CySEC national measures regarding CFDs and how it affects the CySEC CFD brokers

CySEC on September 27th 2019, published its National Product Intervention Measures (“NPIMs”) in relation to the marketing, distribution and sale of Contracts For Differences (“CFDs”) by issuing Directive DI87-09. The measures proposed by CySEC under CP-02-2019 were largely aligned with the European Securities and Markets Authority’s (“ESMA”) temporary product intervention measures.

To this end, CySEC adopted the following measures per category as presented below:

LEVERAGE LIMITS

CySEC will adopt the same leverage limits as ESMA’s for all retail clients. Therefore retail clients will be required to pay at least the following initial margin protection of the notional value of the CFD (i.e. leverage limits):

 

Type of Underlying    
  Initial Margin Protection Leverage Limit
Major Currency Pair 3.33% 30:1
Non-major currency pairs, gold
and major indices
5% 20:1
Commodities other than gold and
non-major equity index
10% 10:1
For individual equities
and other reference
values;
20% 5:1
Crypto Assets 50% 2:1

Clarifications for the initial margin percentages by type of underlying

a) 3,33% of the notional value of the CFD when the underlying currency pair is composed of any two of the following currencies: US dollar, Euro, Japanese yen, Pound sterling, Canadian dollar or Swiss franc;

b) 5% of the notional value of the CFD when the underlying index, currency pair or commodity is:

   (i) any of the following equity indices: Financial Times Stock Exchange 100 (FTSE 100); Cotation Assistée en Continu 40 (CAC 40); Deutsche Bourse AG German Stock Index 30 (DAX30); Dow Jones Industrial Average (DJIA); Standard & Poors 500 (S&P 500); NASDAQ Composite Index (NASDAQ), NASDAQ 100 Index (NASDAQ 100); Nikkei Index (Nikkei 225); Standard & Poors / Australian Securities Exchange 200 (ASX 200); EURO STOXX 50 Index (EURO STOXX 50);

   (ii) a currency pair composed of at least one currency that is not listed in point (a) above; or

   (iii) gold;

c) 10% of the notional value of the CFD when the underlying commodity or equity index is a commodity or any equity index other than those listed in point (b) above;

d) 50% of the notional value of the CFD when the underlying is a cryptocurrency; or

e) 20% of the notional value of the CFD when the underlying is:

   (i) a share; or

   (ii)not otherwise listed in this Section.

 

MARGIN CLOSE-OUT PROTECTION

CySEC will proceed with a Margin-Close Protection requirement as the one adopted by ESMA, which is a margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which CIFs are required to close out one or more retail client’s open CFDs;

In general, the margin close-out rule applies on an account basis across all open CFD positions in a client’s account based on 50% of the initial margin required. This includes positions with a guaranteed stop loss order or limited risk protection.

 

NEGATIVE BALANCE PROTECTION

CySEC proposed under CP-02-2019 to adopt the same requirements as provided for in the ESMA Decision on CFDs in relation to NBP.

CySEC reiterates that NBP means the limit of a retail client’s aggregate liability for all CFDs connected to a CFD trading account with a CFD provider to the funds in that CFD trading account (the “NBP Requirement”). The NBP Requirement must be triggered whenever margin close-out protection cannot be effectively applied due to extreme market events affecting the underlying of the CFD in question.

 

RESTRICTION ON THE INCENTIVES OFFERED TO TRADE CFDs

In order to address the risks emanating from incentivising retail clients to trade in CDFs by means of monetary or certain types non-monetary benefits, CySEC proposed under CP-02-2019 to adopt the same restrictions as ESMA on the incentives offered to clients.

To this end, CySEC believes that the CFD providers should not directly or indirectly provide the retail client with a payment, monetary or excluded non-monetary benefit in relation to the marketing, distribution or sale of a CFD, other than the realised profits on any CFD provided.

CySEC reiterates that “excluded non-monetary benefit” means any non-monetary benefit other than, insofar as they relate to CFDs, information and research tools.

