What Are the Requirements and Rights of a Regulated CYSEC Broker? - FinTechTycoon

What Are the Requirements and Rights of a Regulated CYSEC Broker?

CySEC stands for the Cyprus Securities and Exchange Commission. CySEC is the agency responsible for the regulation of all financial services providers in Cyprus, as well as the financial markets that are operating within the territory of Cyprus. CySEC is therefore responsible for regulating the local stock market, the forex market operators. Up until the EU-wide prohibition of binary options, it also regulated the binary options market and its providers. CySEC not only regulates the Cyprus Investment Firms (CIFs); it also regulates those who work in the industry. It is expected of every CIF that certain categories of workers within the industry must have certain qualifications that showcase their knowledge of the industry as a whole, the operations of the financial markets as well as anti-money laundering and compliance policies.

CySEC the Flagship Regulator for Europe

CySEC has come to play a major role in Europe as far as operations of the financial markets are concerned. The investment-friendly laws of the country have attracted hundreds of companies offering forex and CFD trading to its borders. Therefore, CySEC and the financial services industry that it oversees in Cyprus has become the flagship regulator in Europe, competing perhaps only with the FCA in the United Kingdom in terms of importance, structure and market volume it regulates. CySEC-regulated brokers attract clients from all over the world.

Who Does CySEC Answer To?

As a member of the European Union and a signatory to the MiFID II/MiFIR protocols, CySEC operates under the rules of the European Securities and Markets Authority (ESMA). ESMA is the supervising body for all European financial market regulators. Therefore, CySEC is expected to carry out all mandates and decisions by ESMA regarding the operations, marketing and distribution of financial market products to the end users. So CySEC is bound by whatever ESMA’s decisions on the financial markets in Europe are at any point in time. When ESMA prohibited the trading of binary options, CySEC was forced to end its licensure of companies for offering such a product. Other CIFs which already had licenses were forced to change their product offering or close shop. The restrictions on leverage and new margin requirements for clients of all traders operating with brokers in the EU jurisdiction was also implemented by CySEC. So CySEC answers directly to ESMA.

Who Needs a CIF License?

Cyprus is an attractive destination for companies seeking to become CIFs. Apart from a 12.5% income tax, no capital gains tax is paid. VAT is only paid on some aspects of the CIFs operations; it is not a general thing.
All investment firms that are categorized as Cyprus Investment Firms must obtain authorization from CySEC. CIFs include brokerage companies, investment advisors, fund managers, forex trading companies and other brokerage firms that offer derivative asset trading to the public (i.e. CFDs).
Obtaining CIF licensing from CySEC is a multi-step process which must be adhered to strictly to prevent undue delays. Generally speaking, the pace of licensing in Cyprus is slower than what obtains in the UK or the US. It may take a minimum of 6 months or even up to a year to sort out all licensing with CySEC.
Also, the company applying for a CIF license must possess some prerequisites which have to be included with the application. The table below sums up these requirements.

Investment Service to be Offered Capital Requirement Dealings with Clients’ Funds
Receiving, transmitting and executing clients’ orders 125,000 euros Will be in possession of clients’ funds and financial assets
Investment advisory services 125,000 euros Same as above
Portfolio management 125,000 euros Same as above
Reception, transmission and execution of orders (where funds will not be held by broker) 50,000 euros + professional liability insurance Does not hold the clients’ assets or money.
Portfolio management (where clients’ funds are not held by fund manager) 50,000 euros + professional liability insurance Same as above
Trading on own account 730,000 euros Operating a trading venue which is self-regulatory.
Operating a multilateral trading facility (MTF) 730,000 euros Operating a trading venue which is self-regulatory.

Other documentation to be presented on application for a CIF license include:
• A Memorandum of Association which has to state that the CIF will conduct investment services within the scope of the license category being applied for, and that the firm will comply with the CIF law 144 (i) of 2007.
• A manual which details how the internal operations of the CIF will be conducted. It is important to state that the operations of the CIF will not be in conflict with the interests of its clients.
• A business plan.
• Anti-money laundering procedures to be put in place by the CIF.
• Questionnaires to be filled by all board members or top management of the CIF.
CySEC rules also require that every CIF must have at least 4 board members, majority of whom must be resident in the country. Therefore, the composition of the CIF’s board shall include at least two board members in an executive role, with the other two in non-executive roles.
New passporting rules may come into place when the review process of MiFID II, which is already underway, is concluded. For CIFs wishing to setup shop in the UK, the Financial Conduct Authority (FCA) has made it clear that passporting would no longer be allowed once the implementation period terminates on December 31, 2020.

