Analysis: Will CySEC Really Ban Brokers from Soliciting Non-EU Clients?

This will obviously be a mess for Cypriot brokers since the bulk of their revenue isn’t coming from Europe.

As reported today by Finance Magnates, a routine meeting between the Cyprus Securities and Exchange Commission (CySEC) and executives of 400 Cypriot investment firms took a hostile turn after the regulator’s chairwoman reportedly took a more cursory tone with the firms she regulates.

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According to sources in the meeting, Ms. Demetra Kalogerou made some remarks that may have a potentially dramatic effect on how brokers in Cyprus conduct their business. Specifically, she warned that “Cysec will not allow marketing to third countries (out of the EU) without legal opinion.”

Oops! Will CySEC really ban brokerage firms from soliciting non-EU clients?

The above statement, if confirmed, is expected to cause a tremendous stir among Cyprus-based operators and clients alike. Confirmation means that the Cypriot financial regulator would announce a new ruling, or re-enforce the one issued a few years ago, by which brokers operating under the CIF license are obliged to cease soliciting business outside the European Union.

The first thing that comes to mind is that CySEC is just proceeding with what it has been doing since it first issued its circular banning trading bonuses and tightening trading conditions, including the allowed leverage. The second explanation is that CySEC is following in the footsteps of several other European regulators.

However, in either case, CySEC can’t simply follow in the footsteps of such regulators, whether they be established watchdogs such as those of the UK, Spain, France and Germany, or even minor ones such Malta’s MFSA. FX business for these jurisdictions is tiny as a proportion of the rest of their financial industries. Sometimes, they just don’t want the FX business to tarnish their brand as it ultimately damages the reputation of the country itself.

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This isn’t the case for Cyprus and simply means that it could lose its position as a financial centre bridging Asia and the Middle East to mainland Europe.

So what we expect is that CySEC is just showing signs of wearing patience, or simply completing its mission of ensuring a future good name. As such, even if such speeches were to be announced publicly in the coming days, we expect to see a significant U-turn regarding the solicitation of individuals in third countries. Also, the ‘exit strategy’ is available since MiFID II itself does not regulate the provision of investment services in third countries as the issue was left to the discretion of each member state.

But what will happen if it goes ahead..?

This will obviously be a mess for Cypriot brokers since their financial statements show that the bulk of revenue isn’t coming from Europe. In other words, brokers cannot survive on European business alone.

It would also effectively kill the growth of the Cypriot brokerage sector, including banks which benefit from the brokers clients’ deposits, whilst playing into the hands of jurisdictions that can offer less strict regulations, or at least the advantage of setting up in a more prestigious hub.

How these brokers will manage to maintain market share outside Europe depends entirely on their business models. Obviously, they will turn their focus to more ‘universal’ regulations. But this is also more complicated since it implies additional sub-strategies to handle dealing with non-EU clients from countries with regulators, and non-EU clients from countries without a regulator.

The last approach is to see that CySEC maintains a pragmatic and business friendly approach whilst sending a strong signal about its commitment to overhauling the sector. This means using ‘softer’ language that does not necessarily mean that upcoming regulations will be disregarded, but that more time and operating space will be allowed to brokers to attend to the matter satisfactorily.

 

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