 

STANDARDISED RISK WARNINGS

CySEC will proceed with adopting the same risk warning as ESMA’s, except for the case of new firms that do not have 12 months of retail client trading data where we request that the percentage range is replaced with a reference stating that “The vast majority of retail client accounts lose money when trading in CFDs” in the durable medium and webpage standard risk warning and in the abbreviated standard risk warning and with a reference stating that “‘CFD-retail client accounts generally lose money” in the reduced character standard risk warning.

In particular, the CFD provider should not send directly or indirectly a communication to or publish information accessible by a retail client relating to the marketing, distribution or sale of a CFD unless it includes the appropriate risk warning specified by and complying with the conditions:

SECTION A

Risk warning conditions

      1. The risk warning shall be in a layout ensuring its prominence, in a font size at least equal to the predominant font size and in the same language as that used in the communication or published information.
      2. If the communication or published information is in a durable medium or a webpage, the risk warning shall be in the format specified in Section B.
      3. If the communication or published information is in a medium other than a durable medium or a webpage, the risk warning shall be in the format specified in Section C.
      4. By way of derogation to paragraphs 2 and 3, if the number of characters contained in the risk warning in the format specified in Section B or C exceeds the character limit permitted in the standard terms of a third party marketing provider, the risk warning may instead be in the format specified in Section D.
      5. If the risk warning in the format specified in Section D is used, the communication or published information shall also include a direct link to the webpage of the CFD provider containing the risk warning in the format specified in Section B.
      6. The risk warning shall include an up-to-date provider-specific loss percentage based on a calculation of the percentage of CFD trading accounts provided to retail clients by the CFD provider that lost money. The calculation shall be performed every three months and cover the 12-month period preceding the date on which it is performed (‘12-month calculation period’). For the purposes of the calculation:
        1. an individual retail client CFD trading account shall be considered to have lost money if the sum of all realised and unrealised net profits on CFDs connected to the CFD trading account during the 12-month calculation period is negative;
        2. any costs relating to the CFDs connected to the CFD trading account shall be included in the calculation, including all charges, fees and commissions;
        3. the following items shall be excluded from the calculation:
          1. any profits or losses from products other than CFDs connected to the CFD trading account;
          2. any CFD trading account that did not have an open CFD connected to it within the calculation period;
          3.  any deposits or withdrawals of funds from the CFD trading account
      7. By way of derogation from paragraphs 2 to 6, if in the last 12-month calculation period a CFD provider has not provided an open CFD connected to a retail client CFD trading account, that CFD provider shall use the standard risk warning in the format specified in Sections E to G, as appropriate.

       

SECTION B

Durable medium and webpage provider-specific risk warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. [insert percentage per provider ]% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

SECTION C

Abbreviated provider-specific risk warning

[insert percentage per provider]% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

SECTION D

Reduced character provider-specific risk warning

[insert percentage per provider]% of retail CFD accounts lose money.

SECTION E

Durable medium and webpage standard risk warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

The vast majority of retail investor accounts lose money when trading CFDs.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

SECTION F

Abbreviated standard risk warning

The vast majority of retail investor accounts lose money when trading CFDs.

You should consider whether you can afford to take the high risk of losing your money.

SECTION G

Reduced character standard risk warning

CFD-retail client accounts generally lose money.

TERRITORIAL SCOPE OF CySEC NPIMS (‘CyNPIMs) – IMPORTANT NOTE

The content of CyNPIMs is variable based on the country of residence of the client. Therefore where an entity falling under CySEC’s remit markets, distributes or sells CFDs to a resident of:

   i. Cyprus, CyNPIMs will have their “Default Content”, namely the same as ESMA’s measures with the only difference the risk warning explained above.

ii. A Member State, where the NCA has introduced NPIMs, CyNPIMs will have the content of the measures taken by the NCA of the respective Member State.

iii. A Member State, where the NCA has not introduced NPIMs, CyNPIMs will have their Default Content.

