the only bank with Russian capital out of 142 banks domiciled in Luxembourg. It was founded in the Grand Duchy in 1974 and, since then, has become an indispensable part of the Luxembourg banking community.

EWUB has the status of a Luxembourg bank with a full banking licence. Nowadays the major shareholder of the bank is JSFC "Sistema", Russia’s largest diversified financial corporation. EWUB is part of Sistema’s banking group together with JSC "MTS bank", one of the largest private banks in Russia. Strategic decisions for the Luxembourg bank are not necessarily taken in Russia. Members of the Board of Directors are located in both Moscow and Luxembourg. "The place where board meetings are held itself is not decisive in this case. It is important that all the decisions are collegial, and comply with the general business development strategy."

A different model While many banks in Russia are focused on offering services for the retail sector, EWUB has focused its efforts on the development of private banking and corporate banking services as a "boutique bank". "Our target groups are highnet-worth individuals and corporate clients from Russia and CIS (the Commonwealth of Independent States) countries. Russian customers can use Luxembourg products and services, which are difficult to access directly from Russia. We also work with a network of legal and tax advisors who can help our clients to structure investments and assist in opening and administrating their companies. Another important factor for Russian clients is the professional secrecy law in Luxembourg. At the same time, due to the globalisation of business, the bank can offer its services to European companies interested in entering the Russian market", says Ladygin.

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All EWUB employees are multilingual, as it is important to speak the language of the clients. "We have highly-qualified Russian-speaking specialists in different departments. At the same time, our staff speaks all the major European languages and is able to assist our European clients who are establishing economic relations with Russia. The name of the bank truly represents the meaning of its activity – we act as a "bridge" between the East and the West, and will continue to work in this direction. However, finding good specialists in the Grand Duchy is not easy as there are many financial institutions in Luxembourg constantly recruiting highly qualified professionals, and, in addition, there are few candidates specialised in our services as a boutique bank", reveals Ladygin.

"Another important factor for Russian clients is the professional secrecy law in Luxembourg. At the same time, due to the globalisation of business, the bank can offer its services to European companies interested in entering the Russian market." Given the large difference in size between the two countries, working in Luxembourg has advantages that are unimaginable in Russia: "For example, in the morning you can meet a client in Luxembourg and then have another meeting in Brussels or Paris in the afternoon. It would be impossible to even think about having such a schedule in, say, Moscow."

The place to be Despite the economic crisis, Luxembourg has a very positive image in Russia as a place to do business. "Decades of expertise in the area of private banking and corporate finance have had a positive impact on the speed and the quality of services provided", Ladygin explains. "Due to the special legislative system and the possibility of structuring various favourable tax regimes, Luxembourg is considered a unique place to do business."

"Decades of expertise in the area of private banking and corporate finance have had a positive impact on the speed and the quality of services provided." However, the perception of the economic situation in the European Union by Russian citizens is slightly uncertain. "There is too much misleading information from different media sources. The uncertainty makes people nervous and forces them to make hasty and often incorrect decisions, especially when it comes to personal savings management. Traditionally, Russian people prefer to keep a significant amount of their personal assets in foreign currency, and the choice between the dollar and the euro is usually a difficult one." Ladygin is convinced that the combined efforts of the European Central Bank and national governments will soon bear fruit and as a consequence Russian investors will have more confidence in the euro again. EK

"The place where board meetings are held itself is not decisive in this case. It is important that all the decisions are collegial, and comply with the general business development strategy." "For example, in the morning you can meet a client in Luxembourg and then have another meeting in Brussels or Paris in the afternoon. It would be impossible to even think about having such a schedule say, in Moscow."

East moving West | We few, we happy few, we band of brothers

Dossier East moving West We few, we happy few, we band of brothers In his leisure time, he writes books about Shakespeare and theatre reviews. One of the first things he did on arriving in Luxembourg was to visit René Weis, Professor at the University College of London (UCL), renowned author of a Shakespeare biography, and... a native of Luxembourg. I am referring, of course, to H.E. Wataru Nishigahiro, Japanese ambassador to Luxembourg. After an eventful year in 2011, when he had to be flown out of Libya, his former official residence, and the earthquake in his home country of Japan, Mr Nishigahiro took up his duties in Luxembourg in June 2012. Having worked for the Japanese Ministry of Foreign Affairs since 1974, he is an expert in the diplomatic field.

