articles | 29 August 2017 | Elias Neocleous & Co LLC

CySEC announcement of changes to passporting arrangements and conditions governing the provision of investment services and activities by third country firms resulting from MiFID II

The Cyprus Securities and Exchange Commission (“CySEC”) has issued a summary of the changes to passporting arrangements and conditions governing the provision of investment services and activities by third country firms that will result from the implementation of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, commonly known as MiFID II, and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”). MiFID II and MiFIR have been transposed into Cyprus law by Law 87(I)/2017 and the new provisions will apply from 3 January 2018. Law 87(I)/2017 expressly adopts the provisions of MiFID II, including a number of discretions that member states had been granted the option to adopt in transposing MiFID II.

The scope of MIFID II is wider than under the existing regulatory regime and as a result the MiFID II passporting arrangements will apply to a broader range of activities, services and financial instruments than hitherto.

CySEC advises all the investment firms it regulates to review their passports and authorisations to determine whether they require amendment under the scope of Law 87 (Ι)/2017 and, if so, to submit the new notifications before 29 September 2017, using the new forms available on CySEC’s website. Many Cyprus investment firms primarily focus on markets outside Cyprus and investors located abroad.

The announcement includes details of the main changes to the passport notification process under Law 87(I)/2017, which are summarised below:

Passports for cross border services

Currently, investment firms may submit one service passport notification covering all EEA countries. This will no longer be possible under MiFID II. Instead, investment firms will be required to submit one passport notification for each country in which they intend to provide cross-border services. Investment firms wishing to include Cyprus-based tied agents in any of their service passports will have to confirm, for each tied agent, the activities and financial instruments that the agent will passport cross border. A separate notification, on form 87-00-04, will be required for each country in which the tied agents intend to provide cross border services.

Cross border arrangements in relation to Multilateral Trading Facilities and Organised Trading Facilities

Investment firms operating a Multilateral Trading Facility (MTF) or an Organised Trading Facility (OTF), a new service introduced by MiFID II, intending to provide access from other EEA countries will have to submit separate passport notifications in addition to their notifications for other activities. Individual notifications, on form 87-00-05, are required for every trading platform and for every country in which it is intended to provide arrangements to facilitate remote access to an MTF or OTF. The details required for each trading platform include a brief description of the arrangements for access and the date from which they will be provided in the host member state, together with a brief description of the MTF or the OTF, including the type of the financial instruments traded, the type of participants, and the marketing approach of the MTF or OTF to target remote users, members or participants in the host member state.

Establishment of a branch

Investment firms intending to establish a branch in another EEA country are required to submit an establishment notification on form 87-00-06. The notification process remains generally unchanged, but investment firms will also have to submit details of the organisational structure of the branch, showing the functional, geographical and legal reporting lines, together with a profit and loss and cash flow projection for the first 36 months of operations.

Tied agents based in other EEA countries

Firms intending to use tied agents established in other EEA countries will have to submit two notifications, one to be granted a right of establishment passport to the country concerned using form 87-00-06 and a further notification on form 87-00-07 to be granted the right to appoint a tied agent established there. A complete tied agent notification will be required for each tied agent established in each country.

MiFID II requires all member states to register tied agents established in their territory. Where an investment firm currently utilises a tied agent established in one of the member states that did not previously operate a tied agent regime (Bulgaria, Denmark, Finland, Iceland, Latvia and Lithuania), the investment firm is responsible for re-registering this tied agent with the competent authority in the host country.

Termination of activities of a branch or a tied agent based in another EEA country

In the event that it intends to terminate the operations of a branch or the use of a tied agent based in another EEA country the investment firm will be required to notify CySEC using form 87-00-08 and provide a schedule for the planned termination and information on the process of winding down the business operations, including details of how client interests will be protected and how complaints will be resolved.

Provision of investment services and activities by third country firms

MIFID II gives member states the option to require investment firms headquartered in a third country to establish a branch in their territory in order to provide investment services or perform investment activities, subject to satisfying specific conditions. Cyprus has exercised its discretion and article 40 of Law 87(I)/2017 allows third country firms to provide services in Cyprus as long as they establish a branch in Cyprus.

Any branch established in Cyprus by a third country firm will require authorisation from CySEC, which is subject to the following conditions:

  • the provision of services for which the third-country firm requests authorisation is subject to proper authorisation and supervision in its home country, with due regard to any FATF recommendations regarding money laundering and terrorist financing, and the requesting firm is properly authorised;
  • there are adequate cooperation arrangements between CySEC and its counterpart in the third country, including provisions regulating the exchange of information for the purpose of preserving the integrity of the market and protecting investors;
  • the branch has sufficient initial capital at its disposal;
  • the branch has appropriate management;
  • there are adequate arrangements between the third country and Cyprus to ensure effective exchange of information in tax matters; and
the firm is a member of an investor-compensation scheme authorised or recognised in accordance with Directive 97/9/EC.

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