Interview

FX trading, forex licensing, and fraud - Exclusive interview with Cyprus Securities and Exchange Commission

Monday 18 May 2020 10:31 CET | Editor: Vlad Macovei | Interview

Demetra Kalogerou, Chairwoman of Cyprus Securities and Exchange Commission, discusses CySEC `s mission, the process of licensing forex brokers, forex scams, payments, and how Covid-19 is impacting the FX trading and crypto industry


Could you tell us more about your professional background? 

I’m the Chairwoman of the Securities and Exchange Commission in Cyprus, a position I’ve had the privilege of holding since September 2011. CySEC is the independent regulator responsible for the supervision of the investment services market, transactions in transferable securities carried out in the Republic of Cyprus, and the collective investment and asset management sector. As the head of CySEC, I am also a member of the Board of Supervisors, the governing body of the European Securities and Markets Authority. My additional responsibilities include membership of the Cyprus Public Audit Oversight Board. 

Much of my professional career has been occupied with the fallout from the global financial crisis in 2008, culminating in the Cypriot banking bailout in 2013. As a result, between September 2013 to June 2014, I worked as a member of the Resolution Authority, alongside the Minister of Finance and the Governor of the Central Bank of Cyprus, which supervised and helped implement the resolution of financial institutions in Cyprus. 

Prior to that, I was a Senior Officer of the Cyprus Stock Exchange (CSE). My duties there included the supervision of transactions in transferable securities and the various CSE markets. We monitored the compliance of listed public companies, as well as help research and develop new products, all to further the end goal of ensuring that the Cypriot capital market is a robust and reliable place to do business. With hindsight, it was a great training ground for the work we do at CySEC, where I am able to bring my 15 years’ experience in making sure those participating in the financial markets do the right thing; and consistently so. 

What are Cyprus Securities and Exchange Commission`s mission, objectives, responsibilities?

CySEC’s mission is to effectively supervise those companies regulated in Cyprus, to ensure that investors are protected and the securities market in Cyprus develops with sound integrity. By putting investor protection first, we work to achieve our vision for the Cyprus securities market to be one of the safest and most reliable investment destinations in Europe. 

CySEC’s responsibility is the continuous reform of the regulatory and supervisory framework of the Cypriot securities market. We work to implement and enforce both the national legislation, as well as Directives and Regulations created at an EU level; in line with pan-European and national supervisory priorities and planning. CySEC plays an active role at the EU level, contributing and collaborating on policymaking in the sectors most important to the Cypriot market. This includes the activities of Cyprus Investment Firms and the growing Asset Management Sector. 

Could you elaborate on the process of licensing, registering, authorizing forex brokers? What are the rules in order to be able to receive a CySEC license? And how does a CySEC license compare with other forex jurisdictions eg the UK (FCA) or Switzerland (FINMA)?

EU financial regulation applies uniformly to all EU Member States, save for certain minor Member State discretions provided for in the respective EU legislation. As a result, investment firms domiciled in any of the EU Member States must abide by the same rules and in return, benefit from the right to freely provide their services throughout the EU. Cyprus is no different, so it’s not about what we do differently; it’s about what we and our other European regulators do the same. 

The EU licensing process aims to ensure that the applicant complies with the European regulatory framework, which is designed to ensure adequate protection of investors’ rights. Firms that apply for a CySEC license to offer services in relation to forex trading products must take several steps. The initial application stage includes a detailed description of the company that outlines its business model, and its organizational and capital structure. This includes a description of the policies and procedures that the Company intends to adopt, including, among other things, the rules on business conduct, best execution, and safekeeping of clients’ financial instruments and funds. These are critical pillars of investor protection legislation. 

For the application to progress, companies must provide extensive documentation ranging from their certificate of registration, an organizational chart with names of directors and records of non-bankruptcy and criminal record clearance checks for all board members. We require firms to provide two years of audited financial statements, as well as a reference from the firm’s independent auditor. 

Firms need to outline their procedures and policies to prevent money laundering and terrorist financing, and indeed sign a specific declaration that they have completed - and provide evidence of how they maintain all the relevant checks and balances in this regard. 

Lastly, we require company executives and owners to complete a thorough personal vetting, so we are comfortable that we have a thorough understanding of how the individuals in charge of a company looking to provide forex services – and any other investment service for that matter - will conduct their business. The vetting includes legally binding declarations on past financial and personal character and is accompanied by two references. 

Trading in the global foreign exchange market has jumped to USD 6.6 trillion, according to the Bank for International Settlements, making it a sweet spot for fraudsters and forex scams. What can investors do to identify/avoid crypto and forex fraud and scams?

The investor demand for trading what are high-risk, speculative financial instruments remains very high. As a result, the most important thing investors must do when considering an investment is to do some research into the company offering the product or service and consider whether seeking independent professional advice from another regulated entity might be appropriate. CySEC has a full list of all the companies it regulates on its website, which is easy to check. If a company is not listed by CySEC or another EU competent authority, and is fraudulently claiming to be a licensed firm, investors will not have the same protections they would with a regulated entity. It is critical that investment firms classify their clients in an appropriate manner, and those which qualify as professional investors – and thereby marketed more sophisticated, and often higher risk products and services – are indeed professional. This marketing process must be fair and not misleading. 

