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Known as the Generally Accepted Principles and Practices (GAPP) for SWFs, the principles serve as a voluntary framework for governance and accountability arrangements as well as the investment practices of SWFs.
The GAPP covers legal framework, objectives, and coordination with macroeconomic policies; institutional framework and governance structure; and investment and risk management framework.
The GAPPÆs purpose is to have in place a transparent and sound governance structure that: provides for adequate operational controls, risk management and accountability; ensures compliance with applicable regulatory and disclosure requirements in the countries in which SWFs invest; ensures SWFs invest on the basis of economic and financial risk and return-related considerations; and helps maintain a stable global financial system and free flow of capital and investment.
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 International Monetary Fund (IMF), which has been pushing for the best practices guidelines for SWFs since March this year, organised a two-day meeting in Chile last month where the guidelines were created. The past few weeks were spent by governments of the IWG members reviewing the principles and practices. The IMF facilitates and coordinates the work of the IWG. Previous IWG meetings were held in Norway and Singapore.
Examples of the 24 guidelines in the GAPP include the following: Where the SWF's activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency with the overall macroeconomic policies. There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF's general approach to funding, withdrawal, and spending operations.
ôThere are provisions confirming the IWGÆs expectations that recipient countries will not subject the SWFs to discriminatory measures to which other foreign or domestic investors in similar circumstances are not subjected. We trust the recipient countries will support these provisions,ö says Al Suwaidi.
The need for the GAPP resulted from the increasing profile of SWFs in the global investment community. Concerns have been raised about these funds û whose number and asset size have been increasing û owning significant stakes in major corporations in other countries.
SWFs 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 SWFs 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.
ôThough some of the funds have been operating quietly for decades, their sudden rise to prominence over the past 18 months has fuelled some anxiety in the West about the possibility that their investments could have a political as well as a financial dimension," says New York-based Deloitte Touche Tohmatsu global services leader Jerry Leamon.
The International Monetary Fund (IMF) estimates the total asset size of SWFs at around $2 trillion to $3 trillion, with the potential to grow to between $6 trillion and $10 trillion by 2013.
Leamon says the GAPP is a significant step in the right direction.
The GAPP is "potentially a real watershed event in promoting better understanding of SWFs in their home countries and in the countries where they choose to invest", Leamon says. "These principles could potentially have a significant impact in markets around the world as they facilitate capital flows and enhance liquidity."
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