Cyprus Section Of Mifid II Report 2017 – Wealth Management



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SECTION 1: Market outlook

1.1 Please clarify which products or markets your
jurisdiction hosts that are affected by Mifid II.

There are currently more than 250 investment firms authorised by
the Cyprus Securities and Exchange Commission (Cysec) operating in
or from Cyprus. The financial instruments they deal in include
contracts for difference, binary options and other speculative
forex products, in a number of jurisdictions, either in the EU or
in third countries to the extent permitted by the applicable local
legislation.

In addition, as an intermediary holding jurisdiction, Cyprus
hosts buy-side entities including private asset holding structures
and managers of investment funds. As primary recipients of the
investment services of investment firms, they will undoubtedly
benefit from the Mifid II provisions on investor protection, market
transparency and increased market competition.

The Cyprus Stock Exchange and locally operating trading venues
will be affected but as they lack the critical mass to attract
general attention from potential market participants the impact
will be limited. The main impact of Mifid II is therefore likely to
be on Cyprus Investment Firms (CIFs) as regards their
authorisation, organisational requirements and operating conditions
and procedures and client relationships (especially the expanded
and updated investor protection obligations), on persons that were
outside the scope of the previous Mifid I regime (such as those
engaged in high frequency and algorithmic trading, and the
recipients of investment services, being buy-side entities
established in Cyprus).

SECTION 2 (a) – EU member states: Implementation

2.1 Outline the possible key differences in (a)
goldplating; and (b) exercise of national discretion, where
provided for in Mifid II in your jurisdiction

Mifid II has been transposed into Cyprus local law under Law
87(I)/2017 on the provision of investment services, the exercise of
investment activities, the operation of regulated markets and other
matters (the Investment Services Law).

Gold-plating

Unlike the previous regime that applied under Mifid I and the
existing Law 144(I)/2007 as in force, which regulated investment
services with a number of Cyprus-specific provisions that went over
and above Mifid I, the new Investment Services Law does not include
any provisions that go beyond the provisions of Mifid II.

Exercise of national discretions

The Investment Services Law does not exercise the discretions
provided in the following provisions of Mifid II:

  • Article 3 regarding the optional exceptions;

  • Article 4 regarding the application of the definition of
    “investment firm” to natural persons;

  • Article 9(6) regarding the granting of authorisation to
    investment firms managed by a single natural person;

  • Articles 29(2) to 29(4) inclusive, regarding the obligations of
    investment firms when appointing tied agents;

  • Article 70(1) regarding the administrative sanctions for
    infringements which are subject to criminal sanction under Cyprus
    law, for the reason that such administrative sanctions are deemed
    to be covered by those of Title IX of the Investment Services
    Law;

  • Annex II, II (1) regarding the adoption of specific criteria
    for the assessment of the expertise and knowledge of municipalities
    and local public authorities requesting to be treated as
    professional clients.

On the other hand, the Investment Services Law has exercised the
discretions provided in the following provisions of Mifid II, by
expressly adopting the wording of the directive:

  • Articles 16(1), 24(12), 29(6), 70(7): Although the Investment
    Services Law gives Cysec the power to impose additional
    requirements through relevant directives, no such directives have
    yet been published. With regard to Article 70(7), Cyprus does not
    intend to exercise the discretion to impose fines exceeding the
    amounts stated in points (f ) to (h) of Article 70(6) of Mifid
    II.

  • Article 24(5);

  • Article 28(2); ” Articles 30(3) and 30(4);

  • Article 39(1) with regard to the obligation of establishment of
    a branch by a third country firm intending to provide investment
    services with or without any ancillary to retail clients or to
    professional clients; and

  • Article 48(9).

2.2 What is the biggest concern in respect of these
variations and possible types of divergences?

The Investment Services Law expressly adopts the wording of the
Mifid II provisions with regard to discretions incorporated therein
and so variations and possible types of divergences are not an
issue. However, as noted above, for the discretions of Articles
16(1), 24(12), 29(6), 70(7) of Mifid II, Cysec is empowered to
impose additional requirements through directives but has not yet
done so.

