What the new CySEC rules mean to the FX industry


The winds of change have been blowing hard in the Forex world lately, and nowhere more so than in Cyprus. Cyprus financial regulator CySEC has certainly been flexing its muscles lately. Increased fines. License suspensions. New rules such as those regarding location of call centers and incentive compensation.

In a special guest post, Advanced Markets’ Managing Director Bjorn Enqvist takes a look at what is changing in Cyprus and at CySEC, and what that means for the Retail Forex world.

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As someone who is very passionate about FX and football, I’m always keen to draw parallels between both whenever possible.

Bjorn Enqvist, Advanced Markets
Bjorn Enqvist, Advanced Markets

Where football and, indeed, sport in general is concerned, 2016 will forever be remembered as “the year of the underdog” with Leicester’s City’s remarkable achievement in bringing home the Premier League trophy to a relatively small, and little known, city in the UK. From battling relegation last year, Leicester City rose victorious against the billionaire power houses of London and Manchester, to win the toughest league in the world against all odds. It truly was a remarkable and historical achievement.

In the world of FX, I also believe that this year will be remembered for two particularly unexpected events:

1.  Brexit was an expected event with an unexpected result. The decision has been widely debated and analyzed this past month and, as the dust finally begins to settle, we are eager to uncover its true impact on both the UK and European economies and the on the political landscape.

2.   CySEC’s “comeback” from a much-maligned FX regulatory environment to a proactive jurisdiction that is now boldly implementing and enforcing strategic change and enhanced requirements for retail brokerages.

You Win some and you Learn some

Of course, people will quickly jump to remind us how CySEC has dealt with major economic events in recent years and the criticism they faced because of their actions (or inaction). However, for those who think that CySEC mishandled things in the past, perhaps ask yourselves the question; who amongst us has never made a mistake? In fact, as evident in sport, in business and with life in general, those who make mistakes, and are able to learn and adapt from those mistakes, are the ones who end up succeeding in the end!

I believe this is exactly what CySEC has managed to achieve in 2016 and I can’t help but feel that they are now beginning to win over a few of their doubters. They have combatted the reputation (and criticism) of being over-lenient with the implementation of stricter regulatory measures focusing on sales operations, accompanied by guidance and requirements on choosing a Liquidity Provider. Both are significant changes that will hopefully guarantee that the Cyrus FX sector survives and flourishes in the years to come.

The strong survive

With the economic chaos of 2013, strict EU bailout terms, the SNB dislocation and the brokerage collapses in 2015 and 2016, it is fair to say that Cyprus has been in the middle of a never ending storm on the high seas with its people suffering in several ways economically:

  • Bank Savings over 100k EUR taken away in an instant.
  • Interest rates on house mortgages taken out in CHF doubled in an instant.
  • The rapid rise of unemployment over a short period of time.
  • A sudden fall in house prices and a real estate sector meltdown.
  • The island’s FX sector reputation damaged globally by brokerage turmoil.

To most, this would seem an unsolvable equation however the people of Cyprus and CySEC have stubbornly survived and have worked hard to rebuild the economy and the reputation of the Island as a stable financial and regulatory environment. Cyprus is still home to numerous major FX corporations and some of the world’s thriving MT4 brokerages.

Due diligence, risk management and capital exposure

Only recently, CySEC’s Chairwoman was quoted encouraging brokers to undertake proper due diligence when sourcing their Liquidity provider, and not to rely on a single source for price liquidity. This is something that we at Advanced Markets have also advocated repeatedly for some time.  An example of this can be seen from our Workshop: “Is it really Prime of Prime?” at the iFXEXPO in Cyprus earlier this year.

I would definitely echo CySEC’s recommendation and encourage any broker today to do thorough due diligence when choosing a liquidity provider and to ask themselves if they are in fact working with a true Prime of Prime.

Pertinent and fundamental questions to ask:

1.    Is your Liquidity Provider licensed?

2.    Does your Liquidity Provider have a Tier 1 Prime Broker bank relationship?

3.    What is their “Depth of Market”?

4.    Are they financially stable with solid capital backing?

Capital Risk and Capital Security

Another measure that, from a neutral aspect, could lower risks dramatically, would be the implementation of a maximum capital risk exposure requirement limiting a brokerages’ market risk exposure to, for example, 50% of their capital. A measure like this would probably be unpopular among many initially however, it would surely help stabilize and safeguard the industry as a whole in the long run. It could minimize the risks of brokerage meltdown and safeguard businesses, shareholders and their employees. This would also benefit the traders and take us closer towards a more transparent operation model by sending the message globally that FX business in Cyprus isn’t simply a hit and run affair.

The term “Truly Segregated Funds” is widely used in today’s retail FX world, referring to client monies that are not only segregated from a liquidity provider’s operating account, but that are truly segregated from other clients’ funds as well. This is something that is easy to say but, in reality, very difficult to provide. Perhaps it should be another mandated requirement to ask Liquidity Providers to offer this feature to their clients where warranted?

Advanced Markets provides its brokerage clients with this option through Macquarie Bank. We offer fully-segregated trust accounts for qualified parties where funds are 100% segregated in the client’s own name, providing an additional layer of protection from any unexpected event, such as when the SNB removed its peg in EURCHF in January of last year.

The road ahead

Speaking to regulatory consultancies on the island recently I have found that many brokers are now undergoing restructuring with some looking at their Sales departments with a view to implementing a more marketing-driven operations model. They seem to be seeking to emulate the strategy employed by those brokers that have quietly risen to the top of the ranks in recent years.

Despite stricter regulatory measures it seems Brokers are still coming to Cyprus. The fact remains that Cyprus has many well-known benefits such as:

  • A cost effective and globally-recognized license with a smooth delivery process.
  • Strategic geographical location
  • EU status
  • Excellent corporate tax benefits
  • Educated local and international workforce.

Recent developments and factors in nearby jurisdictions also help strengthen the case for Cyprus. Israel is going through a regulatory overhaul and brokerages are beginning to move their headquarters out of the country. The natural alternative is just 40 minutes across the sea in Cyprus. It also appears that Malta and the MFSA may be looking to restrict the influx of brokerages seeking regulation there.

Time will tell

Taking all of the above into account you could potentially argue that, like a true Leicester City underdog story, CySEC in 2016 has suddenly found itself in the driving seat by helping to reinvent Cyprus as a viable, fast growing center for FX. Whilst London will surely remain as the core/major center for FX globally (regardless of Brexit), the newly-crowned premier league champions of Leicester City have shown us all that anything is possible and Cyprus can definitely establish itself as a rightful challenger in the premier league of regulatory environments.

Advanced Markets invites you to learn more about procedures to set up a CySEC MiFID Investment Firm License.

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