SECTION 1: Market outlook
1.1 Please clarify which products or markets your
jurisdiction hosts that are affected by Mifid II.
There are currently more than 250 investment firms
authorised by the Cyprus Securities and Exchange Commission
(Cysec) operating in or from Cyprus. The financial instruments
they deal in include contracts for difference, binary options
and other speculative forex products, in a number of
jurisdictions, either in the EU or in third countries to the
extent permitted by the applicable local legislation.
In addition, as an intermediary holding jurisdiction, Cyprus
hosts buy-side entities including private asset holding
structures and managers of investment funds. As primary
recipients of the investment services of investment firms, they
will undoubtedly benefit from the Mifid II provisions on
investor protection, market transparency and increased market
competition.
The Cyprus Stock Exchange and locally operating trading
venues will be affected but as they lack the critical mass to
attract general attention from potential market participants
the impact will be limited.
The main impact of Mifid II is therefore likely to be on
Cyprus Investment Firms (CIFs) as regards their authorisation,
organisational requirements and operating conditions and
procedures and client relationships (especially the expanded
and updated investor protection obligations), on persons that
were outside the scope of the previous Mifid I regime (such as
those engaged in high frequency and algorithmic trading, and
the recipients of investment services, being buy-side entities
established in Cyprus).
SECTION 2 (a) – EU member states:
Implementation
2.1 Outline the possible key differences in (a)
gold-plating; and (b) exercise of national discretion, where
provided for in Mifid II in your jurisdiction
Mifid II has been transposed into Cyprus local law under Law
87(I)/2017 on the provision of investment services, the
exercise of investment activities, the operation of regulated
markets and other matters (the Investment Services Law).
Gold-plating
Unlike the previous regime that applied under Mifid I and
the existing Law 144(I)/2007 as in force, which regulated
investment services with a number of Cyprus-specific provisions
that went over and above Mifid I, the new Investment Services
Law does not include any provisions that go beyond the
provisions of Mifid II.
Exercise of national discretions
The Investment Services Law does not exercise the
discretions provided in the following provisions of Mifid
II:
- Article 3 regarding the optional
exceptions;
- Article 4 regarding the application of the
definition of "investment firm" to natural persons;
- Article 9(6) regarding the granting of
authorisation to investment firms managed by a single natural
person;
- Articles 29(2) to 29(4) inclusive,
regarding the obligations of investment firms when appointing
tied agents;
- Article 70(1) regarding the administrative
sanctions for infringements which are subject to criminal
sanction under Cyprus law, for the reason that such
administrative sanctions are deemed to be covered by those of
Title IX of the Investment Services Law;
- Annex II, II (1) regarding the adoption of
specific criteria for the assessment of the expertise and
knowledge of municipalities and local public authorities
requesting to be treated as professional clients.
On the other hand, the Investment Services Law has exercised
the discretions provided in the following provisions of Mifid
II, by expressly adopting the wording of the directive:
- Articles 16(1), 24(12), 29(6), 70(7):
Although the Investment Services Law gives Cysec the power to
impose additional requirements through relevant directives,
no such directives have yet been published. With regard to
Article 70(7), Cyprus does not intend to exercise the
discretion to impose fines exceeding the amounts stated in
points (f) to (h) of Article 70(6) of Mifid II.
- Article 24(5);
- Article 28(2);
- Articles 30(3) and 30(4);
- Article 39(1) with regard to the
obligation of establishment of a branch by a third country
firm intending to provide investment services with or without
any ancillary to retail clients or to professional clients;
and
- Article 48(9).
2.2 What is the biggest concern in respect of these
variations and possible types of divergences?
The Investment Services Law expressly adopts the wording of
the Mifid II provisions with regard to discretions incorporated
therein and so variations and possible types of divergences are
not an issue. However, as noted above, for the discretions of
Articles 16(1), 24(12), 29(6), 70(7) of Mifid II, Cysec is
empowered to impose additional requirements through directives
but has not yet done so.
2.3 What are the most important extraterritorial issues
regarding Mifid II in your jurisdiction?
Following the transposition of Mifid II into the Investment
Services Law, the broad extraterritorial scope of the existing
law has been abolished. Under the existing Mifid I framework,
Cyprus law applies where the provision of investment and
ancillary services in Cyprus includes:
(a) any provision or offer for the provision of investment
and ancillary services that is made from a place outside of
Cyprus, to persons within, or resident or domiciled in Cyprus,
if (i) either the provision of services or offer to provide
services reaches such persons when they are within or resident
or domiciled in Cyprus or (ii) where the relevant transaction
is concluded within Cyprus; or
(b) any provision or offer for the provision of investment
and ancillary services from Cyprus or from a person within,
resident or domiciled in Cyprus, to persons that are within,
resident or domiciled in Cyprus or outside of Cyprus; or
(c) any provision or offer for the provision of investment
and ancillary services, that comes from a person that is
within, resident or domiciled in Cyprus and acts or purports to
be acting in the capacity of an employee or in another
capacity, on behalf of a third-person who is outside of Cyprus,
to persons that are within, resident or domiciled in Cyprus or
outside of Cyprus. Those instances are now replaced as the
scope of application of the Investment Services Law replicates
the provisions of Article 1 of Mifid II.