2.3 What are the most important extraterritorial
issues regarding Mifid II in your jurisdiction?

Following the transposition of Mifid II into the Investment
Services Law, the broad extraterritorial scope of the existing law
has been abolished. Under the existing Mifid I framework, Cyprus
law applies where the provision of investment and ancillary
services in Cyprus includes:

  1. any provision or offer for the provision of investment and
    ancillary services that is made from a place outside of Cyprus, to
    persons within, or resident or domiciled in Cyprus, if (i) either
    the provision of services or offer to provide services reaches such
    persons when they are within or resident or domiciled in Cyprus or
    (ii) where the relevant transaction is concluded within Cyprus;
    or

  2. any provision or offer for the provision of investment and
    ancillary services from Cyprus or from a person within, resident or
    domiciled in Cyprus, to persons that are within, resident or
    domiciled in Cyprus or outside of Cyprus; or

  3. any provision or offer for the provision of investment and
    ancillary services, that comes from a person that is within,
    resident or domiciled in Cyprus and acts or purports to be acting
    in the capacity of an employee or in another capacity, on behalf of
    a third-person who is outside of Cyprus, to persons that are
    within, resident or domiciled in Cyprus or outside of Cyprus. Those
    instances are now replaced as the scope of application of the
    Investment Services Law replicates the provisions of Article 1 of
    Mifid II.

SECTION 3: Research

3.1 Please summarise the challenges Mifid II will
pose in your jurisdiction with regards to
research.

The Mifid II provisions on research are more likely to affect
CIFs, which will need to be in a position to (a) demonstrate that
any research performed contributes to their taking of investment
decisions in a manner that is not likely to constitute an
inducement, (b) refrain from inducing their clients to trade by
including research within their execution services and (c) inform
their clients with regard to the separate costs and charges that
may be imposed for execution, research or other advisory
services.

3.2 Is pricing research compatible with market
practices and existing legal frameworks?

Although there is no distinct market practice or framework in
Cyprus with regard to pricing research, we do not consider that
pricing research is likely to be deemed incompatible in view of
Article 13 of Commission Delegated Directive (EU)2017/593.

3.3 Is there clarity on how to resolve challenges in
unbundling research and complying with Mifid II in this
respect?

Currently, other than in relation to the framework set out under
the EU-applicable legislation on the matter, Cysec has not issued
any country-specific guidance clarifying the matter.

SECTION 4: Trading/market structure

4.1 Which areas of trading / type of instruments
will be most impacted by Mifid II in your jurisdiction and how
might they be impacted?

We believe that the main impact of Mifid II will be on brokerage
activities in derivatives by CIFs, especially as regards their
organisational requirements and operating conditions, in
conjunction with the further obligations set out in the Commission
Delegated Regulation (EU) 2017/565. The same also applies for
derivatives that are sufficiently liquid and eligible for clearing
under the European Market Infrastructure Regulation (Emir), that
will need to be traded on regulated markets, multilateral trading
facilities (MTFs) or organised trading facilities (OTFs), in
accordance with article 28 of Mifir. We also expect that CIFs,
which may operate OTFs, and which will consequently be required to
be authorised in accordance with the new authorisation procedure
for OTFs, or which are to be regarded as Systematic Internalizers
based on the amended framework on equity/non-equity instruments,
will be subject to a significantly increased regulatory burden as a
result of the additional compliance requirements introduced by
Mifid II.

Finally, firms carrying out high-frequency and algorithmic
trading will no longer be exempt from authorisation under Mifid II,
and they will need to be able to demonstrate compliance in areas
such as general organisational requirements, governance, staffing,
IT strategy and the resilience of the trading systems. Not having
been subject to regulation in the past, they will now fall within
the ambit of Mifid II and the Investment Services Law, and will
need to establish an entire compliance infrastructure, which will
inevitably be a drain on financial and managerial resources.

