Cysec Chair Demetra Kalogerou live: What she did, and did NOT say about MiFID II this morning in Cyprus

FinanceFeeds reports live with Demetra Kalogerou, Chair of CySec, deducing that the onus is on highly experienced regulatory technology and trade reporting companies to ensure adherence and future prosperity. Here is our detailed report that shows why you cannot rely on the regulator in the advent of MiFID II

Live report from Limassol, Cyprus

This morning, here at the Crowne Plaza hotel in Limassol, which has in just less than a decade generated a global profile as the center of retail FX and electronic OTC derivatives center, CySec Chair Demetra Kalogerou addressed FX industry participants from regulated companies within Cyprus during a breakfast symposium on the forthcoming MiFID II regulations, hosted and organized by MAP S Platis’ regulatory reporting and infrastructure division, MAP FinTech.

FinanceFeeds has dedicated considerable attention to the forthcoming MiFID II regulations, which are due to be implemented in January 2018 and will effectively require extensive changes and upgrades to the infrastructure used by OTC derivatives firms in within the European Union, and has hosted symposiums on this matter in London, as well as reported on a real time basis from within regulatory technology seminars in London and Limassol, presented by those at the leading edge of trade reporting technology.

Today’s seminar, however, marks a milestone in addressing the companies that will be directly affected by the MiFID II rulings, yet have not been provided, in many cases, with detailed information with regard to their responsibilities post-implementation.

That particular milestone is the opening speech having been delivered by CySec Chair Demetra Kalogerou, this being the very first time that a regulatory chairperson has addressed OTC electronic trading industry executives on a face to face basis, in order to speak directly to those who require the information.

FinanceFeeds is at the seminar, and can deduce, once again, that there is a vast dichotomy with regard to information and the imparting of it between the regulatory authority, in this case CySec, and the professional consultancies who have built their business around providing regulatory reporting solutions.

In fact, it is not a dichotomy, it is a gulf the size of the Aegean Sea.

Ms Kalogerou’s 30 minute repertoire was one which had garnered tremendous anticipation, as MiFID II, an infrastructure and procedure-changing set of all encompassing rulings, has been a massive bone of contention for all firms globally, hence being fully enlightened by Ms Kalogerou herself on how CySec will work with firms and what their detailed requirements are from a highly knowledgeable FX industry center’s leading regulatory figure would represent a turning point in how regulatory heads are viewed.

CySec Chair Demetra Kalogerou in Limassol this morning

It would mean that finally, regulators have thrown away the gray-suit-and-briefcase out of touch haplessness that they demonstrated when the financial markets first became electronic, and have finally become fintech-savvy cornerstones of our industry.

Sadly, this is far from the case.

Far from enlightening the astute, senior level audience of compliance executives with detailed and FX industry specific matters, Ms Kalogerou read verbatim from ESMA circulars.

Urbane and highly experienced regulatory technology expert Demetris Taxitaris, General Manager of MAP S Platis had introduced Ms Kalogerou, his own method of presenting a pinnacle of regulatory changes having been poignant indeed.

Mr Taxitaris mentioned the £35 million penalty issued yesterday to Bank of America’s Merrill Lynch for failing to report transactions – exactly the type of scene that is likely to be set once MiFID II has been implemented, as the European Securities and Markets Authority.

“Many people have asked me if we have liaised with the FCA since yesterday, however we did not know that FCA would impose that fine on Merrill Lynch yesterday and make it global, hence we didn’t consult with the FCA on it but it does demonstrate exactly how important this matter is, and in my opinion EMIR will be even more important going forward” he said.

Providing a concise background, Mr Taxitaris explained “We at MAP S Platis have been involved in this field since 2014 as a group, and have been assisting clients extensively in generating reports and backdating reporting which was a specific topic with which Merrill Lynch had issues with FCA.”

“However” he said, “It would be more interesting going forward to see how authorities approach this topic especially after the implementation MiFID II in January.”

“Generally, we operate as a compliance group. Compliance runs through all of our services and is a prominent feature across our internal audit, accounting and licensing services, and extends to our HR agency and recruitment services” explained Mr Taxitaris, before informing delegates that “We are here to assist all of you with any compliance matters going forward including with MiFID II as it comes into play.”

Mr Taxitaris then handed over to Ms Kalogerou, who quipped “We aren’t here to talk about the fine imposed on Merrill Lynch, we will stick to our own penalties here!”

