European Union: MiFID II And Cyprus: Ready For 2018

This is the first in a series of articles from Harneys on MiFID II. Here we focus on scoping issues and changes to the perimeter of the local investment services regime.

Background

Cyprus has given full effect to Directive 2014/65/EU, (MiFID II), through the enactment of the Investment Services and Investment Activities and Regulated Markets Law 2017 (New IS Law). We outline below the key changes expected for the Cypriot financial services industry once the new MiFID II regime comes into force from 3 January 2018.

The new local legislation repeals and recasts the vast majority of rules contained in the Investment Services and Investment Activities and Regulated Markets Law 2007 (Old IS Law) which implemented Directive 2004/39/EC, (MiFID I).

The macro perspective

MiFID II represents a vast panoply of EU regulations, rules and processes designed to harmonise and set a benchmark for European financial markets in investment services and activities. Together with Regulation (EU) No. 600/2014, known as MiFIR, these two legislative acts constitute the core of the new regime. MiFIR, as a European regulation, will be directly applicable from the same date as MiFID II and as such is not further implemented under the New IS Law. In addition to the provisions of the New IS Law and MiFIR, financial and credit institutions in Cyprus will need to have regard to numerous and growing subsidiary legislation issued at European level, "Level 2", and comprising (as at the date of going to press):

  • 4 delegated acts, comprising one directive and three regulations;
  • 31 regulatory technical standards (RTS) all enacted as regulations; and
  • 9 implementing technical standards (ITS) again solely comprising regulations.

At "Level 3" a range of guidance has been issued by the European Securities and Markets Authority (ESMA) as well as Q&A documents and opinions. Furthermore, the above framework continues to be refined through amendments being formed in consultation papers currently in circulation. The range and depth of such detailed rules and guidance lives up to the stated intention of using the MiFID II regime to impose a minimum standard of regulation on firms, and to achieve a greater level of convergence in such regulation across EU member states.

Implementation of MiFID II under the New IS Law: Scoping issues

New financial instruments

MiFID II, and consequently the New IS Law, has introduced the following additional new classes of financial instruments:

  • physically settled derivatives relating to emission allowances; and
  • emission allowances, consisting of any units recognised for compliance with the requirements of the EU Emissions Trading Scheme Directive 2003/87.

Regulation of data reporting service providers

The New IS Law also introduces the requirement for persons who wish to provide data reporting services to become authorised by CySEC. The requirements of the New IS Law distinguish between the various types of data reporting service provides, these being:

  • 'approved publication arrangements' (APAs), which provide the services of publishing trades on behalf of investment firms;
  • 'consolidated tape providers' (CTPs), which provide the service of collecting trade reports on financial instruments from both trading platforms and investment firms, and consolidating this into a continuous electronic data stream made available to the market; and
  • 'approved reporting mechanisms' (ARMs), which provide the service of enabling investment firms to report transaction details to the relevant competent authorities.

The different requirements between the types of providers reflect tailored requirements which apply to each type of data reporting service, although all categories are subject to tight deadlines and relatively strict obligations. As compared to APAs, ARMs would seem to be subject to a relatively lighter regime, particularly as the responsibility or trade reporting remains with the investment firm, whereas APAs are instead subject to an obligation to improve the quality of data on OTC contracts.

Changes to territorial scope

Significant changes have been made to the territorial scope provisions of the New IS Law. We explore the impact of these changes in a separate article.

Revised exemptions regime

Overview

As with MiFID I, MiFID II comprises 'mandatory' as well as 'optional' exemptions. Cyprus has chosen not to exercise its discretion to implement any of the optional exemptions available – as such the exemptions contained in the New IS Law represent the revised exemptions regime contained in Article 2 of MiFID II.

As regards those mandatory Article 2 exemptions, MiFID II makes a number of changes compared to MiFID I; both in introducing certain new exemptions, but also in modifying existing exemptions. These changes are largely as a consequence of the widened scope of application of MiFID II, and do not ultimately represent a material expansion of the available exemptions. In terms of the existing exemptions which have been revised under MiFID II, these effectively result in narrowing the available exemptions.

Dealing on own account expanded, highly relevant to the Cypriot FX industry

The key exemption for own account dealers under the Old IS Law (MiFID I) has been significantly narrowed. Under the current regime persons who do not provide any investment services or activities other than dealing on own account will not be subject to licensing or regulation unless they, in summary, act as market makers or deal on own account on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them.