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Diplomatic ties between Luxembourg and Japan have existed since 1927. The close relationship between the Grand Ducal family of Luxembourg and the Japanese Emperor’s family is the foundation of this relationship. Before the establishment of the Japanese embassy in Luxembourg, in 1996, the Japanese ambassador to Belgium was delegated to the Grand Duchy. In terms of economic ties, Mr Nishigahiro believes that there are further efforts to be made. "200 million US dollars’ worth of goods are currently exported from Luxembourg to Japan. On the other hand, about 60 million US dollars’ worth of goods are imported. We are mostly exporting electronic equipment and the main item imported from Luxembourg is unwoven fabrics."

"Japanese are coming here as individuals, but they tend to live close to each other. Since most workplaces are in Luxembourg City, about 95% are living in the city and its surroundings." About 470 Japanese nationals currently live in Luxembourg. At first sight, this number may not seem very high, but compared to much larger countries like India, where only 1,200 Japanese citizens live, it is quite impressive. "Japanese are very much addicted to the preservation of nature, that’s what they appreciate here. We like the surrounding of hills and green landscapes in Luxembourg. Also, the location of the country in the heart of Europe is very favourable. Everything is within two hours’ driving distance; if you take a flight, it’s only one hour."

The Japanese community in Luxembourg is not yet very organised. Besides the annual International Bazaar, where Japanese residents have a booth to represent their country, Japanese women recently founded a ladies’ association in Luxembourg. "The Japanese come here as individuals, but they tend to live close to each other. Since most workplaces are in Luxembourg City, about 95% live in the city and its surrounding area", continues the Ambassador. The majority of Japanese expatriates work for one of the five major Japanese banks represented in Luxembourg. Their children attend the International School, where they can take lessons in English. In 1991, a Japanese supplementary school was established in Luxembourg, where kids can attend two weekly classes to study in their mother tongue.

"Japanese are very much addicted to the preservation of nature, that’s what they appreciate it here. We like the surrounding of hills and green landscapes in Luxembourg. Also, the location of the country in the heart of Europe is very favourable. Everything is within two hours’ driving distance; if you take a flight, it’s only one hour." "The biggest challenge here, of course, is the language", the Ambassador admits. "In our country, everything is done in Japanese and for many Japanese it is already a burden to speak English. In Luxembourg, everybody has to understand French and the newspapers are either in German or in French." This mixture of languages somehow discourages Japanese expatriates from working in the manufacturing sector, where English is less common.

"In our country, everything is done in Japanese and for many Japanese it is already a burden to speak English. In Luxembourg, everybody has to understand French and the newspapers are either in German or in French." When ambassador Nishigahiro’s term in Luxembourg ends, in three years, and he packs his bags once again to move to another city, it will be his 18th relocation. As a man of culture and taste, he will probably miss the quality of food available in Luxembourg. As he says, "even in a small village, you can find a superb restaurant – it’s surprising. The variety and quality of food that you find in supermarkets is quite impressive. Supermarkets are much better stocked than some of the ones in New York or in London". Yet another area, it seems, in which Luxembourg can keep up with bigger cities. EK

H.E. Wataru Nishigahiro, Japanese Ambassador to Luxembourg

"200 million US dollars’ worth of goods are currently exported from Luxembourg to Japan. On the other hand, about 60 million US dollars’ worth of goods are imported. We are mostly exporting electronic equipment and the main item imported from Luxembourg is unwoven fabrics."

East moving West | Japanese banks: worlds within worlds

Dossier East moving West Japanese banks: worlds within worlds The Luxembourg financial centre is already a fairly tight-knit community: physical juxtaposition in a small city, combined with dozens of professional associations and working groups, mean that it is a world in which everybody knows everybody else. So it would surprise many people to know that there is a world within this world: the community of Japanese bankers.

