CySEC Publishes Consultation Paper for Client Funds Safeguarding

The Cyprus Securities and Exchange Commission (CySEC) publishes a consultation paper on improving procedures for protecting client funds held by Cypriot investment firms (CIF). The regulatory authority has defined several ways to strengthen existing systems.

04 May, 2020 | AtoZ Markets – CySEC has published a consultation paper regarding the proposed enhancement of procedures for the safeguarding of client funds held by CIFs. In particular, 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,
  • Bank authorised in a third country or a qualifying money market fund.

CIFs Must Obtain Separately Titled Accounts

The title of the client’s account must sufficiently distinguish this account from any account used to hold funds belonging to the CIF. CySEC also defines a set of requirements if the applicable law of the jurisdiction in which client funds are held. However, it prevents a CIF from complying with the provision regarding client accounts identified separately from any account used to hold funds by CIF.

CIFs must demonstrate to the Cypriot regulator that they have no choice but to carry out these activities. The risk to clients’ funds of the entity insolvency is higher. CIFs can maintain merchant accounts with payment service providers (PSPs) and electronic funds institutions (EMIs) for clearing and settling their customers’ payment transactions, between others. CySEC also expects CIFs to take several factors into account when choosing the bank where clients’ funds are placed, such as:

  • The bank capital;
  • Client funds placed, as a proportion of the bank’s capital and deposits;
  • The bank credit rating (if available); and
  • The bank and its affiliated companies undertake loan activities.

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CIFs Must Conduct Due Diligence Regularly

CySEC also pointed out that CIFs are expected to perform due diligence procedures on banks. Client funds are placed there regularly, with a minimum of once per fiscal year.

The document also addresses the issue of depositing client funds with an eligible bank or money market fund in the same group as the CIF. In such cases, the CIF must limit the funds that are deposited with such group entities. Moreover, the funds cannot exceed 20% of all of these funds.

CySEC also considers that the small balance of clients’ funds with a bank or a money market fund must be, at all times, the lower of the two:

  • €3.000.000
  • 50% of the total clients’ funds held by the CIF.

The Cypriot authority also stresses that it is up to the CIF to decide on the part of the buffer. It will be maintained to facilitate the smooth running of its activities to:

  • Guarantee the absence of delays,
  • Cover client funds with PSP / EMI,
  • Manage the exchange risk linked to the maintenance of clients’ funds in another currency and
  • Cover any shortfalls.

The regulatory authority will accept responses to the consultation paper by May 18, 2020.

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