The Cyprus Securities and Exchange Commission (CySEC) has published a Consultation Paper this Monday, in which the regulator seeks to enhance the procedures regarding the safeguarding of client funds held by Cyprus Investment Firms (CIFs).
In particular, the regulator sets out in the proposed Circular that when CIFs receive client funds, they must promptly place those funds into one or more accounts opened with either a central bank, credit institution, bank authorized in a third country, or a qualifying money market fund.
In case CIFs are prevented from complying with the above, CySEC states: “CIFs must notify the entity of par. 6(1) of the Directive, with whom the clients’ account is opened, that they are obliged to keep clients’ funds separate from their own funds. This communication should be kept in the CIFs’ records and be available for review by CySEC.”
As part of this, CIFs must demonstrate to the Cypriot regulator that they had no other alternatives but to conduct such business, seeing as the risk to clients’ funds in the event of the entity’s insolvency is higher.
CySEC: CIFs must do all in power to obtain separately titled accounts
“CIFs must demonstrate to CySEC that they have done everything in their powers to obtain separately titled accounts, including using another third party. If a CIF cannot demonstrate to CySEC that it has fully applied the abovementioned requirements, then CySEC may request from the CIF to segregate an equivalent amount of its own funds in a separately titled account in another jurisdiction where the CIF can comply with the requirement of paragraph 4(1)(e) of Directive,” the proposed Circular said.
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Under the suggested enhancements, CIFs can maintain merchant accounts with Payment Service Providers (PSPs) and Electronic Funds Institutions (EMIs) for the clearing and settlement of their client’s payment transactions, among other purposes.
According to the document seen by Finance Magnates, the watchdog outlines that in an instance where a CIF doesn’t deposit client finds with a central bank, the company must take it upon themselves to ensure the diversification of these funds as part of the required due diligence.
CIFs must conduct due diligence on a regular basis
CySEC also outlined that CIFs are expected to perform due diligence procedures of the banks where clients’ funds are placed on a regular basis, with a minimum of once per financial year.
In the proposed Circular, the regulator also provides guidance on the issue of CIFs depositing clients’ funds withing a bank or money market fund within the same group as the CIF.
“According to paragraph 6(3) of the Directive, where a CIF deposits client funds with a bank or money market fund of the same group as the CIF, then the CIF must limit the funds that are deposited with any such group entity or combination of any such group entities so that the funds do not exceed 20% of all such funds.”
The Cypriot authority also highlights that it is on the CIF to decide how much of a buffer will be maintained in order to facilitate the smooth running of their business, ensure no delays, cover clients’ funds with PSP/EMI, manage the foreign exchange risk from maintaining clients’ funds in different currencies and to cover possible shortfalls.