Local Cyprus regulator Cyprus Securities and Exchange Commission (CySEC) on Monday May 4th, published Consultation Paper on enhancement of procedures regarding safeguard of client funds held by Cyprus Investment Firms (CIFs). The regulatory authority will accept responses to the consultation paper by May 18, 2020.

CySEC intends to publish a circular that will further enhance the procedures that CIFs are following for the safeguarding of their client funds. The regulator indicates when the CIFs receive funds from clients, they must quickly place these funds in one or more accounts either a central bank, credit institution or Bank authorised in a third country or a qualifying money market fund.

If CIFs excludes from complying with this requirement, CIFs must notify the entity, with whom the client’s account is opened, that they are obliged to keep clients’ funds separate from their own funds. This communication should be kept in the CIFs’ records and be available for review by CySEC. In such a situation CIFs are obligated to justify to the local regulator that they had no other option or solution but to conduct such business, considering as the risk to client’s funds in the case of the company’s insolvency is higher.

If a CIF cannot assert to CySEC that it has fully applied requirements, CySEC may request from the CIF to segregate an equivalent amount of its own funds in a separately titled account in another jurisdiction where the CIF can comply with the requirement of paragraph 4(1)(e) of Directive DI87-01 for the Safeguarding of Financial Instruments and Funds belonging to Clients (Directive).

In this case CySEC proposes that, according to paragraph 6(2) of the Directive, the CIF shall exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institutions and banks authorised in a third country, where the funds are placed and the arrangements for the holding of those funds and take into consideration the need for diversification of these funds as part of the required due diligence.

CIFs can maintain merchant accounts with payment service providers (PSPs) and electronic funds institutions (EMIs) for clearing and settling their customer’s payment transactions, between others.

In Consultation Paper CySEC points out that CIFs at least once per financial year should perform due diligence procedures of the banks where clients’ funds are transferred. When selecting a bank where client’s funds are placed, CySEC expects CIFs to consider following factors:

• the capital of the bank;
• the amount of client funds placed, as a proportion of the bank’s capital and deposits;
• the credit rating of the bank;
• the level of risk in the investment;
• loan activities undertaken by the bank and its affiliated companies.

Investment firms have to consider diversifying placements of client funds with more than one bank where the amounts are, for example, of sufficient size to warrant such diversification. The CySEC addresses the issue of placing clients’ funds with a bank or qualifying money market fund of the same group as the CIF. In such cases the CIF must limit the funds that are deposited with any such group entity or combination of any such group entities so that the funds do not exceed 20% of all such funds.

CySEC also considers that the small balance of client’s funds with a bank or a money market fund must be EUR 3 000 000 at all times or 50% of the total clients’ funds held by the CIF. Local authority also points out that it is up to every CIF to decide on the part of the buffer. Reserve will be maintained to facilitate the smooth running of its operations to ensure the absence of delays, compensate client funds with PSP/EMI, manage the exchange risk linked to the maintenance of client’s funds in another currency and cover any deficits.

Offshorelicenese team are ready to assist our clients to acquire ready-made CySec licensed company, apply for the Cyprus Forex license, or, considering Cyprus regulatory authority intentions, apply for EMI and PSP license, or assist with bank account opening.

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