iv. A third country, CyNPIMs will have their Default Content

Based on the above, please find below the national measures imposed by other NCAs of the respective Member State:

 

EU Country Name Competent Authority National Measures of other EU
NCAs
Austria Financial Market Authority of Austria (FMA) Same as ESMA measures –  (risk warning minor change)
Bulgaria Financial Supervision Commission of Bulgaria (FSC) Same as ESMA measures
Croatia Hrvatska agencija za nadzor financijskih usluga of
Croatia (HANFA)
Same as ESMA measures
Czech Republic Česká národní banka of the Czech Republic (CNB) Same as ESMA measures
Denmark Finanstilsynet of Denmark Same as ESMA measures
Estonia Finantsinspektsioon of Estonia (FSA) Same as ESMA measures
Finland Finanssivalvonta of Finland (FSA) Same as ESMA measures
France Autorité des Marchés Financiers of France (AMF) Same as ESMA measures
Germany Bundesanstalt für Finanzdienstleistungsaufsicht of
Germany (BaFin)
Same as ESMA measures
Greece Hellenic Capital Market Commission of Greece (HCMC) Same as ESMA measures
Hungary Magyar Nemzeti Bank of Hungary (MNB) Same as ESMA measures
Ireland Central Bank of Ireland (CBI) Same as ESMA measures
Italy Commissione Nazionale per le Società e la Borsa  of Italy (CONSOB) Same as ESMA measures
Latvia Finanšu un kapitāla tirgus komisija (FKTK) of Latvia Same as ESMA measures  – risk warning minor change
Lithuania Bank of Lithuania (LB) Same as ESMA measures
Luxembourg Commission de Surveillance du Secteur Financier of
Luxembourg (CSSF)
Same as ESMA measures
Malta Malta Financial Services Authority of Malta (MFSA) Same as ESMA measures
Netherlands Authority for the Financial Markets of the Netherlands
(AFM)
Same as ESMA measures
Poland Komisja Nadzoru Finansowego of Poland (KNF) Same as ESMA measures
– introduced leverage of 1:100 for experienced retail clients
Portugal Comissão do Mercado de Valores Mobiliários of Portugal
(CMVM)
Same as ESMA measures
Slovenia Národná Banka Slovenska of Slovakia (NBS) Same as ESMA measures
Spain Comisión Nacional del Mercado de Valores of Spain (CNMV) Same as ESMA measures  – risk warning handwritten signature
Sweden Finansinspektionen of Sweden (FI) Same as ESMA measures
United Kingdom Financial Conduct Authority of the United Kingdom (FCA) Same as ESMA measures

Contact our experts for more information and support

ESMA warns CFD providers on application of product intervention measures

The European Securities and Markets Authority (ESMA), the EU’s securities markets’ regulator, has published a statement on 12 July 2019, addressed to providers marketing, distributing or selling contracts for differences (CFDs) to retail clients. The statement is in response to various practices and situations observed in the market, which raise concerns of non-compliance with the legal requirements applicable when providing services to retail clients.

ESMA still has serious concerns about firms’ marketing, distribution or sale of CFDs to retail clients and considers it necessary to remind CFD providers about some of the requirements connected with the offering of CFDs. ESMA has identified undesirable practices related to:

  • Professional clients on request; and
  • Marketing, distribution or sale by third-country CFD-Providers.

Some of the issues that ESMA identified are the following:

Professional clients on request

ESMA is aware that some CFD providers are advertising to retail clients the possibility to become professional client on request. Investment firms should strictly refrain from implementing any form of practice that incentivises, induces or pressures an investor to request to be treated as a professional client. In this respect, any form of promotional language in relation to the status of professional client shall be seen as incentivising a retail client to request a professional client status. This includes providing a comparison between leverage limits available to different types of clients and the provision of any form of rewards for becoming a professional client.

