What is the Cyprus Securities and Exchange Commission in Regulation (CySEC)
The Cyprus Securities and Exchange Commission was formed in 2001 as a regulator of the financial markets and market participants in Cyprus. When Cyprus joined the European Union in 2004, CySEC was mandated to conform with the MiFID protocol as an EU-member state. MiFID gave regulated entities in Cyprus access to other markets all over Europe, thus putting a lot of responsibility on CySEC in ensuring these entities met the required standards.
Functions of CySEC
The Role of CySEC
The Cyprus Securities and Exchange Commission (CySEC) is the agency tasked with the regulation of the financial markets and players in the financial markets in Cyprus. Being a major financial hub which attracts a lot of financial services companies, Cyprus plays a key role in the European financial markets.
Many forex brokers and binary option firms have taken advantage of the low tax and investor-friendly environment that Cyprus presents to open shop in the country. This has put a lot of responsibility on CySEC in terms of controlling the activities of these firms and making sure they operate within the laws and regulations.
CySEC performs several functions in its capacity as a regulator of financial markets and market participants.
- Licensing of investment firms (known as Cypriot Investment Firms or CIFs).
- Supervision of licensed and regulated companies operating in the financial markets.
- Regulation and supervision of the Cypriot Stock Exchange and companies operating within that market.
- To sanction and discipline errant market operators.
An explanation of each of these functions is provided below.
Licensing of Investment Firms
CySEC has rapidly expanded the category of companies that it regulates, especially since the recognition of binary options as a financial instrument worthy of regulation. The following categories of companies are eligible for licensing by CySEC:
- Companies classified as Cypriot Investment Firms (CIFs), which are firms that receive and transmit trade orders for execution from clients or on behalf of clients as portfolio managers.
- Companies and individuals operating in the stock market as brokers, financial advisers, etc.
- Companies that issue loans.
- Companies that issue derivative instruments, money market assets and securities.
By this definition, CySEC provides regulation for brokers and other market operators within the stock market, forex market and binary options market. Due to the influx of many of these companies into Cyprus at the turn of the century to benefit from its tax haven status, CySEC has literally had to undertake licensing of thousands of companies and entities operating in these markets.
Supervision of Regulated Entities
CySEC does not just stop at issuing of licenses to these firms. It also carries out continuous supervision, monitoring and evaluation to determine if the companies are operating under the terms by which the licenses have been issued. CySEC has had to revoke licenses of a few companies which broke the rules of operation as CIFs.
CySEC has strict rules for companies operating with its licenses. Some of these rules are as follows:
- Members of the governing boards of licensed companies are required by law to hold certain qualifications. If for any reason there is a change in membership, CySEC must be notified and any replacements must have the requisite qualifications.
- The names of the companies must be a reflection of the services such companies offer to the investing public, and any changes in the name or branding of a company must be visible for at least one year while the company transits from the old brand to a new one.
- The payments of salaries and allowances of employees of such firms must not be structured in such a manner as to constitute a conflict of interest with their clients. This means that regulated firms must not pay staff based on trading volumes, percentage of net revenue and percentages based on client retention rates.
- Licensed firms are expected to fulfill CySEC-mandated reporting requirements.
- CIFs are required to maintain a certain minimum level of physical presence in Cyprus to continue enjoying EU-wide licensing.
There are other rules which operators with a CySEC license must fulfil. CySEC regularly monitors these firms as part of its supervisory role in the financial markets.
Sanctioning of Errant Market Operators
Where market operators licensed by CySEC run foul of the rules, CySEC takes punitive action against such operators. Many of these sanctions start from issuance of public warnings against certain brokers, financial penalties and in a few cases, outright suspension of licensing.
A criticism of CySEC in this area is that the punishments rendered by CySEC to errant operators are relatively lenient when compared to the punishments that other regulators dish out to operators who do not comply with the rules. For instance, CySEC’s most common mode of punishment is application of financial penalties which are in tens of thousands of Euros, whereas the CFTC which regulates binary options and forex in the US has been known to apply fines in millions of dollars against errant brokers.
How CySEC Protects Traders
The CYSEC is there to protect all market players but emphasis is placed on consumer protection. Protection of consumers of financial products (including traders who trade forex and other financial market products) is carried out at three intervention points:
- CySEC runs a register which lists regulated firms as well as firms under various levels of sanction. This enables consumers to know what brokerage company to do business with BEFORE they apply their money.
- CySEC conducts regular supervision of brokers and usually broadcasts public warnings on its website about the activities of brokers who are not following the rules under which they are to operate as mandated by CySEC. These warnings serve to keep active traders on notice.
- In a few cases, CySEC has actually taken very strong punitive action against brokers and assisted in recovery of clients’ funds where this was an issue. WGM Services and Pegase Capital Ltd are two companies who were fined 340,000 Euros and 300,000 Euros respectively for failing to honour withdrawal requests of traders. However, action at this level has not been very robust and therefore traders are advised to use the previously mentioned intervention areas as better alternatives.
Why choose a CySEC regulated broker
As the years go by, the Cyprus Securities and Exchange Commission has been making improvements to its regulatory structure for the financial services industry in Cyprus and Europe as a whole. Credit must go to this agency for stepping in to take responsibility to regulate the binary options market and prevent the industry from being overrun by unregulated cowboy brokers.
While there have been criticisms over the perceived slow and light-handed punitive actions against errant brokers, CySEC has gotten tougher with bad brokers over time and the message being sent out is very clear: Cyprus is no longer a scammer’s haven when it comes to binary options products.