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  • Emily A. Georgiades, Esq.

CYSEC Enhances Procedures for Safeguarding Client Funds Held By CIFs.

Cyprus’ securities regulator, CySEC, has recently issued a consultation paper aimed at enhancing procedures to protect client funds held by Cyprus Investment Firms (“CIFs”). The clock is ticking as CySEC will be taking comments on the consultation paper until May 18, 2020.


Amongst such measures that CIFs are expected to take when choosing banks to deposit client funds, CIFs are expected to consider the bank’s capital and the amount of the client’s funds, as a proportion of the bank’s capital and deposits. Additionally, CIFs should consider the bank’s credit rating (if available), the level of the risk of the investment and loan activities undertaken by the bank and its affiliated companies. Such measure protects not only client funds but also the bank- i.e. the bank does not take a risk of going under in an unfortunate event (especially if the bulk of the bank’s capital and deposits consists mainly of the client’s funds).


As a brief overview, according to the new consultation paper, the new enhanced procedures include as per Article 6(1) of the Directive:


1. Placing client funds into one or more accounts opened with either the central bank, a credit institution, a bank authorized in a third country, or a qualifying money market fund;


2. Such account(s) must be labeled in a manner that sufficiently distinguishes it from any account used for holding the CIF’s funds (to prevent comingling);


3. If clients’ funds are deposited with a bank or qualifying money market fund that is of the same group as the CIF, then the CIF must limit the funds that are deposited with such group entities so that the funds do not exceed 20% of all such funds.


4. CIFs are prohibited from transferring funds belonging to non-retail clients without being able to demonstrate that a Title Transfer Collateral Agreement would be appropriate for that non-retail client and without properly informing the non-retail client for the risks entailed (Para. 8(3) of the Directive);


5. CIFs are not allowed to transfer funds belonging to retail clients to a third party as per section 17(10) of the Law.


In addition, if a central bank is not being used but rather a bank in a third country is being utilized for client funds, then the CIF shall exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institutions and banks authorized in a third country where the funds are deposited and the arrangements for the holding of such funds. Furthermore, the need for diversification of such funds needs to be taken into consideration as part of the required due diligence (para 2 of the Directive). The amplified care, skill and due diligence taken by the CIF is significant as any breach of this will lead to a risk of litigation and may be considered at least negligence on the CIF's part.


Part of the CIF’s responsibility is to conduct due diligence procedures of the banks where client funds are deposited at least once within each financial year.


More information may be found in the consultation paper itself. For any queries, please contact us at emily@eaglaw.co


#compliance #CySEC #CIFs #investmentfirms #duediligence #investorprotection #clientfunds #bankinglaw #securitieslaw #funds #eaglaw



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