Legal Framework

Cyprus investment firm law is a direct adaptation of the European commissions Markets in Financial instruments Directive (MiFID), which is the core pillar underlying EU financial markets integration. The Directive facilitates harmonized regulation for investment services across thirty European nations. Its main objective is to increase competition and consumer protection in investment services; and is considered the most significant piece of legislation pertaining to financial services hitherto introduced in Europe.

 

The following discussion intends to underline some of the highlights of the EU Directive. The MiFID classifies clients into retail, professional (accredited) and eligible counterparties. This facilitates the tailoring of regulatory requirements according to the knowledge and experience of clients. Therefore different levels of regulatory protection pertain to each category.

 

The client categories, emphasizing the level of legal and regulatory protections, are summarized in the following table:

 

Category Protection Description
Retail HIGH Retail clients are afforded the most regulatory protection.
Professional MEDIUM

Professional clients are considered to be more experienced, knowledge-able and sophisticated and are able to assess their own risk and are thus afforded fewer regulatory protections.

A client can be classified as professional if he or she meets the following three criteria:

1. The client has carried out transactions, in significant size, on the relevant market at an average frequency of i0 per quarter over the previous four quarters.

2. The size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments exceeds € 500,000.

3. The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the trans» actions or services envisaged. it is worth mentioning that the above criteria are in line of the industry's definition of an accredited investor [standard Industry convention]. An Accredited investor pertains to an individual that has a Net Worth of at least one million US$, not including the value of ones primary residence, or has income of at least $200,000 each year for the last two years [or $300,000 together with his or her spouse if married] and has the expectation to make the same amount this year. 

Eligible Low Eligible

Counterparties are investment firms, credit institutions, insurance Counterparties companies, UCITS and their management companies, other regulated financial institutions and in certain cases, other undertakings.

MiFlD provides a light-touch regulatory regime when investment firms bring about or enter into transactions with the Cyprus Investment firm (it should be noted that this category does not include pension funds and other employee benefit plans, which enjoy a high degree of regulatory protection). 

In addition to the categories in the above table, the EU directive also distinguishes between discretionary and non-discretionary clients (or discretionary verses non-discretionary investment services).

When an investment firm executes transactions for non-discretionary clients, the directive stipulates that the firm should seek "best execution" as opposed to selecting the option that has the lowest transaction costs. More explicitly, in order to ensure a high quality of execution of investors transactions and to uphold the integrity and overall efficiency of the financial system, the EU Directive imposes an effective "best execution" obligation to ensure that investment firms execute clients orders on terms that are most favorable to the clients This obligation applies to firms which owe contractual or agency obligations to their clients.

In assessing best execution the investment manager should consider a number of criteria, such as the availability of pre- and post-trade transparency data, as well as transaction costs. Nevertheless, other information such as the number of orders cancelled prior to execution or the speed of execution can also be relevant.

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