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SAFEGUARDING OF CLIENTS’ FUNDS

We would like to draw your attention to Consultation Paper CP (2016-10) (hereafter “the Consultation Paper”) issued by the Cyprus Securities and Exchange Commission (“CySEC”) on 27 October 2016 regarding a proposed Circular on the requirements for the safeguarding of clients’ funds. The Consultation Paper will be addressed to all Cyprus Investment Firms (hereafter the “CIFs”) and the main points outlined therein relate to the following matters:

  1. Requirement for holding separate clients’ accounts:

In accordance with the provisions of Section 18(1)(e) of Directive DI144-2007-01 (hereafter the “Directive”), CIFs must ensure that clients’ funds are held in accounts identified separately from any accounts used to hold funds belonging to the CIF. In this respect, CIFs must ensure the following:

  • A written confirmation will be obtained from the person to which the CIF intends to deposit clients’ funds, as it is specified in section 20(1) of the Directive (hereinafter “the Person”), stating that all funds standing to the credit of the account are held by the CIF as trustee (or if relevant, as agent) and that, the Person is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account, in respect of any sum owed to it on any other account of the CIF (relevant template will be provided by CySEC).
  • The title of the clients’ account sufficiently distinguishes that account, from any account used to hold funds belonging to the CIF (i.e. denoted clients’ accounts).

It is noted that, in case where CIFs are not in a position to ensure compliance with the aforementioned requirements, due to different legislative requirements of the jurisdiction in which the clients’ funds are held, CIFs must satisfy CySEC that they had no other alternative but to conduct such business and demonstrate to CySEC that they have done everything in their powers to obtain separately titled accounts, including using another third party. In any other case, it is important to be mentioned that, CySEC may request from the CIFs to segregate an equivalent amount from their own-funds in a separately titled account in another jurisdiction, so as to be in compliance with the provisions of Sections 18(1)(e) and 20(1) of the Directive.

2. Transferring of clients’ funds to another person:

The transfer of funds to third parties, other than those mentioned in paragraph 20(1) of the Directive (e.g. liquidity provider / market-maker) can only be done if all the following conditions are applied:

  • The respective persons are licensed / regulated in their home country.
  • Before transferring clients’ funds to the abovementioned persons, the CIF:
    • Notifies the person in advance that, the CIF is obliged to keep the clients’ funds separate from its own funds, placing them in a client bank account.
    • Instructs the person that, any funds paid to it in respect to that transaction are to be credited to the CIF’s clients’ transaction account.
    • Written confirmation will be obtained from the person indicating that the CIF’s clients’ transaction account, is not to be combined with any other account, nor is any right of set-off to be exercised by that person against funds credited to the clients’ transaction account in respect of any sum owed to that person on any other account. A relevant template will be provided by CySEC.
  • Retail clients have been notified that their funds may be transferred to another person (e.g. through T & Cs, email, notification).

It is stressed that, the initial margin of clients cannot be used as collateral with the persons mentioned in this current part when they transact on their own name or hedge their open trade positions. In case such collateral is required, CIFs must use their own funds and not clients’ funds. The ultimate responsibility for clients’ funds remains with the CIF, irrespective of transferring them to another person.

3. Other administrative procedures

It is noted that, CIFs must exercise all due skill, care and diligence in the selection, appointment and periodic review of the person where the clients’ funds are held and in the arrangements established for the holding of those funds. In addition, concerning clients’ accounts, CIFs must ensure that at least two (2) persons with combined signatory powers will be authorized.

 

4. Reconciliation of clients’ funds:

In accordance with the provisions of Section 18(1)(c) of Directive, a CIF is required to conduct on a regular-basis reconciliations between its internal accounts and records and those of any third parties by whom those assets are held. Through the proposed circular, CySEC wishes to emphasize that, when a CIF undertakes transactions on a daily-basis, it is expected that reconciliations of clients’ funds are conducted in each business day in order to ensure that funds held are equal to amounts owned to clients. It is also clarified that reconciliations must be performed between:

  • Clients’ bank accounts or any other third party holding clients’ money (as per CIF trial balance) with the bank statements or any other third party statements.
  • Clients’ bank accounts or any other third party holding clients’ money (as per CIF trial balance) with the clients’ credit balances (as per CIF trial balance / trading platform).

5. Reporting obligations to CySEC

In the context of verifying the compliance of CIFs with their regulatory obligations, CIFs must report information on clients’ funds to CySEC, as follows:

Reporting reference dateReporting remittance date
31 March10 April
30 June * 20 July
30 September10 October
31 December *20 January


*
Information concerning the reporting reference date 30 June and 31 December, must be submitted to CySEC, within the above remittance dates alongside with the External Auditors’ verification report.

It is noted that, CIFs must comply within three (3) months from the notification date of the proposed circular, date which still remains to be announced.

Please contact us for more information or assistance.

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