Sovereign wealth funds agree on best practices

A preliminary agreement has been reached on Generally Accepted Principles and Practices for Sovereign Wealth Funds, pending approval from the various governments.
Members of the International Working Group of Sovereign Wealth Funds (IWG) have reached a preliminary agreement on a set of principles and practices, which are subject to review by their respective governments.

The Generally Accepted Principles and Practices for Sovereign Wealth Funds (GAPP) is a voluntary framework aimed at guiding governance and accountability arrangements as well as the investment practices of sovereign wealth funds. The content of the draft guidelines has not been released pending approval from the various governments.

The need for the GAPP resulted from the increasing profile of sovereign wealth funds in the global investment community. Concerns have been raised about these funds û whose number and assets size have been increasing û owning significant stakes in major corporations in other countries.

Sovereign wealth funds have existed since the 1950s. Their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years, however. Among the more prominent investments made by sovereign wealth funds recently were those that involved the rescue of US banks that fell victim to the subprime crisis. For example, Singapore's Temasek Holdings bought a $5 billion stake in Merrill Lynch (it has committed a further $3.4 billion that is awaiting regulatory approval) while Abu Dhabi bought a $7.5 billion stake in Citigroup.

The International Monetary Fund (IMF) estimates the total asset size of sovereign wealth funds at around $2 trillion to $3 trillion, with the potential to grow to between $6 trillion and $10 trillion by 2013.

The IWG was established in May in Washington DC. Members of the IWG are Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad and Tobago, the United Arab Emirates, and the United States. Oman, Saudi Arabia, Vietnam, the OECD, and the World Bank, participate as permanent observers of the IWG.

The IWG is co-chaired by Hamad al Suwaidi, undersecretary of the Abu Dhabi Department of Finance and a director of the Abu Dhabi Investment Authority, and Jaime Caruana, counsellor and director of the International Monetary FundÆs monetary and capital markets department.

The IMF, which has been pushing for the best practices guidelines for sovereign wealth funds since March, organised the two-day meeting in Chile earlier this week where the draft GAPP was created. The IMF facilitates and coordinates the work of the IWG. Previous IWG meetings were held in Norway and Singapore.

The IWG expects to present the GAPP to the IMFÆs policy-guiding International Monetary and Financial Committee (IMFC) at an October 11 meeting in Washington DC.

"The outcome of our intensive deliberations, since May 2008, including three rounds of discussions with recipient countries, reflects a cooperative and consultative spirit among all IWG members,ö the IWG co-chairs said in a statement. "These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of sovereign wealth funds, thereby fostering trust and confidence in the international financial system.ö

Even before the IWG was formed, the US, Singapore, and Abu Dhabi agreed in March on principles for sovereign wealth funds that emphasise transparency and specify that politics will not influence investment decisions. They agreed on five policy principles for sovereign wealth funds, such as ôinvestment decisions should be based solely on commercial grounds and not based on geopolitical goals of the controlling governmentö. They also agreed on four policy principles for countries receiving investments from sovereign wealth funds, such as ôcountries receiving investments from sovereign wealth funds should not erect protectionist barriers to portfolio or foreign direct investmentö.
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