SECTION 3: Research
3.1 Please summarise the challenges Mifid II will pose in
your jurisdiction with regards to research.
The Mifid II provisions on research are more likely to
affect CIFs, which will need to be in a position to (a)
demonstrate that any research performed contributes to their
taking of investment decisions in a manner that is not likely
to constitute an inducement, (b) refrain from inducing their
clients to trade by including research within their execution
services and (c) inform their clients with regard to the
separate costs and charges that may be imposed for execution,
research or other advisory services.
3.2 Is pricing research compatible with market practices
and existing legal frameworks?
Although there is no distinct market practice or framework
in Cyprus with regard to pricing research, we do not consider
that pricing research is likely to be deemed incompatible in
view of Article 13 of Commission Delegated Directive
(EU)2017/593.
3.3 Is there clarity on how to resolve challenges in
unbundling research and complying with Mifid II in this
respect?
Currently, other than in relation to the framework set out
under the EU-applicable legislation on the matter, Cysec has
not issued any country-specific guidance clarifying the
matter.
SECTION 4: Trading/market structure
4.1 Which areas of trading / type of instruments will be
most impacted by Mifid II in your jurisdiction and how might
they be impacted?
We believe that the main impact of Mifid II will be on
brokerage activities in derivatives by CIFs, especially as
regards their organisational requirements and operating
conditions, in conjunction with the further obligations set out
in the Commission Delegated Regulation (EU) 2017/565. The same
also applies for derivatives that are sufficiently liquid and
eligible for clearing under the European Market Infrastructure
Regulation (Emir), that will need to be traded on regulated
markets, multilateral trading facilities (MTFs) or organised
trading facilities (OTFs), in accordance with article 28 of
Mifir.
We also expect that CIFs, which may operate OTFs, and which
will consequently be required to be authorised in accordance
with the new authorisation procedure for OTFs, or which are to
be regarded as Systematic Internalizers based on the amended
framework on equity/non-equity instruments, will be subject to
a significantly increased regulatory burden as a result of the
additional compliance requirements introduced by Mifid II.
Finally, firms carrying out high-frequency and algorithmic
trading will no longer be exempt from authorisation under Mifid
II, and they will need to be able to demonstrate compliance in
areas such as general organisational requirements, governance,
staffing, IT strategy and the resilience of the trading
systems. Not having been subject to regulation in the past,
they will now fall within the ambit of Mifid II and the
Investment Services Law, and will need to establish an entire
compliance infrastructure, which will inevitably be a drain on
financial and managerial resources.
4.2 What will be the key challenges with regards to
transaction reporting and pre-trade transparency?
We do not foresee any Cyprus-specific challenges with
regards to transaction reporting (as set out in Article 26 of
Mifir and the data reporting services of Title V of Mifid II)
or pre-trade transparency over and above those that may be
expected on an EU-wide basis or that may be faced by any other
EU-based entities subject to the obligations set out in Mifir
and Mifid II. In early August 2017, Cysec issued an
announcement regarding the requirements for authorisation and
operation of the newly introduced Data Reporting Service
Providers (DRSPs), namely Consolidated Tape Providers (CTPs),
Approved Reporting Mechanisms (ARMs) and Authorised Publication
Arrangements (APAs), aiming to inform potential applicants and
assist them in their preparations for the Mifid II
authorisation requirements.
4.3 What are the main considerations that trading venues
and exchanges will have to make?
From a Cyprus market perspective, Mifid II does not greatly
affect the current picture, given the absence of any sizeable
trading venues and exchanges. From the perspective of local
market participants, to the extent that CIFs or entities
established in Cyprus participate in or deal with trading
venues or exchanges overseas, we do not expect any significant
difficulties with implementation of the Mifid II regime. On the
contrary, the intended increased competition in trading and
clearing in accordance with Title VI of Mifir may be viewed as
a favourable development towards the non-discriminatory access
to trading venues and central counterparties (CCPs) and to
benchmarks for trading and clearing purposes by Cyprus-based
participants.
