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).
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|
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).
|About the author|
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.