CySEC proposes enhancement to client money handling including quarterly reports, semiannual audits


Cyprus financial regulator CySEC has issued a Consultation Paper regarding a proposed circular on the requirements for the safeguarding of client funds at regulated CIF entities.

cysec-logoCySEC already requires regulated brokers to fully segregate client funds – one of the facets which saved Cyprus brokers and their clients from the ‘haircut’ given to all bank accounts in the country as part of the 2013 EU bailout of Cyprus’ banks. Account funds were technically owned by each individual investor, not the brokers themselves.

The main changes CySEC is proposing deal with direct and frequent reporting of client fund amounts and details to CySEC. The new proposals require CIFs to make quarterly reports on client funds between 10-20 days after each quarter end. And, the June and December figures require an external audit.

CySEC requests that any comments to the proposed rules to be submitted to it by Friday November 18, 2016.

The full CySEC circular follows, and can also be seen here.


TO: Cyprus Investment Firms
FROM: Cyprus Securities and Exchange Commission
SUBJECT: Requirements for safeguarding of clients’ funds

The Cyprus Securities and Exchange Commission (‘CySEC’) wishes to draw the attention of the Cyprus Investment Firms (‘the CIFs’) on their obligations with regards to safeguarding of clients’ funds and to clarify matters, in the context of establishing adequate arrangements to safeguard clients’ rights. More specifically:

A. Regulatory framework

1. According to section 18(2)(j) of the Investment Services and Activities and Regulated Markets Law of 2007, as amended (‘Law’), ‘a CIF must, when holding funds belonging to clients, make adequate arrangements to safeguard the clients’ rights and, except in the case of credit institutions, prevent the use of client funds for its own account’.

2. Part VI of CYSEC Directive DI144-2007-01 of 2012 (‘Directive’) specifies further the requirements for the safeguarding of clients assets.

3. For ease of reference, the abovementioned provisions are presented in Annex 1.

B. Requirement for holding separate clients’ accounts

4. According to section 18(1)(e) of Directive, CIFs must ensure that clients’ funds are held in accounts identified separately from any accounts used to hold funds belonging to the CIF.

5. For compliance purposes with the above, CIFs must ensure that, when opening a clients’ account with a person, as it is specified in section 20(1) of Directive (hereinafter ‘the Person’), in any jurisdiction, a written confirmation is obtained from that Person, stating that all funds standing to the credit of the account is held by the CIF as trustee (or if relevant, as agent) and that the Person is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the CIF. A relevant template will be provided by CySEC.

6. CIFs are allowed to deposit clients’ funds to a Person only when they receive the above mentioned written confirmation. In case a CIF is unable to obtain such confirmation, it must not deposit clients’ funds in that Person.

7. It is provided that the title of the clients’ account sufficiently distinguishes that account from any account used to hold funds belonging to the CIF, as it is required by sections 18(1)(e) and 20(1) of Directive (denoted as clients’ accounts).

8. Having exercise the powers provided for in paragraph 18(3) of Directive, CySEC prescribes below the requirements that CIFs must apply in case the applicable law of the jurisdiction in which the client funds are held, prevent them from complying with the requirement of section 18(1)(e) of Directive (holding clients’ accounts identified separately from any accounts used to hold funds belonging to the CIF):

i. CIFs must satisfy CySEC that they had no other alternative but to conduct such business, given the risk to clients’ funds in the event of the Person’s insolvency.

ii. CIFs must demonstrate to CySEC that they have done everything in their powers to obtain separately titled accounts, including using another third party.

If a CIF cannot satisfy the CySEC on the adequacy of point (i) and (ii) above, the 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 sections 18(1)(e) and 20(1) of Directive.