Marketing, distribution or sale by third-country CFD-Providers

ESMA is also aware that some third-country firms are marketing CFDs that do not comply with ESMA’s measures to retail clients in the European Union (EU), particularly through online advertising, and that EU firms are engaged in activities that are intended to circumvent ESMA’s temporary product intervention measures.

ESMA observes that some CFD providers established in the EU are marketing the possibility for retail clients to move their accounts to an intra-group third-country entity. ESMA notes that firms should not incentivise retail clients to start trading with an intra-group firm established in a non-EU jurisdiction.

ESMA clarifies in its statement that in the absence of authorisation or registration in the EU in accordance with MiFIR or with the national third-country regimes in force in various Member States, third-country firms are only allowed to provide services to clients in the Union at the client’s own exclusive initiative. Furthermore, information in relation to the ‘benefits’ of trading CFDs with such an intra-group third-country entity could be seen as a circumvention of ESMA’s product intervention measures by the EU authorised firm.

Next steps

Firms must ensure that they are compliant with all applicable legislative requirements and with the relevant product intervention decisions, taking into consideration clarifications provided in relevant Q&As and the content of this statement. ESMA and NCAs will continue to monitor compliance of CFD providers with the product intervention decisions.

Contact our experts for more information and support

Introduction of CySEC’s Form 144-14-61 – Prudential Supervision Framework

Cyprus Securities and Exchange Commission (CySEC) with the publication of Circular C326, introduced additional reporting obligations to CIFs and requested relevant information to facilitate its supervisory role in regards to:

  • the assessment of Internal Capital Adequacy Assessment Process (ICAAP)
  • the assessment of annual audited financial statements
  • the safeguarding of clients’ money.

More specifically:

  1. CySEC published a new Form with number 144-14-11 ‘Prudential Supervision Information’ (the ‘Form’), which it is addressed to all CIFs in its website.
  2. CIFs should complete the Form once a year and submit it to CySEC via Transaction Reporting System (‘TRS’) from 1st to 30th June each year. The deadline to submit the Form is the 30th of June each year. It is clarified that the first submission of the Form is due by 31 July 2019.
  3. The Form contains several information that the CIFs must complete, including but not limited to:
    a) Last reviewed date of their ICCAP
    b) How much own funds the CIFs considered adequate in line with their latest ICAAP
    c) The risks that the CIFs are exposed, their risk appetite and the total capital requirement allocated to each risk
    d) Analysis of audited financial statements and the reconciliations performed in relation to clients’ money.

Contact our experts for more information and support on the preparation of the ICAAP and other related matters.

Successful presence for FiveComply at the iFXExpo International Conference 2019.

On 21-23 May 2019 FiveComply attended the iFXExpo International Conference that took place in Limassol, Cyprus. It was a great networking and educational event that gave us the chance to showcase our services to a global audience. The event was a great success with our team making more connections that will help us grow faster.

Our founder Gabriel Styllas mentioned: “On behalf of FiveComply I would like to thank my colleagues, friends, clients, associates, partners and potential clients for such a successful event for FiveComply. Your interest in FiveComply global licensing, compliance, internal audit and risk Management solutions as well as your positive comments and feedback for our services encourage our team to move forward offering more options / solutions to our clients globally.”

FiveComply team would also like to thank the organizers of the iFXEXPO for a successful and fruitful event. We measure our success through our clients; how well we are regarded by them and the depth of the service offering that we provide. So let’s help your business grow in a compliant way!

Please feel free to contact our team of experts any time, should you require additional information about global licensing, compliance support, internal audit and risk management solutions.

Enjoy the highlight video we prepared!

AML Directive

On 10 May 2019, CySEC published a new Directive regarding the prevention and suppression of money laundering and terrorist financing (the ‟Directive” currently available only in Greek).