Under the New IS Law (MiFID II) the revised exemption will no longer apply to dealers in commodity derivatives, emissions allowances or emissions allowance derivatives. As such the dealing activities of the following types of persons may be subject to licensing under the New IS Law:

  • persons who are members or participants of a regulated market or a multilateral trading facility, or who have direct electronic access to a trading venue, except for non-financial entities carrying out hedging activities for themselves or their group
  • persons who apply a high frequency algorithmic trading technique
  • persons who deal on own account when executing client orders

Commodities trading now caught, highly relevant to the Cypriot FX industry

Under the Old IS Law (MiFID I) commodity dealers not part of a wider financial or credit institution fell almost entirely outside of scope of the regime (under section 3(2)(k) of the Old IS Law equivalent to Article 2(1)(k) of MiFID I). That blanket exemption has gone under the New IS Law and in its place commodity dealers seeking to avoid regulation must now rely on a far more curtailed safe-harbour under section 4(1)(j) of the New IS Law equivalent to Article 2(1)(j) of MiFID II.

This provides an exemption only in respect of persons dealing or providing investment services in commodity derivatives to the clients of their main business, where this is an ancillary activity to their main business and where the main business does not consist of the provision of investment or banking services. In addition, persons looking to benefit from the exemption:

  • must not apply a high-frequency algorithmic trading techniques; and
  • must notify annually the relevant competent authority (the Cyprus Securities and Exchange Commission – CySEC) that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity is ancillary to their main business.

Matched principal trading: reclassified and consequential

This last provision gives effect to the intention to include 'matched principal trading' within scope of the dealing on own account activity. Historically this has been considered to constitute 'execution of orders' under the Old IS Law (MiFID I). Matched principal trading would cover a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction.

With matched principal trading now being considered part of the investment activity of dealing on own account, rather than the investment service of execution of orders a number of consequences occur – perhaps the most significant being that the group company exclusion will no longer apply to it. This is because the group company exclusion applies exclusively to the provision of investment services – but not investment activities.

As such it will be imperative that EU entities providing broker-like services on an unregulated basis to group affiliates now reconsider whether such services will continue to be viable.

The organised trading facility

The New IS Law (MiFID II) introduces regulation covering the operation of a new type of trading venue, the 'organised trading facility' or OTF. As an investment service, operating an OTF will be subject to licensing by CySEC. OTFs will operate alongside the existing concepts of the regulated markets and the multilateral trading facility (MTF). An OTF is a multilateral system, other than a regulated market or a MTF, in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives (i.e. non-equity instruments) are able to interact in the system in a way that results in a contract. The key distinguishing feature of an OTF is that in an OTF the execution of orders is carried out on a discretionary basis, where such discretion may be exercised by the operator of the OTF:

  • when deciding to place or retract an order on the OTF, and
  • when deciding not to match a specific client order with another order available in the system at a given time, provided it is in compliance with specific instructions received from a client and best execution obligations. 

Regulation of algorithmic trading

The New IS Law (MiFID II) introduces a significant shift in relation to the regulation of algorithmic trading. Dealers engaging in high frequency algorithmic trading (HFAT), categorised as a sub-set to algorithmic trading, will no longer be able to benefit from the exemptions under the Old IS Law (MiFID I) and, as discussed above, will now need to become authorised by CySEC. Persons dealing in algorithmic trading other than HFAT will not be required to become authorised by CySEC, however they will be subject to some obligations newly introduced by the New IS Law.

More specifically, all persons dealing in algorithmic trading will now be required to have in place effective systems and risk controls to ensure their trading systems are resilient and have enough capacity, are subject to appropriate thresholds and limits which prevent sending erroneous orders, do not function in a way that contributes to a disorderly market and cannot be used for any purpose that is contrary to the rules of a trading venue to which it is connected. They will also need to have effective business continuity arrangements to deal with trading system failures and to ensure their systems are tested and monitored. A firm engaging in algorithmic trading or providing direct electronic access is required to notify accordingly CySEC and the competent authority of the trading venue of which it is a member, and must further maintain records to enable CySEC to monitor the firm's compliance with these requirements.

Final thoughts

MiFID II has been years in the making. The ten years following the original MiFID have contributed to a fair amount of emotional 'baggage' for the industry to contend with: the 2008 Lehman Brothers crash, the 2009 Madoff scandal, LIBOR rigging in 2013. The list goes on. The new rules in many ways follow the classic adage on financial regulation – that it tends to be reactive rather than proactive. Indeed many of the changes to scoping and perimeter provisions in MiFID II look backwards over the experience of the last ten years. The absence of any significant regulation over, for example, the rapidly expanding financial technology sector is intriguing. It therefore remains to be seen whether the MiFID II regime will be able to achieve its aspirations to protect investors and empower competitiveness in this respect./

From a Cypriot perspective however the net outcome of MiFID II results, in practice, in the transfer of much discretion from the local legislature and regulator under MiFID I to the EU competent authorities, namely the Commission and ESMA. Whilst excessive EU harmonisation and power transfer is often criticised, bearing in mind the strength in depth that the European institutions offer to smaller member states such transfers are in many ways and in practice to be welcomed as they level the playing fields throughout the Union.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions