CySEC Mandates Removal of Investor Compensation Fund Contributions from Capital Accounting

The Cypriot regulator is mandating brokers to remove the ICF contributions from their equity capital

The Cyprus Securities and Exchange Commission (CySEC) has just issued an announcement today, outlining to Cyprus Investment Firms (CIFs) that the companies will have to change the accounting procedure for funds which are committed to the Cyprus Investor Compensation Fund (ICF). The news comes as part of a slew of changes this year, which the Cypriot regulator has made in order to boost its credibility as a EU-wide supervisory authority.

This is the spot to remind our readers what are the ICF fees which brokers are paying on an annual basis – brokers that operate as market makers pay an initial fee of €22,212, while companies that only provide straight-through processing of client orders pay €13,669. If the broker operates both models, the company pays as a market maker.

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The changes are to take effect immediately with all brokers taking account of their capital requirements

In addition, if the brokerage deals on its own account it pays an additional €17,086 fee, while if it manages portfolios it must provide an additional sum totaling €25,629. If the brokerage also underwrites financial instruments and/or places financial instruments on a commitment basis, it has to pay an additional €17,086.

For CIFs offering the service of safekeeping and administration of financial instruments for client accounts, including custodianship and related services such as cash/collateral management, the additional fee is €20,503.

Every CIF is required to pay up to one per mille of the eligible client funds which it holds.

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Up until now a provision in Cypriot law was allowing CIFs to boost their capital by categorizing their ICF expenses as ‘exposure to public sector entities’.

The CySEC has decided to remove the provision in order to bring the contributions in line its aim of acting as a prudent supervisory authority. According to the regulator, capital adequacy of institutions should not be dependent on their ICF contribution.

The changes are to take effect immediately with all brokers to take account of their capital requirements and undertake additional measures to fulfill the mandatory levels. All CIFs are required to deduct the ICF contribution presented in their records from Common Equity Tier 1 Capital and must no longer risk weight the relevant amount, when total risk exposure amount is calculated.

For accounting purposes, the ICF contribution must be presented under “additional deductions of CET1 Capital.

In its announcement, the CySEC has highlighted that in the case when own funds and/or capital adequacy ratio of a CIF fall below the minimum allowable limits as a consequence of the new changes, the firm must take all necessary measures so as to comply with capital requirements immediately and not later than December 31, 2016.


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