The new Directive applies to, among others, CIFs, ASPs, AIFs and AIFMs

Please find below the most important amendments made:

TABLE OF AMENDMENTS
Paragraph Explanation
1. Definitions Obliged Entity

The definition ‘Financial Organization’ is replaced by the definition ‘Obliged Entity’. The said definition refers to the categories of persons that fall under the scope and obligations of the Directive

 

2. 5A Appointment of Board Member

One member of the Obliged Entity’s Board of Directors should be designated as the responsible person for the implementation of the legal framework related to the prevention and suppression of money laundering and terrorist financing. Information about the said designation is provided in paragraph 5A of the Directive.

3. 8 Appointment of Alternate AML Compliance Officer

The Obliged Entity should appoint temporarily an Alternate AML Compliance Officer, when the AML Compliance Officer is absent (can be added in the replacement policy of the Company). It is clarified that the provisions of paragraph 8 of the Directive do not apply when the AML Compliance Officer resigns from his position, since in such case the Obliged Entity should appoint a new AML Compliance Officer. Information regarding the Alternate AML Compliance Officer’s appointment is provided in paragraph 8 of the Directive

4. 12 Assessment of money laundering and terrorist financing risk

The Obliged Entity, when assessing the risk of money laundering and terrorist financing should take into account, among others, the Risk Factor Guidelines and any guidelines/guidance issued by the Financial Action Task Force (FATF).

5. 25 Third Party reliance

The Obliged Entity that relies on a third party for the customer due diligence measures and identification procedures should apply the measures and procedures described in the present paragraph.

6. 33 Types of documents

The Obliged Entity may collect original documents and true copies of the original documents. Additionally, provided that some conditions are met, copies may be collected, as well as, it may use electronic means for the collection of data and information.

7. 36 United Nations (‘UN’) and European Union (‘EU’) Sanctions Regimes

The Obliged Entity should apply the measures and procedures described in the present paragraph related to the UN and EU Sanctions Regimes.

8. Fourth Appendix Non-exhaustive list of Factors and Measures

The Fourth Appendix of the Directive is a non-exhaustive list of:

(a)    factors of potentially higher risk, that the Obliged Entity should take into account during its risk-based approach and

(b)   enhanced customer due diligence measures, which may be applied in high risk cases.

Please note that CySEC issued recently related Circulars C314, C315, C317 and C318 regarding anti-money laundering and terrorist financing.

ICF IMPORTANT POINTS OF DI87-07

On 13 March 2019 CySEC issued Directive DI87-07 (in Greek) regarding the operation of the Investor Compensation Fund (hereinafter “new ICF Directive”), replacing Directive DI144-2007-15. The new ICF Directive applies to, among others, CIFs, UCITS Managers who provide certain MiFID services and AIFM Managers who provide certain MiFID services.

Please find below the most important amendments made:

  • Initial contribution has been set as follows:

For CIFs and other Investment Firms which are members of the ICF:

  1. €2.000 per investment service under Part I of the First Appendix of the Investment Services Law 87(I)/2018;
  2. €35.000 for the ancillary service of safekeeping and administration of financial instruments, including custodianship and related services
  • CySEC has decided to maintain the annual fee to cover the ICF’s operational expenses at €700 annually for members who hold eligible funds and clients’ financial instruments. CySEC decided to set the fee at €100 annually, for members who do not hold eligible funds and clients’ financial instruments, so that these members pay a nominal contribution. In the New ICF Directive, CySEC also added a provision for the contribution of an additional fee to cover operational expenses, where the ICF’s liquid assets to cover operational costs are insufficient
  • The statement of eligible funds and financial instruments must be submitted by the 10th May each year, allowing for the completion of the audit of the annual financial statements. (Previously 31 March). The statement of eligible funds and financial instruments must be accompanied with external auditors’ opinion/confirmation.
  • In addition to the above point, the Association of Certified Public Accountants of Cyprus (“ICPAC”), to ensure that there is uniformity and consistency with regard to the content, the quality and the structure of the auditing reports regarding eligible funds and financial instruments, provided template reports based on the International Auditing Standard No. 805 (ISA 805), relating to an
  • “Unmodified Opinion”,
  • “Modified Opinion – Except for Opinion”,
  • “Modified Opinion – Adverse Opinion” and
  • “Modified Opinion- Disclaimer of Opinion”,

which have been incorporated in the text of the New ICF Directive and form part of the regulatory framework, and can be found in ICF Form 87-07-06.

