The 5 Areas of Regulatory Compliance
More than 230 investment firms are regulated by the Cyprus Securities and Exchange Commission (CySEC) as of October 2019. As discussed, all firms offering and performing these investment and ancillary services must be authorised by a National Competent Authority (NCA) of the European Union member state. In the case of Cyprus the NCA is CySEC, in the case of Germany it is BaFin and so on.
All these Cyprus Investment Firms (CIF) are authorised to offer a varying combination of investment services that suit their business model and objectives. Most of the companies are online brokerages for Contracts of Difference (CFD), while others are Asset Managers and Wealth Managers, with a few also or solely performing Portfolio Management and Investment Advisory.
A common challenge all these European investment firms face is adapting to upcoming regulations while enforcing the demands of existing regulatory requirements. Managing the compliance costs is of paramount importance.
Our approach needs to be proactive rather than reactive, to save time and effort. Two resources of extreme importance for profitability.
In this article, we list the 5 main areas out of which most compliance requirements (and costs) are coming from and, indicate how SALVUS can be of value in identifying interdependencies of and synergies from all regulations and enhancing business through efficient practices and policies.
The 5 areas of regulatory compliance are:
1. Markets in Financial Instruments Directive (MiFID)
2. European Market Infrastructure Regulation (EMIR)
3. Capital Requirements Directive IV (CRD IV)
4. Anti-Money Laundering (AML) and Terrorism Financing
5. OECD Common Reporting Standard (CRS)
1. Markets in Financial Instruments Directive (MiFID)
Firstly, the basis of it all, the MiFID. The Directive officially came into force on November 1st in 2007. Its aim was to integrate the financial markets of EU and out of it a range of measures such as pre- and post-trade transparency, disclosure requirements were introduced.
In January 2018, the Markets in Financial Instruments Directive II (MiFID II) built on the initial MiFID aim of promoting increased market transparency, enhancing investor protection and harmonising the regulatory regimes within the different European Economic Area (EEA) jurisdictions. MiFID II introduced additional measures, which addressed issues identified during the 2008 financial crisis.
How we help: We work with you and undertake a gap analysis between your firms’ current practices and the MiFID provisions.
– Implement the requirements identified by the gap analysis
– Answer all your day-to-day or ad hoc queries in relation to the Directive
– Prepare or update your firms’ Procedures Manual, Conflicts of Interest Policy, Best Execution Policy, Product Governance and all other policies and procedures
– Deliver tailor-made training to your internal teams, junior and senior, on many MiFID related subjects
– Deliver the MiFID II standards RTS 27 and 28 and meet the Directive’s Best Execution
2. European Market Infrastructure Regulation (EMIR)
EMIR, stands for the European Market Infrastructure Regulation, and it is Regulation (EU) No 648/2012. Its introduction affected the global OTC derivatives market reporting. Firstly, derivative contracts are traded on exchanges or electronic platforms, cleared through a central counterparty (CCP), reported to a trade repository (TR) and are subject to capital or other requirements to reflect the risk of transactions. CCP and TR are key participants in EMIR.
EMIR introduced a set of procedures regarding clearing, transaction reporting and risk management for firms that are subject to the regulation. Risk management requirements were phased in on March 2013, while reporting requirements came into force on February 2014.
How we help: We work with you and your internal team in understanding the EMIR regulation and its requirement for your firm.
– Support the in-house responsible person, required by CySEC, to draft adequate policies, perform daily reconciliations, identify and correct any errors occurred.
– Gather business requirements, map the data and specify the migration processes
– Identify derivative products your firm offers subject to the EMIR obligation
– Design, test and document business and operational processes
– Design, build and implement management information systems to monitor different risk types
3. Capital Requirements Directive IV (CRD IV)
The CRD IV package is a single rule book for European credit institutions and investment firms, which includes the Capital Requirements Regulation (CRR), and the Capital Requirements Directive (CRD). The CRD IV aims to ensure that a robust capital and liquidity framework for all credit institutions and investment firms in Europe through strict requirements.
Efficiently using capital is the prime and most important challenge here. The CRD IV Directive also deals with corporate governance, including remuneration, and standardised EU regulatory reporting specifications.
How we help: We work with your team to establish policies and procedures in order to adhere to the CRD IV requirements.
– Build streamlined systems to quantify your capital ratios, liquidity ratios and leverage
– Design scenarios for stress testing analysis
– Optimise your capital requirement and allocation
– Prepare or review, and answer ad hoc questions on the prudential Capital Adequacy forms submitted to CySEC
– Train and equip your firm’s internal team with the necessary skills and knowledge through tailor-made workshops
– Prepare or review, and answer ad hoc questions on the Internal Capital Adequacy Assessment Process (ICAAP)
– Prepare or review, and answer ad hoc questions on the Pillar 3 Disclosures report
4. Anti-Money Laundering (AML) and Terrorism Financing
The economic environment, through laws and regulations, has become stricter and more demanding in its effort to establish a stronger framework to deal with existing and new threats to the international financial system. A continuous AML risk assessment and the implementation of adequate controls to mitigate these risks must be performed by firms in order to successfully follow a risk-based approach. Know-Your Customer (KYC) procedures, including enhanced due diligence for customers that are categorized as high risk is the fundamental requirement.
How we help: We work with your board and senior management to build integrated, risk-based and efficient AML compliance control programmes.
– Prepare or work with the internal team to deliver the AML Annual report for submission to the regulator.
– Perform an AML risk assessment in line with regulatory requirements and best practices
– Create effective and sustainable AML compliance monitoring
– Design and implement effective customer due diligence processes
– Train senior executives and employees on key topics
– Prepare or update your policies and procedures, the AML Policy, to ensure compliance with the regulatory requirements and the next regulatory regime of Anti-Money Laundering (AMLD5).
5. OECD Common Reporting Standard (CRS)
A global standard for the automatic exchange of financial account information was released by the Organization for Economic Cooperation and Development (OECD) in February 2014, which systematically and periodically transmits taxpayer information. The OECD Common Reporting Standard imposes obligations on financial institutions to review and collect information to identify an account holder’s country of residence and then provide certain specified information to the home country’s tax administration. Investment Firms as financial institutions are affected by CRS.
How we help: We work with you in designing effective due diligence through smart and strategic alignment with AML/KYC processes for a successful CRS project.
– Assess and analyse the gap in your current policies and procedures against the key CRS provisions
– Define the CRS related specification requirements for your individual IT platform
– Provide support in the implementation of the CRS requirements
Our team, at SALVUS Funds, is dedicated and specialized in doing exactly the things mentioned in this article. We would love to answer your questions on these or any other matter – feel free to email us at info@salvusfunds.com.
Assisting our clients, via a wide range of services in Operations, Compliance and Risk Management, in complying with their specific regulatory obligations and deliver real tangible value to your business through more elaborate solutions is what we do.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.