The Cyprus Securities and Exchange Commission (CySEC) has announced a new format for capital adequacy and exposures affecting Cyprus Investment Firms (CIFs) submission processes, according to a CySEC statement.
Indeed, the recent announcement can best be summed up as CySEC’s implementation of COREP or consolidated reporting regime for capital adequacy. More specifically, this is a new format for submitting complex financial updates to assure regulators of the fortitude of firms and their maintenance of adequate capital to support their immediate liabilities and potential market disruptions. While not a new change in and of itself, this is simply another layer for firms still struggling with their existing reporting requirements that must now be dealt with to ensure proper reporting.
Reiterating CIF Own Funds and Capital Adequacy Ratio
The announcement details specifically a number of points, beginning with CIF’s funds and capital adequacy ratios. According to the manifest, “CIFs must have own funds, which are at all times more than or equal to the sum of its capital requirements and the CIF’s own funds must in no case fall below the level of initial capital as provided for in section 10 of the Law.”
Section 10 states that a CIF providing investment services and holding clients’ money and/or clients’ financial instruments, must have an initial capital of at least €200,000.
Additionally, “If the CIF’s own funds fall below the level stated in section 67 of the Law, this must be notified immediately to the Commission that may, under justified circumstances and at its absolute discretion, set a deadline by which the CIF must remedy the situation.” This is a natural check against improper reporting which in essence serves as the justification for a new approach from CySEC.
For these reasons, CySEC urges all CIFs to more diligently police and monitor the composition and amount of its funds, including capital adequacy ratios, on a more routine basis. Moreover, preventive steps are urged to be taken by firms to avoid at any times from falling below key thresholds stipulated by the manifest. Supervisory authorities under the mantle of the European Directive (Articles 102 and 104) are the primary enforcers to this end and in certain situations where CIF funds not only breach these defined limits, but enter negative territory, CySEC is within its legal bounds to weigh options for suspension until noted improvement at their discretion is seen.
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Issues of Large Exposures
CySEC also explained the propensity and prevention against large exposures from CIFs, except in very limited cases, which have prompted the Cypriot regulator to define these legal measures.
As such, the document references frequent issues for a number of CIFs that exceed allowable limits of aggregate exposure, as based on section 69 of the Commission’s Directive DI144-2007-06. Compounding this issue is the apparent lack of notification to CySEC – rather this knowledge and acknowledgement must be submitted with regular capital adequacy reports, prompting deadlines that can effectively alleviate the situation at hand. CIFs are urged to take measures to prevent this, as the alternative can lead to possible non-compliance.
The Submission of Capital Adequacy and Large Exposures Reports
The nature of reporting for capital adequacy is also paramount for CIFs – the most effective way to satisfy this requirement is for CIFs to submit the 144-05-06.1 form on capital adequacy within one month from the end of the reporting period, as stipulated under Directive 144-2007-05.
The reiterating of this procedure comes as a result of observations by CySEC that a number of CIFs do not proceed with this timely submission of capital adequacy and large exposures through the TRS system. In addition, possible errors in this system can prevent proper submission and need to be accounted for and corrected for resubmission – another point of contention as stated by the Commission.
This announcement comes on the heels of a fresh statute adopted by the European Commission on April 16, which calls for Implementing Technical Standard (ITS) in relation with a common framework reference for firms (COREP). The enforcement date for this measure is expected to coincide with the law’s publication in the Official Journal of the European Union, slated for the near future.
For the above reasons, the Commission invites all CIFs to establish and execute proper reporting and submission methods for capital adequacy and large exposures with clear knowledge of key deadlines and procedures – all of these are to be implemented through the TRS system.