Five of the largest Japanese global banks are present in Luxembourg and they have a large footprint: both Mitsubishi UFJ Global Custody and Mizuho Trust & Banking employ over one hundred staff and Nomura Bank just under 300. SMBC Nikko Bank employs 78 and only Sumitomo Mitsui Trust Bank is smaller, at around 20. Furthermore, they have been around for a long time. In Luxembourg, all five banks do fund administration and fund custody. The difference lies in the focus of their client base, some, like Nikko, servicing a large in-house asset management business and others offering what is principally a third party service. This can be limited to custody work (like Sumitomo) or it can be the full value chain from asset management to distribution (like Nikko). Nomura has developed an integrated service for third party fund promoters, taking care of all that lies between the asset manager and distribution. As part of a network that reports to the European headquarters in London, Nomura Luxembourg also does securities lending, treasury services and forex dealing alongside corporate custody, clearing and security agency services. Mitsubishi belongs to one of Japan’s largest trust banks. The company has a network of correspondent banks in 90 countries, including many of its own branches and subsidiaries. The Luxembourg office is one of three global custody centres (along with Tokyo, New York and London) that, like Nomura, offer securities lending and forex.

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Founded in 2000, Mizuho is the youngest of the five but is in fact the result of a merger between four former (Japanese) entities with a network covering 50 markets. In addition to third party fund custody and administration, the bank offers security agency services and is the first Japanese institution appointed by Euroclear and Clearstream as their Common Depositary. Nikko, which focuses on the core services of fund custody and fund administration, stands out for the size of its in-house customers. The company has a thriving asset management business and the Luxembourg bank enjoyed growth of 24% in assets under administration in the year to 31 March 2011. The company attributes this to "high levels of subscriptions" in six new investment funds launched that year, remarking on a "growing demand by Japanese investors for diversified investment possibilities". The contrast with Europe in 2010 is startling. The companies are not loquacious on the advantages or disadvantages of Luxembourg. However, combining a word here and a phrase there, there is a consensus that "(skill in) languages including Japanese" (Mizuho), and "worldclass expertise" (Mitsubishi) at international custody and portfolio administration work are important factors. All this adds up to "a favourable business environment" (Nikko). It is even harder to learn whether Japanese staff enjoy living and working in Luxembourg. Like many other communities, Japanese staff employed at the five banks see a lot of each other socially. Professionally, four of the five banks are members of at least one industry working group and most are members of several. The Japanese banks have a reputation for rigorous attendance "but their members are very discreet", comments a fellow member. Like everybody else, the Japanese banks also employ a great many local residents and cross-border commuters from the neighbouring markets of Belgium, Germany and France. ER

Established in Luxembourg Mitsubishi UFJ Global Custody SA

1974

SMBC Nikko Bank (Luxembourg) SA

1974

Sumitomo Mitsui Trust Bank (Luxembourg) SA

1985

Nomura Bank (Luxembourg) SA

1990

Mizuho Trust & Banking (Luxembourg) SA

2000

Solvency II

The Solvency II Directive (2009/138/EC) has been around since 2009 and will not be implemented until 1 January 2014. With 15 months still to go, the directive with a name like a scary movie continues to generate heated discussion. What are the issues? The europa.eu website is a good place to start, where 44 Frequently Asked Questions await the interested reader. It all make perfect sense on paper. At risk of over-simplifying a complex evolutionary process, the story runs as follows.

A brief look at the new regulatory regime for EU insurance companies

In the 1990s, when the third generation of insurance directives established an "EU passport", many Member States took the view that the rules were too light and set standards of their own, thus undermining the principle of the single market. In response to this, Solvency I (2002) laid down a common risk management system. However, a number of key risks were not captured, including market risk, credit risk and operational risk. Solvency II reflects new risk management practices that have evolved in the industry. It forces insurers to hold capital in proportion to the riskiness of their investments and to be more transparent on what those investments are. The Solvency II framework has three "pillars": quantitative requirements, governance & risk management requirements and disclosure & transparency rules. As always, the devil is in the detail. All three pillars have been challenged for different reasons by different sectors of the industry.

