The Cyprus Securities and Exchange Commission (CySEC) is actively working with brokers to ensure negative balance protection (NBP). The Cypriot regulator’s latest move has been to ensure that companies are well capitalized and have the right license.
The move undertaken by the regulator was split into two directions. Brokers were either mandated to upgrade to a market-making license or transfer the negative balance obligation to their wholesale partners.
The brokers had until September 14 to get on the bandwagon with the new license. Apparently, due to the high demand, not everyone was able to submit their applications on time. The CySEC has extended the deadline until the end of October.
The process of upgrading a license takes some time and requires additional capital. Meanwhile, some prime of prime service providers have been offering to their broker clients to take on the negative balance protection.
The UK Financial Conduct Authority (FCA) has not overlooked the matter and has been urging brokers to upgrade for months. While not officially mandating the changes just yet, the regulator is said to be vigilantly monitoring the matter.
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Several firms in the UK have upgraded their licenses to the full €730K permit. Aside from adhering to the regulatory recommendation (which is always a good thing to follow), the firms are allowed to execute market making activities.
That said, in the current environment, market making has proven to be a capital-intensive effort. Brokers who are not paying sufficient attention to risk management are at risk.
Negative Balance Protection from Prime of Primes
The Cypriot regulator is giving another option to brokers who are not willing to upgrade their licenses. They can pass on the NBP requirement to their liquidity counterparts.
The prime of prime brokerage companies that are offering the service are looking at it from a risk management perspective. The downside for the brokers who need the upgraded license is that they might need to provide additional access to protected client IDs.
Prime of primes need to be able to monitor individual accounts in order to manage risk effectively. The conditions under which the prime of prime brokerages are providing NBP might include a certain number of clients or volumes and an API which provides access to the broker’s backend.