Want to know exactly how to structure a brokerage in a MiFID compliant way? Ask a regulatory technology company

“The reason that I came here today is that it a very topical theme here in Cyprus at the moment is MiFID II, along with the EMIR reporting directive, both being very important regulations, thus it is very good to talk about the technical issues” she said.

Ms Kalogerou then explained that she intended to provide an overview of how CySec views these regulations, and then focus on the fourth AML (anti money laundering) directive, explaining that she is also very concerned about that particular set of rulings.

Instead, however, of delving deep into the exact responsibilities that will be required by firms that currently, in many cases, consider that they have been left in the dark, Ms Kalogerou began on a complete tangent, that being the Cyprus financial crisis of 2013.

“Let’s talk about the economic crisis and how we got out of it” she said. “Cyprus was able to complete the ecomnomic adjustment program within 3 years. That is a remarkable recovery, and we have since experienced a growth rate 3.5% in terms of our GDP, creating prospects in Cyprus.”

“All the regulations that have now been put in place to prevent economic crises like the one that we experienced in the past. MiFID and EMIR will try to close any loopholes that the previous regulations had such as MiFID I” she said.

MiFID, however, is absolutely not related, nor does it cover, any aspects relating to the Cyprus economic crisis. It is an infrastructure directive that OTC brokerages in the European Union must follow, hence ambiguity as to the point of this was abound.

Now onto the main subject

“MiFID II is a big challenge for the regulators and the OTC derivatives industry. It starts on January 3, 2018 which is now very near. MiFID II and MiFIR will change the landscape of this business as we know it today” – Demetra Kalogerou, Chair, CySec

“There are new rules that take into account recent developments, including the economic crisis and the technological growth that we have experienced and developed in this industry, so that the way that business is conducted can become more efficient and more transparent” she said.

“MiFID II onbjectives are in 5 core areas, those being to enhance investor protection, take into account the innovation of financial technology, to increase transparency and regulator and client reporting requirements, and that organized trading should be on regulated platforms and be able to be reportable in pre and post trade states” she explained.

“One of the key factors is that MiFID II mandates an approved market structure, and ESMA’s intention is to limit OTC transactions in financial markets, and move some of the asset classes onto regulated markets which are represented by exchanges, multilateral trading facilities and specific venues” – Demetra Kalogerou, Chair, CySec

“In Cyprus, very recently, there was a report by ESMA that cited Cyprus as being the second biggest CFD transaction area in Europe after the UK on an OTC basis. This means that the regulator has a lot of work to do” she said. “Product governnance is important” were Ms Kalogerou’s generic musings, however no explanation was given.

Indeed, it may well be that ESMA will attempt to place cetrain trades on exchange, and Ms Kalogerou did highlight that ESMA may check and decide that certain derivatives that are traded through a centralized counterparty should be on exchange or MTF, based on venue test and liquidity test performed by ESMA, however a massive difficulty that is looming over Cyprus is that whilst this may extinguish the binary options fraud and marketing of unregulated products by small firms in Cyprus with their main head offices overseas, it paves the way forward for binary options firms to simply change their ‘platform’ to a cryptocurrency brokerage facility, or begin participating in ICOs.

This is because the European ruling states that ESMA will analyze trades made relating to underlying instruments that have significant liquidity on regulated marketplaces – those being exchanges – and as there is no Cyprus Stock Exchange listing for currency derivatives, nor are cryptocurrencies the subject of exchange liquidity, binary options firms whose product is considered ‘complex’ or too much of an uncertainty for retail clients can simply switch their operations to cryptocurrency and ICO, and carry on.

Senior FX industry officials discuss how the FX industry’s structure will change under MiFID II in Cyprus this morning

Ms Kalogerou stated on this subject “I have to make it clear that only the investment firms whose products are eligible for trading, where the underlying instrument is on a trading venue, they are supposed to be connected to a reporting mechanism and have their trades reported to ESMA. If your underlying instrument is not on a venue you are not supposed to report it. For example, in FX, we do not have a stock exchange or venue for FX, hence it will remain OTC.”

Indeed so, however what was omitted from this, is that ESMA could insist that FX products and certain other OTC derivatives that have substantial exchange based liquidity in other ESMA-supervised regions – the UK for example – could be traded via British institutional venues or MTFs, hence the best execution analysis could be conducted with greater ease, and then once again, the floodgates for OTC cryptocurrency fraud and ICO fraud would remain open in Cyprus due to the inability to price or report these transactions on a regulated venue.

