Abstract
ABSTRACTThe Cayman Islands is a key node in contemporary global finance, yet it is severely under-researched. This paper compiles the first ‘anatomy’ of the Cayman offshore financial center (OFC), utilizing all sources of publicly available data about the three main segments: banking, direct investment, and portfolio investment. The analysis is performed both diachronically to see when large inflows occurred and geographically to determine what role certain countries play in different segments. This dissection of the Cayman OFC shows that the United States is the largest counterparty in all segments with Japan playing an important role too. In fact, when excluding long-term Treasuries, Cayman is the largest holder of US securities in the world. Hedge funds are the main factor for this strong Cayman-US link. About 60% of global hedge fund assets are legally domiciled in Cayman – an extraordinary spatial concentration in such a tiny jurisdiction. A novel contribution to the analysis of the Cayman OFC is the introduction of the Anglo-America/Anglosphere approach. This approach provides one plausible explanation for the unparalleled rise of the Cayman OFC by seeing this jurisdiction as one node in an Anglo-American triangle together with the USA and the UK, Cayman's sovereign power.
Highlights
‘Small place, big money’ was the apt title of one of the first analyses concerning the position of the Cayman Islands in the international financial system (Roberts 1995)
As the legal domicile of choice for the global hedge fund industry (Clarkson et al 2014), and as the second largest jurisdiction in the world regarding the issuance of asset-backed securities (ABS) from 1983 to 2008 (Cetorelli and Peristani 2012), the Cayman Islands has played a key role for financial ‘innovation’ in recent decades
The analysis of the Cayman Islands offshore financial center (OFC) in this paper shows that while it is an important factor that this jurisdiction is under UK sovereignty, Cayman primarily caters to the interests of American investors and is not as strongly connected to the City of London
Summary
‘Small place, big money’ was the apt title of one of the first analyses concerning the position of the Cayman Islands in the international financial system (Roberts 1995). This shows that the Cayman Islands do not function as an international banking center in the sense that banks from different nationalities lend to each other but rather that foreign banks (mainly American and Japanese ones) lend money to hedge funds and other investment funds. The Cayman Islands reports only portfolio investment held by banks excluding the vast hedge fund sector (Lane and Milesi-Ferretti 2010; Zucman 2013) This renders the official Cayman CPIS data virtually useless. Due to foreign pressure, the Cayman regulator began publishing yearly investment statistics in 2008 These data allow for a granular analysis of the financial geography of Cayman’s giant hedge fund sector, which comprised over 11,300 funds at end-2013 (CIMA 2014). The analysis of the Cayman Islands OFC in this paper shows that while it is an important factor that this jurisdiction is under UK sovereignty, Cayman primarily caters to the interests of American (and to a lesser degree Japanese) investors and is not as strongly connected to the City of London
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