  • The amount of the annual contribution due shall be notified in writing to the members of the ICF, by no later than 10 June. (Previously 30 April).
  • The regular annual contribution shall be paid by 10 August of each year. (Previously 31 March).
  • The annual contribution is calculated as follows:
  • Five per thousand (5 ο/οο) of the eligible funds and financial instruments of a member’s covered clients, with a discount of 80% when all deadlines are met, the external auditors expressed an “Unmodified Opinion” and, based on the audit they have conducted, there are no misstatements which have not been corrected.
  • Five per thousand (5 ο/οο) on eligible funds and financial instruments of a member’s covered clients, without any discount, when all deadlines are met, the auditors express an “Unmodified Opinion” and, based on the audit they have conducted, there are misstatements which have not been corrected.
  • When the audited statements of eligible funds and financial instruments are not submitted on time, accompanied by their external auditor’s opinion, or where the auditors express a “Modified Opinion – Except for Opinion”, or a “Modified Opinion – Adverse Opinion” or a “Modified Opinion – Disclaimer of Opinion”, the annual contribution shall be the amount of one hundred thousand euro (€130.000), or an amount equal to one percent (1%) of eligible funds and financial instruments of the member’s covered clients, for the last year, for which an audited statement of eligible funds and financial instruments was submitted, accompanied by an “Unmodified Opinion” of the external auditors, whichever amount is the highest.
  • The discount shall be granted when the annual contribution has been paid by July 10 of each year. (Previously 15 May).
  • CySEC, in order to ensure that there will be a minimum limit of liquidity for immediate payment, when the need for imposing an extraordinary contribution arises, CySEC has decided to add a provision, pursuant to which members are required to keep a minimum cash buffer of 3 per thousand of the eligible funds and financial instruments of their clients as at the previous year, in a separate bank account, especially for the case that the need for an extraordinary contribution arises. Members are further obliged to submit a standardised confirmation (Form 87-07-05), from 15-20 May of each year, signed by their internal auditor (or in the absence of an internal audit function due to legislative provisions, signed by their compliance officer), that attests to the fulfilment of the above obligation. This confirmation will be submitted for the first time in 2020. It is provided that the above is a minimum limit of special purpose liquidity, and not a limit of extraordinary contribution. The extraordinary contribution may surpass the above minimum limit, and members will be obliged to pay it.
  • The maximum amount of cover by ICF will be, either the 90% of the cumulative covered claims of the covered investor, or the amount of €20.000, whichever is lower. Therefore coverage = Min (90% Χ claimed amount, €20.000). This means that, if the claim is for €50.000, the coverage will be €20.000, due to the fact that 90% of this claim, equals to €45.000. However, if the claim is for €10.000, the coverage will be €9.000 (Min (€10.000 Χ 90%, €20.000) = €9.000).
  • Funds collected prior to the issuance of the new ICF Directive will continue to be kept in the accounts/shares of members, and any unutilized balance will be returned to the respective member after the member renounces its license and subject to the resolution of any pending complaints against the said member, as per the relevant provisions of Directive DI 144-2007-15. However, the funds collected under the New ICF Directive will not be returned.
  • According to the new ICF Directive, following Article 8(2) of the European Directive 97/9/EC, in the case where claims relating to joint investment business, to which two or more persons are entitled as members of a business partnership, association or grouping of a similar nature which has no legal personality, may, for the purpose of calculating the limits of compensation, be aggregated and treated as if arising from an investment made by a single investor.

Affected members of the ICF need to modify their information to clients (e.g. Investor Compensation Fund document) to reflect the relevant changes of the new ICF Directive, as applicable.