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Pillar I sets qualitative and quantitative requirements for calculation of technical provisions and Solvency Capital Requirements (SCR). Henceforward, technical provisions will represent the current amount that the(re) insurance company would have to pay for an immediate transfer of its obligations to a third party. The SCR requires the (re)insurer to hold enough capital to meet all its liabilities even in the event of a financial calamity that has only a 0.5% chance of occurring in any year. At the same time, tougher stress tests on asset valuation ("value at risk" models) will force many companies to rethink their asset allocation model. Given the higher capital charge of "risky" investments, insurance companies will have to weigh up whether the higher returns on any given investment remain attractive after the capital charge. Equities are likely to become unpopular, especially where expected returns do not justify the higher risk. However, a full retreat to sovereign bond issues could mean that insurance companies find themselves with a funding gap. Asset classes likely to become popular include fixed income and real assets. Real estate debt is an example: if the loan to value ratio is less than 65%, insurers will be able to treat it as risk free: that is, there will be no capital charge. As a consequence, asset management mandates may start to focus on absolute returns, allowing fund managers the freedom they need to avoid certain sectors. Pillars II and III are equally challenging. Christian Eilert, member of the Executive Committee of ACA, the Luxembourg insurance company association, comments that the Luxembourg Insurance industry shares the original goals of the Directive. "However we have noted the overwhelming number of

"However we have noted the overwhelming number of quantitative and qualitative requirements. As a result, compliance will become even more burdensome, especially for small to mid-sized companies which, on top, often lack the necessary highly skilled employees such as specially trained actuaries."

The objectives of Solvency II To reduce the risk that an insurer will not meet its claims To reduce policyholder losses in the case of insolvency To provide an early warning system for supervisors To promote confidence in the financial stability of the insurance sector

quantitative and qualitative requirements. As a result, compliance will become even more burdensome, especially for small to midsized companies which, on top, often lack the necessary highly skilled employees such as specially trained actuaries."

the Taxation of Savings’ Directive, PRIPS, IMD2, and FATCA* - to name but a few," continues Mr Eilert. "This will lead to additional overhead investment. Compliance has a cost and, ultimately, it will have to be borne by someone."

"This is all the more important because the sector will shortly be compelled to comply with a number of other challenging European and international initiatives, such as the Taxation of Savings’ Directive, Prips/IMD2, and FATCA - to name but a few."

The combined effect of all this is that insurance savings plans are likely to cost more and yield less and some guaranteed products may present a funding problem. Annuity plans, popular in the UK, will pay out lower incomes at a time when the shift towards defined contribution occupational pension plans makes annuities more necessary. Faced with lower incomes, there is a risk that retirees will start taking greater risks with their retirement income, or that there will be widespread poverty.

ACA hopes that the principle of proportionality will be taken into account by those currently drafting the Solvency 2 implementation measures. "This is all the more important because the sector will shortly be compelled to comply with a number of other challenging European and international initiatives, such as

With so much at stake, commercially and socially, the debate has been heated. When the time comes, however, it is likely that the effect of true cross-border competition will stimulate financial services companies to make the best of it. As they have always done before. ER

* PRIPS: UK regulation on Packaged Retail Investment Products; IMD2: the second Insurance Mediation Directive; FATCA: the US Foreign Account Tax compliance Act.

"This will lead to additional overhead investment. Compliance has a cost and, ultimately, it will have to be borne by someone."

Rock me Amadeus

Of the various cultural branches in Luxembourg, the music scene is the most vibrant. With the two major concert halls, the "Philharmonie" and "den Atelier", there is something for every taste. Famous artists like the Chinese pianist Lang Lang have performed at the Philharmonie, while at den Atelier, bands like Depeche Mode or Placebo come and go. Two completely different venues, with vastly different programmes ranging from classical to rock music, they share the same ultimate goal: to offer visitors a musical experience they will never forget.

MUSIC | P. 16|17

The Philharmonie was opened in 2005 on the Kirchberg plateau, among the European Institutions and close to the banking centre, and soon became the most renowned concert hall of its type in the Greater Region and far beyond. As a public institution, it partly benefits from public support. Its impressive appearance was designed by the French ar­ chitect Christian de Portzamparc, who has also left his footprints in New York, Paris and Berlin. Residence of the Luxembourg Philharmonic Orchestra, it has the perfect conditions for high-quality entertainment.