SECTION 5: Investor protection
5.1 Explain the impact of heightened investor protection
obligations in your jurisdiction
The Mifid II heightened investor protection obligations
supplement a number of added obligations recently imposed by
Cysec on CIFs engaging in the offering of investment services
in CFDs and other speculative forex products to retail
investors. In this respect, we do expect the new Mifid II
regime to have a material adverse impact on the business of
such CIFs.
5.2 Which area of focus within investor protection is of
most concern/importance to your jurisdiction?
Although there is no distinct area within investor
protection that is regarded as of more concern or importance
for Cyprus than others, current experience suggests that
emphasis should be given to the performance of appropriateness
and suitability tests by CIFs, in order to ensure that only
services and products appropriate and suitable for the specific
client reach them. In parallel, the strict adherence to the
conflicts of interests and best execution principles and
policies comprise elements equally important for the efficient
protection of the clients' interests.
SECTION 6: Outlook 2017
6.1 What are the overall risks or opportunities that Mifid
II might bring to your market? Will Mifid II impact the
competitiveness of your market?
From a Cyprus regulatory standpoint, Mifid II is expected to
positively impact on the best execution of transactions for the
benefit of the clients of CIFs and, in terms of investor
protection, achieve the aimed-for transparency of
over-the-counter (OTC) trading, especially in derivatives and
previously unregulated areas and platforms. While there will
inevitably be an increased cost for firms operating in Cyprus
arising from more rigorous compliance obligations, which will
have to be passed on to clients in the form of higher charges,
the effect on Cyprus firms' competitiveness is unlikely to be
material, since their competitors in other countries will be
faced with the same issue.
The changes to the passporting regime make it advisable for
Cyprus market participants to re-examine their target markets
selected for passporting of their investment services against
their existing market penetration levels. At the same time,
third country investment firms will need to consider whether
they need to establish a branch in Cyprus as a result of the
new third country regime under Mifid II. In this regard, the
express recognition of the concept of reverse solicitation in
Article 42 of Mifid II should be welcomed as a positive
development. This practice was previously tolerated by
regulators rather than explicitly permitted, and together with
the abolition of the vague extra-territorial scope of the
previous Cyprus investment services law, this development is
expected to provide more certainty.
6.2 What are the next steps – what should market
participants be doing now to best prepare themselves?
Cysec is currently issuing announcements, guidance and
updated forms of documentation in order to alert regulated
firms of the Mifid II requirements, so that they are
well-prepared when they take effect on January 3 2018. At this
early stage of implementation of the Mifid II provisions, we
would highlight those relating to the passporting of the CIFs'
investment services Mifid II (including for the broader range
of activities, services and financial instruments than that of
the current Mifid I passporting regime, such as for dealing on
own account, extended to include matched principal trading), as
well as on the third country regime (Articles 39- 42 of Mifid
II). Market feedback suggests that CIFs are only now getting
themselves prepared for the updated Mifid II regime, and that a
great deal of work remains to be done over the next few
months.
| About the
author |
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Dimitris Papoutsis
Senior associate, Elias Neocleous &
Co
Limassol, Cyprus
T: + 357 25 110 145
F: +357 25 110 110
E: dimitris.papoutsis@neo.law
W: www.neo.law
Dimitris Papoutsis is a senior associate in the
financial services department of Elias Neocleous &
Co LLC.
He advises Cyprus, EU and third-country credit and
financial institutions, investment firms, funds and
leading corporations and their legal advisors on
regulatory matters relating to the provision of
investment services in and from Cyprus. Prior to
joining the firm, Papoutsis practised law in Greece,
where he gained extensive experience in the fields of
domestic and international banking and finance, capital
markets and corporate law.
Papoutsis was admitted as lawyer of the Athens Bar
Association (Greece) in 2007 and holds an LLB from the
Faculty of Law, University of Thrace, Greece (2005) and
an LLM in corporate, banking and capital markets law
from the Faculty of Law, Athens University, Greece
(2007).
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| About the
author |
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Daniel Sakellariou
Senior associate, Elias Neocleous &
Co
Limassol, Cyprus
T: + 357 25 110 130
F: + 357 25 110 110
E: daniel.sakellariou@neo.law
W: www.neo.law
Daniel Sakellariou is a senior associate in the
banking and finance department of Elias Neocleous &
Co LLC.
He advises and supports corporate clients, financial
institutions and investment firms on issues of asset
finance, project finance and commercial contract
negotiations both from a transactional and regulatory
perspective. Sakellariou has experience of working in
London, Hong Kong, Singapore and Athens and prior to
joining Elias Neocleous & Co he practised law with
a big four accountancy firm.
Sakellariou is an Oxford graduate and a scholar of
the Alexander S Onassis and the WSD Louey Foundations.
He is an advocate of the Supreme Court of Cyprus and a
member of the Cyprus Bar Association and is also
admitted to practice in Greece as a European Union
lawyer.
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