Following the consultation period initiated by Cyprus Securities and Exchange Commision (CySEC) – which ended mid of June 2019 – the Cypriot National Competent Authority (NCA) issued their policy statement (PS-04-2019) introducing the permanent product intervention measures at a national level (cyNPIM). The statement provides restrictions on the marketing, distribution and sale of contracts for difference. This was expected to take place, after the temporary intervention measures of ESMA were not extended after 1^st of August and each NCA was called to introduce their permanent measures at a national level.

CySEC suggestions in the CP-02-2019 consultation paper
The proposal of CySEC in relation to the regulators suggestions for the national measures and all their details was discussed in a previous article. The essence of CySEC’s proposal was focused on an enhanced product governance within the firms and on a sound clients’ appropriateness assessment. CySEC suggested the introduction of a risk-based approach for the classification of the retail clients in order to eliminate the risks arising for clients falling in the negative or grey target market area, and to allow the clients that fall in the upper tier of the positive target market to trade with higher leverage.

Finally, the appropriate leverage for each client would have been determined upon the appropriateness assessment of clients’ profile and the identified target market. CySEC had suggested an approach on how the retail clients should be categorized and be allowed an appropriate leverage – instead of all retail clients falling in the same category.

Despite its suggestions, CySEC has now permanently introduced the ESMA measures into national law and pursuant the MiFIR regulation EU No 600/2014.

What is included in the CyNPIM and what is NOT changing from the initial temporary ESMA measures
1. The prohibition of the marketing, distribution and sale of binary options,
2. The restriction on the incentives (bonuses) offered to clients,
3. The mandatory negative balance protection per account basis, so clients cannot lose more than the total funds on their account,
4. The margin close-out rule of 50% and on account basis,
5. A standardised risk warning that includes the percentage of losses on retail client accounts,
6. The adoption of the same leverage limits for all clients.

It is worth noting that even though CySEC had different view on how clients should be categorized to receive the appropriate leverage as previously mentioned, the Cypriot NCA introduced the same leverages as ESMA for ALL retail clients.

Furthermore, CySEC was of the view that the crypto assets are carrying excessive risks due to their extreme volatility and proposed lower leverages than ESMA, and even suggested the prohibition of the distribution of crypto assets to clients fall into the ‘grey area’ and the ‘positive’ target market. All crypto related suggestions are removed and CySEC is in line with ESMA.

To conclude, the table below summarizes the CySEC suggested proposal with clients being categorized in groups, versus the official leverages by ESMA and finally the permanent decision of CySEC.

What is changing from the ESMA measures?

ESMA and CySEC require firms to provide a standardised risk warning to inform ALL clients (current and prospects) about the percentage of losing retail client accounts. However, CySEC allows the new CFD providers that did not have any open position in the last 12 months and with less than 12 months operating history, to display a standardised risk warning without showing any percentage of losses. In this case, the two type of risk warnings are;
1. the generic warning: “The vast majority of retail client accounts lose money when trading in CFDs”
2. the abbreviated warning: “CFD-retail client accounts generally lose money”

Further, CySEC introduces a territorial approach to the cross-border marketing, sale and distribution of contracts for difference (CFD) for Investment Firms falling under the supervision of CySEC. This decision is due to a possible deviation of the CySEC measures and other NCA measures. Therefore, the Cyprus National Product Intervention Measures (cyNPIM) apply in cases where a client is a resident of;
– Cyprus,
– a third country,
– a member state which did not introduce national measures.
In the case where a member state introduced its own measures, then the respective measures shall be considered.

Asset Class	CySEC Proposed Leverages based on the Target Market			ESMA	Final Permanent CySEC Leverages
	Grey Area	Positive	Upper Tier Positive
Major Currency Pairs	20:1	30:1	50:1	30:1	30:1
Non-major currency pairs, gold and major indices	10:1	20:1	30:1	20:1	20:1
Commodities other than gold and non-major indices	5:1	10:1	20:1	10:1	10:1
For individual equities and other reference values	2:1	5:1	10:1	5:1	5:1
Crypto assets	1:1	1:1	2:1	2:1	2:1

 

To conclude, CySEC aims to provide an enhanced approach for a risk-based client classification by the firms was not introduced. CySEC followed the ESMA measures and only introduced a different risk warning for new CFD providers.

In an article we published early in February this year, we discussed the impact of the temporary product intervention measures imposed by ESMA. If we compare the suggested proposal by CySEC versus the final decision taken, the flexibility given to the EU member states to introduce their own measures was commonsensically minute and in avoiding regulatory arbitrage within the Union, it made sense that a similar set of rules would have had to be the final decision by all member states.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.