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Controlling Sovereign Wealth Funds: Issues and Options Print
Brown Bag Seminar, Speaker: Julien Chaisse, Alternate Leader, Individual Project "Investment" (IP11)
3 November 2008, 12.15 - 13.45, Auditorium Silva Casa, WTI, Berne, Switzerland

Sovereign wealth funds have become major players in the global finance system and more recently have been attracting increasing public attention. Currently, SWFs and central banks with a large SWF function manage an estimated USD 3.2 trillion of assets. Global Insight announced earlier this year that SWFs have been growing by 24 per cent annually for the past three years. Projecting from this annual growth rate, it forecasts that SWFs will surpass the entire current economic output of the United States by 2015, and that of the European Union by 2016. G-7 leaders called on global institutions to examine further the structure, transparency and accountability of SWFs. The rapid growth of sovereign wealth funds risks provoking a protectionist response by industrialized countries, notably in the US and within the EU, as the presentation will discuss. This recent move is aimed to prevent countries like China and Russia using investments in US or EU to obtain political influence in strategic sectors, such as energy and defense. Sovereign wealth funds have however existed since the 1950s, constituting an important source of liquidity in financial markets.

Options to control SWFs are mushrooming: the US revised the law underpinning its Committee on Foreign Investment in the United States (CFIUS), thereby especially strengthening its investment review mechanism for state-controlled entities. A number of other countries (e.g., Germany, the Republic of Korea) are considering establishing similar screening mechanisms. The European Union’s approach is different. It calls for a code of conduct ensuring transparency and that the basic motives for the investment of these sovereign wealth funds become clear and that the funds themselves apply good corporate governance. A voluntary code of conduct adopted at global level could help avert the problem. The IMF and OECD are both working on the issue, developing a set of best practices for SWFs and a code for inward investment, respectively.

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