Cyprus government at odds with CySec: Whilst regulator protects small FX firms, hedge funds are the priority from Nicosia

During the course of the past decade, the island of Cyprus, a strategically placed former British colony which bridges the cultural and geographical gulf between East and West and holds the unique economic and political stature as the only European Union member state in the Middle East has become one of the most important bases for retail FX companies with international origins.

The island’s standing as a small, business-friendly nation which operates under the English Common Law system has led it to become a veritable springboard to Europe and Asia for small to medium sized retail FX companies which benefited from very easy routes to market and the kudos of Europe-wide MiFID regulation and a ‘passporting’ system which affords CySec regulated firms a similar level of investor protection as those regulated by Britain’s esteemed Financial Conduct Authority (FCA).

Contrary to Britain’s retail environment, however, the ethos within the authorities has been somewhat different until now, in that CySec, the regulatory authority that is operated from a tiny Nicosia office and is responsible for setting guidelines that are in keeping with those required by the European Securities and Markets Authority (ESMA) has over 150 licensed electronic trading companies to oversee on an island which has a population of less than a million people.

Thus, CySec’s interest is very much in keeping the vast FX industry in Cyprus, whereas the British regulator, whilst working along exactly the same lines and is bound by the exact same requirements as CySec, operates in the world’s center of financial services, hence it does not need to pander to small retail FX companies due to England’s broad range of financial services entities that effectively power the world.

As this decade now enters its twilight period, however, Cyprus has learned a great deal during its highly successful encouragement of retail FX business, that being the perils of issuing licenses to all and sundry, in particular small FX firms with their origins (as well as their bank accounts and senior management) outside Cyprus in Israel or Russia, and even more problematic, several years of allowing nefarious binary options fraudsters to approach global client bases by boasting of European regulation.

Whilst various national governments from European parliaments to the FBI have begun to clamp down very hard on binary options fraudsters, most of which were licensed by CySec, as were their market makers which are now at the center of a full FBI investigation, CySec allowed full licensing and a business as usual approach by legitimizing their false offerings as genuine financial markets products.

Things, however, are set to change,  because whilst CySec continues to bumble along and allow the status quo to prevail, itself not fully understanding the full remit required by MiFID II the central government has much greater aspirations.

The reputation of Cyprus as a safe, tax-efficient and highly attractive overseas investment area for British, European and Russian high net worth individuals and the managed funds that they often hold dates back to the colonial era.

Cyprus today retains a very strong British influence in its social and economic culture, and has been a very favorable region for investment over decades since the 1960s for peace of mind in terms of wealth management.

FinanceFeeds has it on very good authority that the central government of Cyprus seeks to preserve this and move it on into today’s electronic investing world, and views the reputational damage done by some of the small FX firms, binary options and now ICOs along with their purpetrators as ultimate in terms of investor confidence in the island as a safe haven.

Hence, the government is seriously considering a move away from the small retail FX shops, ICOs and binary options – effectively the willy-nilly issuing of CIF licenses to all and sundry from any dubious region of the world with no questions asked, toward hedge funds and family offices.

This is excellent news not only for Cyprus but also for the institutional liquidity and market connectivity providers that have an established reputation worldwide.

Companies providing liquidity and ancillary services to Cyprus brokerages will, instead of having to deal with a massive churn rate and worry about compliance issues, be able to distribute Tier 1 liquidity to proper hedge funds should this move go ahead.

No longer will there be a battle for small retail clients, a profit and loss sharing model and lack of value proposition. Instead, a whole new range of high net worth clients and proprietary trading entities can be onboarded, with far less risk, far less cost as they would not need to keep being replaced, and much less regulatory risk.

This could not come at a better time, either.

Hedge funds are outperforming stocks and bonds on both a short-term and long-term basis, according to new research from data provider Preqin.

In partnership with the Alternative Investment Management Association (AIMA), the organisation found that the value of hedge fund performance gains in 2017 was around $250 billion.

On a risk-adjusted basis, it was found that hedge funds performed better over one, three, five and 10-year periods.

“We already knew that 2017 was a good year for hedge funds, with 11 per cent returns for the average fund and gains in every month of the year,” said Jack Inglis, CEO of AIMA in London this morning.

“But this new research makes an important contribution to the debate about hedge fund performance over the long-term since it shows that hedge funds have produced consistent and competitive returns for the last 10 years. This of course helps to explain why the industry has consistently expanded and attracted new investor capital since the global financial crisis” he said.

This is a very different picture to the loss-sharing model used by many small Cyprus based firms that has created a reputational dark shadow, and will likely elevate the standing of the island tremendously.

With a massive talent base already in situ within Limassol’s comprehensive FX industry ecosystem, it will be a very easy shift toward this method if the government can be successful in implementing it.

Research has also established that funds which are no longer seeking external capital produced marginally better returns in 2017 than those that remained open to new investments.

Amy Bensted, head of hedge fund products at Preqin this morning stated: “Hedge funds have become an important part of institutional portfolios since the GFC a decade ago, and today are helping thousands of pension funds, endowments, sovereign wealth funds and other institutions meet their investment objectives.

“As our results show, hedge funds have proved their value within these investor portfolios over both the short and longer term by providing superior risk-adjusted returns to both bonds and equities on a one, three, five and 10-year time frame.”

Let’s hope that this direction can be pursued by the Cyprus government, as it most certainly would be a natural progression in the right direction, and the talent required to operate it is not only in Cyprus, but is absolutely up to the mark and more.