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CySEC guidance on speculative investment products

On 30 November the Cyprus Securities and Exchange Commission (“CySEC”) issued Circular C168 to Cyprus Investment Firms (“CIFs”) that it regulates informing them of recent changes to the European Securities and Markets Authority’s guidance on the application of the Markets in Financial Instruments Directive to the marketing and sale of financial contracts for difference and other speculative products to retail clients.

The circular draws particular attention to the following new requirements:

·         Bonuses to clients

CIFs should not offer bonuses that are designed to incentivise retail clients to trade in complex speculative products such as contracts for difference, binary options and rolling spot forex as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients as required by article 36(1) of the Investment Services and Activities and Regulated Markets Law. CIFs are required to report existing bonus schemes to CySEC by 14 December 2016 and CySEC expects them to close any existing bonus schemes directed at retail clients and not to launch any new schemes. Furthermore, CIFs must notify CySEC of any new type of trading benefits that they intend to offer to retail clients, before implementing them. CIFs must be able to demonstrate to CySEC that any proposed such trading benefit is not designed to encourage behaviour that is not in clients’ best interests.

·         Withdrawal of funds

CIFs must process any request by a retail client to withdraw funds on the same day that the request is made (or the next working day if the client’s request is received outside of normal trading hours) if there are funds on the client’s account.

·         Use of leverage 

CySEC’s policy on leverage is based on the premise that a CIF offering excessive leverage to retail clients is unlikely to be able to demonstrate to CySEC that this is in the best interests of retail clients as required by article 36(1) of the Investment Services Law. CIFs should establish a leverage policy which is approved by the board of directors of the CIF and design their trading systems in a way that offers their retail clients the most prudent leverage option as a default, and requires positive action on the part of the client to opt for a higher ratio. They must limit the level of leverage available to retail clients that do not meet required criteria and they must ensure that the client’s maximum exposure to loss never exceeds the client’s available funds.