4.2 What will be the key challenges with regards to
transaction reporting and pre-trade transparency?

We do not foresee any Cyprus-specific challenges with regards to
transaction reporting (as set out in Article 26 of Mifir and the
data reporting services of Title V of Mifid II) or pre-trade
transparency over and above those that may be expected on an
EU-wide basis or that may be faced by any other EU-based 
entities subject to the obligations set out in Mifir and Mifid II.
In early August 2017, Cysec issued an announcement regarding the
requirements for authorisation and operation of the newly
introduced Data Reporting Service Providers (DRSPs), namely
Consolidated Tape Providers (CTPs), Approved Reporting Mechanisms
(ARMs) and Authorised Publication Arrangements (APAs), aiming to
inform potential applicants and assist them in their preparations
for the Mifid II authorisation requirements.

4.3 What are the main considerations that trading
venues and exchanges will have to make?

From a Cyprus market perspective, Mifid II does not greatly
affect the current picture, given the absence of any sizeable
trading venues and exchanges. From the perspective of local market
participants, to the extent that CIFs or entities established in
Cyprus participate in or deal with trading venues or exchanges
overseas, we do not expect any significant difficulties with
implementation of the Mifid II regime. On the contrary, the
intended increased competition in trading and clearing in
accordance with Title VI of Mifir may be viewed as a favourable
development towards the non-discriminatory access to trading venues
and central counterparties (CCPs) and to benchmarks for trading and
clearing purposes by Cyprus-based participants.

SECTION 5: Investor protection

5.1 Explain the impact of heightened investor
protection obligations in your jurisdiction

The Mifid II heightened investor protection obligations
supplement a number of added obligations recently imposed by Cysec
on CIFs engaging in the offering of investment services in CFDs and
other speculative forex products to retail investors. In this
respect, we do expect the new Mifid II regime to have a material
adverse impact on the business of such CIFs.

5.2 Which area of focus within investor protection
is of most concern/importance to your
jurisdiction?

Although there is no distinct area within investor protection
that is regarded as of more concern or importance for Cyprus than
others, current experience suggests that emphasis should be given
to the performance of appropriateness and suitability tests by
CIFs, in order to ensure that only services and products
appropriate and suitable for the specific client reach them. In
parallel, the strict adherence to the conflicts of interests and
best execution principles and policies comprise elements equally
important for the efficient protection of the clients’
interests.

SECTION 6: Outlook 2017

6.1 What are the overall risks or opportunities that
Mifid II might bring to your market? Will Mifid II impact the
competitiveness of your market?

From a Cyprus regulatory standpoint, Mifid II is expected to
positively impact on the best execution of transactions for the
benefit of the clients of CIFs and, in terms of investor
protection, achieve the aimed for transparency of over-the-counter
(OTC) trading, especially in derivatives and previously unregulated
areas and platforms. While there will inevitably be an increased
cost for firms operating in Cyprus arising from more rigorous
compliance obligations, which will have to be passed on to clients
in the form of higher charges, the effect on Cyprus firms’
competitiveness is unlikely to be material, since their competitors
in other countries will be faced with the same issue.

The changes to the passporting regime make it advisable for
Cyprus market participants to re-examine their target markets
selected for passporting of their investment services against their
existing market penetration levels. At the same time, third country
investment firms will need to consider whether they need to
establish a branch in Cyprus as a result of the new third country
regime under Mifid II. In this regard, the express recognition of
the concept of reverse solicitation in Article 42 of Mifid II
should be welcomed as a positive development. This practice was
previously tolerated by regulators rather than explicitly
permitted, and together with the abolition of the vague
extraterritorial scope of the previous Cyprus investment services
law, this development is expected to provide more certainty.

6.2 What are the next steps – what should
market participants be doing now to best prepare
themselves?

Cysec is currently issuing announcements, guidance and updated
forms of documentation in order to alert regulated firms of the
Mifid II requirements, so that they are well-prepared when they
take effect on January 3 2018. At this early stage of
implementation of the Mifid II provisions, we would highlight those
relating to the passporting of the CIFs’ investment services
Mifid II (including for the broader range of activities, services
and financial instruments than that of the current Mifid I
passporting regime, such as for dealing on own account, extended to
include matched principal trading), as well as on the third country
regime (Articles 39- 42 of Mifid II). Market feedback suggests that
CIFs are only now getting themselves prepared for the updated Mifid
II regime, and that a great deal of work remains to be done over
the next few months.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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