MiFID II investment firm licences and MiCA: Two for one

Both regimes are administered by the Cyprus Securities and Exchange Commission (CySEC) which is responsible for the licensing and supervision of Cyprus investment firms under the local MiFID II regime (CIFs) and crypto-asset service providers under the Local CASP Regime.

Following the imminent replacement of the Local CASP Regime with the rules of EU Regulation 2023/1114 on markets in crypto assets (MiCA), which will enter into force on 30 December 2024 (subject to transitional periods), CIFs will be able to provide crypto-asset services by submitting a simple notification to CySEC containing certain information in accordance with MiCA, without additional authorisation under MiCA.

As there are significant overlaps between the regulatory standards under MiFID II and MiCA, the option of obtaining a CIF licence to cover both spot crypto products and crypto derivatives has become an increasingly attractive option for crypto exchanges that are looking to obtain a foothold in the EU and enjoy the right to provide their services across the EU (aka passporting).

With the above in mind, we provide below an overview of the key features for the licensing of a CIF in Cyprus.

CySEC will expect an applicant CIF to have sufficient economic substance in Cyprus, including the following requirements:

• The CIF will be expected to have:
  • a local office, and
  • physical presence in Cyprus.
• All employees of the CIF engaged in the provision of investment services or performance of investment activities are expected to take the relevant Certification Exams provided by CySEC and be registered in the relevant register of certified persons maintained by CySEC. These exams are divided into two levels (Basic and Advanced) which may apply depending on the type of investments services/activities provided by the relevant person.
• The CIF is expected to maintain a minimum physical presence in Cyprus and have at least the following personnel:
  • At least two executive directors and two independent non-executive directors. The majority of the board of directors must be Cyprus residents.
  • A Money Laundering Compliance Officer (MLRO) which will have to be a holder of the CySEC AML certification and be registered in the AML compliance officer register. The MLRO may concurrently be one of the directors, subject to CySEC approval. The MLRO should be based in Cyprus.
  • A regulatory compliance officer which will need to be a holder of the CySEC Advanced certification and be registered in the relevant register of certified persons.
  • Senior officers acting as heads for the following departments: dealing rooms, sales, dealing on own account, risk management, back office, accounting, internal audit. The senior officer may concurrently be one of the directors, subject to CySEC approval. Certain functions can be outsourced.
  • An external auditor.

• The minimum initial paid share capital requirements for a licensed CIF ranges from €75,000 to €750,000 depending on the actual investment and ancillary services offered. For instance:
  • Minimum paid up share capital of €75,000 will apply where a CIF offers or provides the services of reception and transmission, execution of orders on behalf of clients, portfolio management, investment advice and placing of financial instruments without a firm commitment basis, provided that the relevant CIF is not permitted to hold client money or securities belonging to its clients.
  • Minimum paid up share capital of €750,000 will apply where the following services are offered by the CIF: dealing on own account (market maker) and the provision of underwriting services in respect of issues of financial instruments.
  • Minimum paid up share capital of €750,000 will apply where a CIF offers or provides investment services or undertakes the activity of operating an organised trading facility and where that CIF also engages in dealing on its own account or is permitted to do so.
  • Minimum paid up share capital of €150,000 will apply for any CIFs not falling in any of the above categories.

The relevant application form to be submitted to CySEC for the CIF licensing is CySEC Form 87-00-01. The application form and the accompanied documents requested by CySEC must be submitted in wet-ink version.

The documents that are usually submitted to CySEC in connection with the application form for a licence include the following:

• Information about the directors, managerial staff, and shareholders with special participation (CVs, completed questionnaires as provided by CySEC etc)
• Company incorporation documents (certificate of incorporation, certificate of Registered Office, Directors’, Shareholders’, and Secretary Certificate, Memorandum and Articles of Association, etc)
• Analytical group and organisational structure charts
• Evidence of paid-up share capital and other types of capital raised
• Clean criminal records and Certificates of Good Standing of the shareholders, the Board of Directors, and senior management of the Company
• Company procedures manual for all activities and operations, an internal procedures manual, and AML (Anti Money Laundering) manual
• A detailed business plan
• Financial statements and forecast accounting plans
• Certification from the external auditors and legal advisors of the applicant

CySEC application fees can range from €7,000 to €25,000 depending on the types of services and ancillary services to be provided by the applicant.

Once licensed the CIF will need to pay annual fees to CySEC – these commence from fixed charges ranging between €5,000 and €10,000 with additional variable charges based on a percentage scale and depending on the types of services and ancillary services, and extent of business undertaken, by the authorised firm.

Separately to licensing fees, an obligation to make an initial and thereafter annual contributions to the mandatory Investors Compensation Fund will also apply. Initial contributions are set at €2,000 per investment service provided and €35,000 for the safekeeping ancillary service.

Ongoing obligations imposed to CIFs in the context of providing investment services in Cyprus include the following:

• An obligation to ask existing or potential clients to provide information regarding their knowledge and experience in the investment field, so as to enable the CIF to assess whether an investment service or product is suitable/appropriate for them.
• An obligation to take all reasonable steps to identify and prevent or manage conflicts of interests-including between the CIF - including its managers, employees, and tied agents as well as any person directly or indirectly linked to them.
• A requirement to act honestly, fairly, and professionally in accordance with the best interests of their clients, including in terms of any relevant remunerations and commissions.
• When a CIF holds financial instruments or funds belonging to clients, it should make adequate arrangements to safeguard the ownership rights of the clients.
• An obligation to take all sufficient steps, when executing orders, to obtain the best possible result for their clients – also as known as “best execution”.
• An obligation to provide appropriate information to clients in good time in relation to the CIF, its services, financial instruments, and other related matters.

Secretary & Registered Office

All Cyprus entities must have a Secretary and a Registered Office Address in Cyprus.

Secretary: The Secretary can carry out all the necessary secretarial duties including the preparation and filling of the Annual Returns (to the Registrar of Companies) and ensure that all minutes are prepared for the Annual Statutory Meetings.

Registered Office: A registered office in Cyprus is required in order to receive any official correspondence and notifications from any Government Department of the Republic of Cyprus.

Ongoing statutory compliance obligations

Aside from its regulatory obligations, during its operations, CIFs will have certain statutory compliance and reporting obligations as follows which generally apply to Cyprus companies:

• Book-keeping: monthly bookkeeping function of the CIF.
• Monthly & quarterly management accounts: preparation of management accounts to comply with the reporting requirements of the CIF.
• Preparation of Annual Financial Statements under IFRS: liaising with auditors providing them with all necessary information for the preparation of the Annual Financial Statements.
• Tax compliance services: preparation of the annual tax computations, completion, and submission of the Annual Income Tax Return (form TD4), automatic exchange of information obligations and others.
• VAT compliance services: providing preparation of the quarterly VAT forms and any other VAT matters which might be required.
• Payroll services: Full payroll compliance services for the employees of the company situated in Cyprus.

Auditors

All Cyprus companies must appoint an external auditor to provide auditing services to the CIF.

Other relevant operational costs

A new CIF set up in Cyprus would be faced with several operational costs.

These costs include:

• Set up and maintenance costs
• Renting a space to use as an office
• IT
• Telephone
• Electricity
• Annual company levy which is imposed by the Cyprus government on companies

It will be important for any CIF to conduct its own due diligence on operational costs and planning as the licensing process progresses.

Please contact the authors or your usual Harneys contact if you require further information.