Den Atelier was a dream come true for its creators, the two Luxembourger music lovers Laurent Loschetter and Petz Bartz. Located in the pulsating station quarter of Luxembourg City, it is known as the "venue with the stage in the corner". Since 1995, Loschetter and Bartz were already organising parties and a few concerts in the venue. Over time, they professionalised their passion by opening a concert hall. Since then, crowd pullers as well as newcomers have passed the mic to each other. Roughly 40% of visitors of den Atelier, and around 25% of the visitors of the Philharmonie originate from the Greater Region.

is much more interesting to engage a popular artist and to sell tickets and make people happy here in Luxembourg, than to offer something for an elite group of only 100 people." Naske agrees that a concert hall thrives on its relation to its audience and thus responds to its wishes. "But it is not a musical juke box either; it’s more subtle than that. We evaluate every event and draw conclusions on the programming, but always on the premise of outstanding artistic quality."

© Dan Thuy

Right VENUE, right place

Insight the scene Since its foundation, both the Philharmonie and den Atelier have managed to build up an impressive network of renowned artists. "It is a range of factors that affect the destiny of a cultural institution", Matthias Naske, Director General of the Philharmonie explains. "But without any doubt, strong dedication by locals to culture, and the cultural events on offer, form the basis of further success. The quality of the architecture and acoustics is of importance as well. After these criteria, the quality of artistic planning, service and communication then come into play as major factors."

"It is a range of factors that affect the destiny of a cultural institution."

Michel Welter, responsible for programming at den Atelier, provides an insight into his work: "The music scene is much smaller than one would expect. We are in touch with music agents, and of these, there aren’t many. Worldwide, there are perhaps 100 to 150 agents that represent the big artists. We managed to build up our network with the consistency and reliability that characterise our work. We welcome every artist with passion and joy. It is important that the artist is happy when he leaves and that he has the impression: "this concert was awesome!" We love our work and do it with passion and, of course, this is reflected in the implementation." Asked about the choice and the quality of artists performing in den Atelier, Welter answers: "We don’t like talking about the quality of artists, but of their potential to fill the hall. Quality is completely subjective. Of course, we have our opinion and sometimes we choose based on our own preferences. But it

For both venues, competition within Luxembourg is limited. For Naske, the main challenge is the preconception by people that they have nothing to do with music or concerts. "Everybody who has been lucky enough to experience a successful concert, of whatever genre, will experience incomparable quality. The direct and focused exchange with (live) music is an adventure that addresses all the senses and brings happiness and deep emotions into life. Musicality and knowledge about music can be helpful, but the conditions for an exhilarating experience at a concert are openness and active percipience of what is happening."

"It is important that the artist is happy when he leaves and that he has the impression: "this concert was awesome!" We love our work and do it with passion and, of course, this is reflected in the implementation." For den Atelier, the opening of another, bigger, concert hall in the South of Luxembourg in 2005, the Rockhal, actually had a positive effect on programming. "All of a sudden we could engage artists that for production reasons or from their commercial potential couldn’t perform at den Atelier. Our venue is just too small for the stage shows of some artists, but now we can book the big hall of the Rockhal in order to organise concerts there."

DIARY UPCOMING LFF events

Despite the difficult economic situation for cultural institutions, Naske is convinced that quality will always succeed. Partnerships with the financial sector, for instance, help to sustain a high-quality programme. "Our partnerships are characterised by substantial contributions to the funding of single artistically outstanding concerts and primarily serve the occurrence of the event and not the distribution of tickets."

"Our partnerships are characterised by substantial contributions to the funding of single artistically outstanding concerts and primarily serve the occurrence of the event and not the distribution of tickets." As a private institution, den Atelier relies on structural partners that support the venue on a long-term basis. However, they live on ticket sales. "Luxembourg is a bit special. Recently, the increase in ticket prices exceeded inflation. We were forced to recognise that cheaper tickets sell better. We pay attention to that. However this year, there is no longer a profit margin on ticket prices." Though music is a tough business, it is passionate people like Michel Welter and the team at den Atelier that make Luxembourg and the Greater Region benefit from its cultural institutions and contribute to the high quality of local life. Matthias Naske from the Philharmonie would agree: "Luxembourg is a wonderful place for music". EK

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Economic and Financial Mission to Latin America > 15 - 19 October 2012

| Latin America

The mission will be led by H.E. Luc Frieden, Minister of Finance. LFF is organising financial seminars in Mexico City, Sao Paulo and Rio de Janeiro. In Mexico, the seminar is organised with the kind support of ProMexico. The seminars will showcase the wealth management and investment fund industries in Luxembourg.