Requirements for CySEC-Regulated Brokerages

CySEC expects brokers that it oversees and regulates to abide by certain rules and regulations set out to ensure that the conduct of business in the financial markets supervised are transparent. Instilling investor confidence into the markets without undue stifling is at the heart of CySEC’s operations.
Here are the requirements for all brokers wishing to operate under CySEC’s oversight.
a) Licensing
Every firm that is subject to regulation by CySEC is known as a Cyprus Investment Firm (CIF). These firms must have the appropriate license. The licensing requirements of ESMA, which are to be implemented by all brokers in Europe, is that the license details must be placed on the home page of the financial trading provider’s website. CySEC adopts a licensing system where the broker is assigned a number that also contains the date of registration. This information must then be provided by the broker on the home page of the website.
Furthermore, ESMA rules require that all brokers in Europe indicate the percentage of their clients that lose money from trading. All CySEC-regulated brokers have also complied with this ruling, in addition to the leverage caps and margin requirements for the trading of FX and CFD instruments.
Furthermore, Articles 35 and 36 of the Investment Services and Activities and Regulated Markets Law L.87(I)/2017, which transposes the Directive 2014/65/EU of the European Parliament and of the Council on Markets in Financial instruments (‘MiFID II’), allows the “passporting” of brokerage licenses within the EU. Passporting allows the CySEC-registered firms to open new branches or offices in other European countries without having to file new applications for licensing in the other countries they intend to operate. However, such firms must file reports with CySEC on where they intend to passport their licenses to.
b) Qualifications
CySEC does not only regulate CIFs, but also the people who work in these firms. The roles covered range from entry-level roles all the way up to the management level positions. Therefore, CySEC requires that everyone working with a Cyprus Investment Firm must have the requisite industry qualifications. CySEC maintains certification registers which contain the names and biodata of all persons who are certified to work in CIFs. CySEC offers two examinations: the Basic Exam and the Advanced exam. These exams are designed to test the knowledge of the participants regarding the investment climate in Cyprus, AML rules as well as the regulatory framework under which the CIF the person works with operates. Therefore, persons who want to perform the following functions as part of their work description in a CySEC-regulated CIF must pass both the Basic and Advanced exams offered by CySEC:
• receiving and transmitting orders regarding one or more financial instruments;
• execution of orders on behalf of clients;
• dealing on own account;
• offering investment advice or managing portfolios
• promoting or providing of investment services relating to financial instruments in order to attract clients.
• underwriting of financial instruments
• operation of a multilateral trading facility (MTF) or organized trading facility (OTF)
Those who have only passed the Basic exam and have not taken the advanced exam can receive/transmit orders, execute orders on behalf of clients and provide information/promote investment services.
Those who wish to work:
• in a UCITS management company as a full-time staff of a contractor
• in a Variable Capital Investment Company that does not have a management company as a full-time staff or contractors.
must at least have passed the first step of the Advanced exam (Advanced Exam 1). These workers must also be registered in CySEC’s public register.
Those who wish to work as Anti-Money Laundering & Compliance Officers (AMLCO) must have passed the industry-level exam for AMLCOs and also be registered in the AML compliance officers’ register.
There are other categories of licensing of staff of CIFs and details of these are found on CySEC’s website.
c) Operations
CySEC allows its brokers to take clients outside of Europe. Furthermore, the following guidelines regarding broker conduct, trade practices and reporting requirements must be observed by all CySEC-registered brokers.
• A brokerage cannot be a sole proprietorship. More than one person must be in charge of managing the affairs of a brokerage.
• A brokerage must maintain a physical presence in Cyprus, and this office must be appropriately staffed with personnel who have the correct CySEC qualifications.
• All services to be offered by the CIF must be included in the initial application for a CySEC license.
• The broker must contribute to CySEC’s Investor Protection Fund and must have operating capital of at least €750,000.
• All brokers must have insurance to the tune of €1m and €1.5m to cater to individual losses and losses resulting from negligence respectively.
• All CySEC-registered brokers must submit reports to CySEC on a range of financial transactions, including client deposits and withdrawals and the brokerage’s own transactions. This is to enable the regulator spot early signs of potential insolvency. Audited financial reports are also a requirement.
CySEC also publishes a list of regulated entities on its website and also provides information on brokers that are no longer in good standing.


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