C. Transferring clients’ funds to another person, other than those mentioned in section 20(1) of Directive

9. In the context of facilitating clients’ transactions, CIFs usually transfer clients’ funds to persons, other than those mentioned in paragraph 20(1) of Directive, such as an exchange, a clearing house, a liquidity provider/market maker, or an intermediate broker. This can only be done if all the following conditions are applied:

i. The abovementioned persons are licensed/regulated in their home country.

ii. Clients’ funds are transferred for the purposes of:

  • A client transaction through or with that person; or
  • A client’s obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment).

iii. Before transferring clients’ funds to the abovementioned persons, the CIF:

  • Notifies the person with whom the account is to be opened that the CIF is obliged to keep clients funds separate from its own funds, placing them in a client bank account.
  • Instructs the person with whom the account is to be opened that any funds paid to it in respect to that transaction is to be credited to the CIF’s clients transaction account.
  • Requires the person with whom the account is to be opened to acknowledge in writing that the CIF’s clients transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against funds credited to the clients transaction account in respect of any sum owed to that person on any other account. A relevant template will be provided by CySEC.

iv. In the case of a retail client, that client has been notified that his funds may be transferred to another person. The notification may be done through clients’ terms and conditions or email or web notifications.

10. It is stressed that the initial margin of clients cannot be used as collateral with the persons mentioned in this current part when they transact on their own name or hedge their open trade positions. In case such collateral is required, CIFs must use their own funds and not clients’ funds.

11. CIFs remain ultimately responsible for the funds of their clients, irrespective of transferring them to another person.

D. Other administrative procedures

12. CIFs must exercise all due skill, care and diligence in the selection, appointment and periodic review of the person where the clients’ funds are held and in the arrangements established for the holding of those funds.

13. As far as clients’ accounts are concerned, CIFs must ensure that there are at least two persons with combined signatory powers.

E. Reconciliation of clients’ funds

14. According to paragraph 18(1)(c) of Directive DI144-2007-01 «a CIF is required to conduct on a regular basis reconciliations between its internal accounts and records and those of any third parties by whom those assets are held».

15. In determining the term ‘regular basis’, CIFs should consider the risks which their business is exposed, such as the nature, volume and complexity of the business, and where and with whom the clients’ funds are held. When a CIF undertakes transactions on a daily basis, it is expected that reconciliations of clients’ funds are contacted in each business day in order to ensure that funds held are equal to amounts owned to clients.

16. CIFs must ensure that reconciliations are performed between:

i. Clients’ bank accounts or any other third party holding clients’ money (as per CIF trial balance) Vs bank statements or any other third party statements.

ii. Client bank accounts or any other third party holding clients’ money (as per CIF trial balance) Vs clients credit balances (as per CIF trial balance/trading platform).

17. The provisions of CySEC’s Circular on payment service providers (still in consultation) must be taken into account when CIFs perform clients’ funds reconciliation.

F. Reporting obligations to CySEC

18. In the context of verifying the compliance of CIFs with their regulatory obligations, CIFs must report information on clients’ funds to the CySEC.

19. Information must be reported to CySEC as follows:

Reporting reference date – Reporting remittance date:

  • 31 March – 10 April
  • 30 June – 20 July
  • 30 September – 10 October
  • 31 December – 20 January

If the remittance date is a public holiday or a Saturday or Sunday, the report should be submitted on the following working date.

In order to facilitating the reporting procedure, CySEC will prepare and publish a relevant template to be filled in and submitted by CIFs.

20. CIFs must ensure that the figures related to the reporting reference date 30 June and 31 December are verified by an external auditor and the auditors’ verification report is submitted to CySEC within the above remittance dates.

21. CySEC will consult further with the Institute of Certified Public Accountants about the audits that need to be performed by their side. Additional information will be published in the near future, if necessary.

G. Entry into force

This circular enters into force on the notification date of this circular.

As far as the existing accounts are concerned, CIFs must comply within three (3) months from the notification date of this circular.

Sincerely,

Demetra Kalogerou
Chairman Cyprus Securities and Exchange Commission

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CySEC proposes enhancement to client money handling including quarterly reports, semiannual audits

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