Financial Seminar in Paris > 14 November 2012

| Paris

In the presence of H.E. Luc Frieden, Minister of Finance. This conference is organised by Luxembourg for Finance in cooperation with Paris EUROPLACE. This event will be held at Salons Hoche. A roundtable discussion will be held in the morning, at which experts will debate the current situation in Europe. In the afternoon, workshops will be held on Insurance, Investment Funds and Support PSF.

Financial Seminar in Milan > 5 December 2012

| Milan

Luxembourg for Finance will hold seminars on the wealth management and investment fund industries. This event is taking place at the Hotel Principe di Savoia. Further details to follow.

> For further information, visit our website: www.luxembourgforfinance.lu

Luxembourg. We’re fluent in finance... and we speak your language.

The multilingual, multi-skilled executives in Luxembourg’s finance sector are ready to greet you. Over 75% of finance workers are foreign residents or cross-border commuters, so new arrivals quickly feel at home. Both stable and dynamic, Luxembourg is open for business.

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Agency for the Development of the Financial Centre 12 Rue Erasme, P.O. Box 904, L-2019 Luxembourg Tel: (+352) 27 20 21 1 Fax (+352) 27 20 21 399 Email [email protected]

LIFESTYLE Sonny Rollins & Band

> 08 november > Philharmonie

Deep Purple

In November 2012 you will have the rare opportunity to experience one of the true jazz legends live. Born in Harlem in 1930, the musical partner of Thelonious Monk, Miles Davis, John Coltrane, Clifford Brown, Max Roach and many other jazz greats, Sonny Rollins will be coming with his quintet to the Philharmonie.

> 08 november > Den Atelier Deep Purple operates on fresh cycles of adrenalin. Purple has moved progressively into new areas, piquing the interest of fans who were not even born when the mighty Purple machine ruled the music world. Over the years, Deep Purple has been more than in synch with fans’ tastes to remain a powerful drawing force since their formation in 1968. Purple, version 2012, is intense, full of fire, wit, and passion… and marked by serious virtuosity, but never a slave to it.

www.philharmonie.lu

www.atelier.lu

Bach meets Fats Waller with Nigel Kennedy

> 18 november > Philharmonie The eternal enfant terrible of the violin returns with "Bach meets Waller", building a daring bridge between baroque and jazz – a technical and artistic challenge which promises "a truly memorable night" (London Jazz).

www.philharmonie.lu

Night of the Proms

> 29 november > d’Coque For its 2012 tour, Night of the Proms is proud to confirm the participation of Mick Hucknall from Simply Red, Anastacia, Jupiter Jones and Naturally 7! These internationally-renowned artists are accompanied by the Il Novecento orchestra, conducted by Robert Groslot, the Electric Band and John Miles, true spearheads and columns of the "Night of the Proms" concept, which combines classical music with pop.

www.coque.lu

Atelier Luxembourg The Venice biennale projects 1988-2011

> 13 OCT. 2012 - 24 FEB. 2013 > MUDAM With Atelier Luxembourg, five musical institutions of Luxembourg join forces during the 2012-2013 season to provide an overview of artistic creation in Luxembourg from 1945 until now. This wide panorama relives the struggles of newcomers living in a country for a long time, situated in the margins of dominating artists, but whom since the nineties, have found their place in the European artistic development. The exposition Atelier Luxembourg - The Venice Biennial Projects 1988-2011 takes a retrospective look at projects realised since 1988 for the Luxembourg pavilion at the Venice Biennale. Also, it reflects in depth the considerable development of the Luxembourg artistic scene in the last 25 years.

www.mudam.lu

Impressum Editor: Luxembourg for Finance • 12, rue Erasme • B.P. 904 • L-2019 Luxembourg • Tel. (+352) 27 20 21 1 • Fax (+352) 27 20 21 399 • Email [email protected] Responsible for publication: Jean-Jacques Picard. Editorial Team: Elisabeth Kugel (EK), Eleanor de Rosmorduc (ER), Christian Welter (CW). Circulation: 6,500 – quarterly. Photos: all rights reserved