CySEC regularly updates its ‘Warnings’ page on the back of the most recent information we have on prevalent scams and nefarious operators. Investors are encouraged to keep an eye on this page, so they are aware of what types of fraud and scams are being tried. 

Typically, investors should be especially wary if they feel under pressure to make a decision to invest quickly (such as a time-limited offer); are offered returns on their investment that sound too good to be true, and are told about products or services that don’t adequately explain the risk of losing money. 

Forex trading is inherently speculative, and firms must uphold their responsibility to warn their clients that their capital is at risk. Aggressive cold-calling tactics (either by phone, email, online pop-ups or on social media) are also likely to be perpetrated by unscrupulous providers rather than by reputable players in the market. We have also observed cases where people are fraudulently presenting themselves as CySEC Officers or representatives in an effort to defraud investors. For this reason, CySEC has issued several announcements, informing the public that it never sends unsolicited correspondence to investors or members of the public, nor does it ever request any personal data, financial or otherwise.

How is Covid-19 impacting the FX trading and crypto industry?

Like similar firms across the world, Cypriot Investment Firms face dramatically increased and prolonged volatility in the markets. The unprecedented market activity has thrown investor protection into sharp scrutiny, as CIFs have had to provide for big intra-day movements, often, increased trading volumes and in some cases liquidity concerns. Robust systems, adequate technology and prudent risk management are very important during such turbulent periods. 

All CIFs have implemented plans for the continuation of their business activity. Their employees are working safely and remotely. 

In terms of the market itself, across FX, Contracts for Difference (CFDs) and crypto products, there were financial instruments related to European and US shares and Indices that have suffered from low liquidity, exacerbated by European and US trading halts. From contacting the CIFs, we are aware that traders are trying to navigate the unpredictable market; CIFs are seeing CFD spreads on indices and commodities increasing due to low liquidity. Spreads in FX have not witnessed the same extreme variations.

Could you please provide more details about the most popular payment methods among traders? Do they use cryptocurrencies?

The clients of firms falling under our mandate predominantly fund their accounts using fiat currencies. Firms use various funding methods, including bank transfers and money remittances through Payments Services Providers. CySEC’s position on firms accepting crypto assets as a means of payment and/or as collateral for margined transactions is that this is a risky practice. 

There are three main reasons. Firstly, the cryptoassets market is highly volatile and highly unpredictable. Certain cryptoassets experience high levels of intraday volatility and in some cases high levels of intra-hour or even intra-minute volatility, leading to price gaps. Such price gaps render cryptoassets as high-risk collateral and can result in unintentional margin close-outs for investors trading margin.

Secondly, and in contrast to cash transactions (which are also high-risk transactions), which require the physical presence of the respective person, cryptoasset transactions are performed remotely. This lowers the barrier for this type of transaction to be carried out, thereby increasing the frequency of a high-risk transaction. This poses a significant operational risk to the system. 

Lastly, where cryptoassets are being used as a form of payment, there is an increased risk of money laundering and terrorist financing. We expect that the incorporation of cryptoasset businesses under the scope of the EU AML legislation by means of the 5th EU AML Directive, in conjunction with our proactive engagement with such firms in the context of the activities of the CySEC Innovation Hub, through which we have clearly communicated our expectations, will alleviate the risks involved. However, we are concerned that the premature integration of a recently non-regulated high-risk market with the heavily regulated investment services industry is likely to create an AML spill-over risk.

As a result, we do not encourage regulated firms to engage in such activities and share ESMA’s position on the inherent risks they pose for investor protection. However, CySEC constantly re-evaluates this rapidly evolving sector, and our approach on this might be reconsidered once we have a clear view of the compliance culture of crypto entities. 

About Demetra Kalogerou 

Demetra Kalogerou is the Chairwoman of the Securities and Exchange Commission in Cyprus, a position she has held since September 2011. As the head of the CySEC, she is also a member of the Board of Supervisors, the governing body of the European Securities and Markets Authority. Mrs Kalogerou is additionally a member of the Cyprus Public Audit Oversight Board. Between September 2013 to June 2014, she worked as a member of the Resolution Authority, alongside the Minister of Finance and the Governor of the Central Bank of Cyprus, which supervised and helped implement the resolution of financial institutions in Cyprus following the Cypriot banking bailout in 2013. Prior to her current role, she was a Senior Officer of the Cyprus Stock Exchange (CSE).  There, she supervised transactions in transferable securities, monitored the compliance of listed public companies, and helped research and develop new products.

About Cyprus Securities and Exchange Commission

Cyprus Securities and Exchange Commission is the independent regulator responsible for the supervision of the investment services market, transactions in transferable securities carried out in the Republic of Cyprus, and the collective investment and asset management sector. CySEC’s role is to effectively supervise companies regulated in Cyprus to ensure that investors are protected and the securities market in Cyprus develops with sound integrity. By putting investor protection first, it works to achieve its vision for the Cyprus securities market to be one of the safest and most reliable investment destinations in Europe.

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Keywords: CySEC, Demetra Kalogerou, forex brokers, forex scams, payments, FX trading, licensing, covid-19, regulations, legislation, supervision, policymaking, CIF, FCA, FINMA, investors, funds, money laundering, terrorist financing, foreign exchange market
Categories: Banking & Fintech | Payments General
Countries: Cyprus
This article is part of category

Banking & Fintech