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CYPRUS INVESTMENT FIRMS (CIF)

A Capital Markets Union

Cyprus Investment Firms (CIF) that operate in Cyprus must be licensed by the Cyprus Securities and Exchange Commission (CySEC). The Investment Services and Activities and Regulated Markets Law of 2007 (L.144(I)/2007), as amended (the Law), is the main piece of national legislation that governs investment firms in Cyprus, in addition to European Union (EU) legislation and secondary national legislation.

On 26 June 2021 the new prudential framework for investment firms in the EU (including for CIFs) has entered into force. The new framework forms part of the EU’s action plan for a Capital Markets Union and comprises of:

The New Classification System

The new IFR /IFD framework introduces a new classification system for investment firms based on their activities, systemic importance, size, and interconnectedness as follows:

Class 1A

Consists of firms which are considered systematically important firms, which are described to firms that carry out the services under points (3) and (6) of Part I, Annex I of the Law as well as a collective undertaking or an insurance undertaking that meet any of the criteria below:

  • the total value of consolidated assets of the undertaking amounts to €30 billion or more;
  • the total value of the assets of the undertaking is less than €30 billion, and the undertaking is part of a group in which the total value of the consolidated assets of all undertakings in that group that individually have total assets of less than €30 billion and that carry out any of the activities referred to in points (3) and (6) of Part I, Annex I of the Law is equal to or exceeds €30 billion;
  • the total value of the assets of the undertaking is less than €30 billion, and the undertaking is part of a group in which the total value of the consolidated assets of all undertakings in the group that carry out any of the activities referred to in points (3) and (6) of Part I, Annex I of the Law is equal to or exceeds €30 billion.

Such undertakings will be considered as systematically important firms and must seek authorisation as a credit institution under the CRR2/CRDV capital framework.

Class 1B

Consists of investment firms that carry out the services under points (3) and (6) of Part I, Annex I of the Law as well as a collective undertaking or an insurance undertaking that meet any of the criteria below:

  • the total value of the consolidated assets of the investment firm amounts to €15 billion or more;
  • the total value of the consolidated assets of the investment firm is less than €15 billion, and the investment firm is part of a group in which the total value of the consolidated assets of all undertakings in the group that individually have total assets of less than €15 billion and that carry out any of the activities referred to in points (3) and (6) Part I, Annex I of the Law is equal to or exceeds €15 billion;
  • the investment firm is subject to a decision by the competent authority in accordance with Article 5 IFD.

Such investment firms will remain under the supervision of CySEC but will be supervised CRR2/CRDV for prudential requirements.

Class 2

An investment firm that no longer meets any of the criteria Class 3 below and is subject to the new IFR/IFD regime.

Class 3

Consists of investments firms that meet all the criteria below:

  • AUM (Assets Under Management) is less than €1,2 billion;
  • COH (Client Orders Handled) is less than either €100 million/day for cash trades, or €1 billion/day for derivatives;
  • ASA (Assets Safeguarded and Administered) is zero;
  • CMH (Client Money Held) is zero;
  • DTF (Daily Trading Flow) is zero;
  • NPR (Net Position Risk) or CMG (Clearing Margin Given) is zero;
  • TCD (Trading Counterparty Default) is zero;
  • The on‐ and off‐balance sheet total of the investment firm is less than €100 million;
  • The total annual gross revenue from investment services and activities of the investment firm is less than €30 million, calculated as an average on the basis of the annual figures from the two‐year period immediately preceding the given financial year.

Such investment firms will be deemed as small and non-interconnected investment firms and will be subject to the new IFR/IFD regime, with certain exceptions.

Initial Capital Requirements

New capital requirements are introduced by Article 9 IFD for investment firms which carry out the services listed in Part I, Annex I of the Law as per the below:

  • Dealing on own account, underwriting and/or placing on a firm commitment basis shall have a €750,000 initial capital requirement;
  • Reception and transmission of orders in relation to one or more financial instruments, execution of orders on behalf of clients, portfolio management, investment advice and placing of financial instruments without a firm commitment basis and an investment firm which is not permitted to hold client money or securities belonging to its clients shall have a €75,000 initial capital requirement;
  • Investment firms that do not fall under points a), b) and d) shall have a €150,000 initial capital requirement;
  • Operation of an organised trading facility shall have a €750,000 initial capital requirement.

Moreover, the composition of the initial capital should be in line with the provisions of the IFR.

The K-factor requirements

Investment firms are required to apply K-factors (i.e., quantitative indicators reflecting the risk) to capture the risk they pose to customers, to market access or the investment firm itself.

Requirements for own funds and composition

The IFR provides that investment firms should calculate their own funds, and provides thresholds applicable according to the particular class in which the investment fund was classified into.

Concentration risk requirements

Subject to exemptions, investment firms under Classes 2 and 3 must monitor and control their concentration risk in order to not exceed the limits imposed by Article 37 IFR.

Liquidity requirements

Subject to exceptions, investment firms under Classes 2 and 3 must hold an amount of liquid assets as per the provisions of the Law.

Disclosure requirements

The IFR/IFD regime sets out various disclosure obligations for Class 2 investment firms as well as for some Class 3 firms. Summarily, public disclosures are required with regard to:

  • Risk management objectives and policies;
  • Internal governance arrangements;
  • Own funds requirements;
  • Remuneration policy and practices;
  • Investment policies; and
  • Environmental, social and governance risks.
Reporting requirements

The IFR also imposes reporting requirements on investments firms. Most notably, Class 2 investment firms must report on a quarterly basis to their respective EU Member State’s competent authority the following:

  • Level and composition of own funds;
  • Own funds requirements;
  • Own funds requirements calculations;
  • Where the firm is a Class 3 firm, the level of activity, including the balance sheet and revenue breakdown by investment service and applicable K-factor;
  • Concentration risk; and
  • Liquidity requirements.

Class 3 investment firms must report the above to their respective EU Member State’s competent authority on an annual basis.

Other supervisory requirements

The IFD provides a requirement for Class 2 investment firms to have in place sound, effective and comprehensive arrangements, strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital and liquid assets that they consider adequate to cover the nature and level of risks which they may pose to others and to which the investment firms themselves are or might be exposed (Internal Capital Adequacy Process (ICAAP)). Moreover, Class 2 investment firms must establish internal governance processes on treatment of risks, country-by-country reporting, and specific remuneration rules as per the provisions of the IFD.

Class 3 investment firms also have to establish internal governance processes on treatment of risks whereas with regard to the ICAAP requirements, the respective competent authorities in the EU Member States may request Class 3 investment firms to comply to the extent they deem it to be appropriate.

The Guidance by CySEC

The guidance provided by the Cyprus Securities and Exchange Commission (CySEC) of the Republic of Cyprus includes Circular No. C355, Circular No. C426, and Practical Guide for the New Prudential Framework for Investment Firms.

Our CIF Practice Portfolio

ServPRO is a well-established team of accountants, auditors, advocates and consultants in Cyprus. Our areas of expertise are Accounting & Finance, Advisory & Consulting, Audit & Assurance, Corporate & Legal, Economic Substance and Taxation.

Our team has a stellar track record in delivering practical solutions to corporate and individual clients with a spherical, solution-driven and detail-oriented approach, while demonstrating an aptitude of professionalism, integrity and commercial acumen.

Contact us today for an initial consultation on establishing and operating a CIF.

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