“Enhanced governance through a board of supervisors will be required, as well as ESMA’s remit to increase the role of compliance more. There will be a mechanism restricting and prohibiting any instrument that gives concern, which applies to binary options and retail FX, but also structured products that thrive in Cyprus” – Demetra Kalogerou, Chair, CySec

“Companies will have to alter their strategies or turn to the provision of other products for retail investors and maintain complex products only to institutional or experienced investors” she explained, further demonstrating the direction which many smaller, foreign-owned brokerages, especially those with binary option white label brands from Israeli market makers who are now turning to cryptocurrency and ICOs due to the Israeli ‘ban’ on binary options and the reliance that CySec binary options brands have on their Israeli suppliers.

“There is an emphasis that certain instruments may be forced onto exchanges as ESMA continues to assess which are going to have to be traded via what is termed by the MiFID II directive as a ‘regulated marketplace’. The scope is to reduce the OTC market and as long as they have liquidity they will put them onto MTF or RM as part of best execution” – Demetra Kalogerou, Chair, CySec

Having liquidity being the very operative words.

Binary options, cryptocurrency and ICOs do NOT have liquidity.

Neither was it explained how firms that keep a very small number of clients on the books via their Cyprus based, CySec licensed entity, show those to the auditors, then onboard the vast majority of their clients via offshore entities under terms that are completely counter to those set out by MiFID II in terms of best execution, (1:1000 leverage in some cases) and thus are not subject to any form of trade reporting, and then launder money through personal accounts, and operate a P&L model, yet still market their business as a EU compliant, CySec regulated firm under MiFID ruling.

FinanceFeeds has approached CySec on this matter several times, yet no dialog has ensued, yet this morning, Ms Kalogerou, alluding to the 4th EU anti money laundering directive that is currently in the Cyprus parliament awaiting implementation explained

“95% of clients in Cyprus are non-face to face, so they are in the category of high risk as far as the new AML directive is concerned, so you will have to build an internal risk based tool, that helps assess th risk of non-face to face clients as far as money laundering is concerned, then the onus is on you to put htem in the category of low, medium or high risk” – Demetra Kalogerou, Chair, CySec.


Ms Kalogerou then proceeded to read verbatim some of the directives issued by ESMA. These were pertinent to many classes, and different industry sectors and were presented in a very generic manner, as read from the exact same manual that can be viewed on ESMA’s website. Her allusion to pension funds during her reading, and then a swift realization “oh, this doesn’t apply to you” is testimony to this.

Some of the key matters of importance included that ESMA will insist that competent authorities will have to assess the aptitude of board members of firms, as well as the CFOs, which are often not board directors, and that key compliance officers, auditors and risk management officials will be subject to continual assessment under ESMA’s remit as of June 2018, hence a greater emphasis on corporate governance is coming.

In terms of clearing obligations, Ms Kalogerou did not explain how retail FX firms in Cyprus have to report this, but instead read verbatim the EMIR document on it, and referred delegates to circulars on connecting to a CCP to clear derivatives. In May this year, FinanceFeeds detailed exactly how this must be carried out.

CySec has confirmed that it has outsourced two projects to ESMA, those being the accessibility of trade reporting data, and financial industry reference data. Ms Kalogerou explained that, along with most EU member states, these have been delegated to ESMA as a huge amount of resources are required to gather, validate and make an assessment of the data that is coming from firms across Europe.

CySec will continue to work on MiFIR. Will store quantitative and qualitative information, done via reporting mechanism that gets your trsnasacitons and transfers them to ESMA.

LEIs, and the need for them to be obtained was covered in very scant detail, as well as spread betting being a new trading type that has been added to the repporting requirements for derivatives, before Ms Kalogerou handed over to Alexandros Constantinou, Director of Compliance at MAP S Platis, who really went into great detail with regard to what exactly needs to be done.

Mr Constantinou took a look at the revised technical standards that will be enforced, and the European Commission’s propopsal which was dated May 4 this year, to include certain instruments on exchange.

MiFIR directive

“Although EMIR has been around since 2012, and reporting started in 2014, we haven’t seen the regualtors taking serious actions against entities but yesteday we saw the first fine, but have seen CySec doing inspections on companies, as to whether companies do report, do not report and whether they comply with EMIR” said Mr Constantinou.

“With respect to MiFID and requirements on transactions reporting, we have experienced a greater emphasis on it by competent authorities” he said.

“However, the objective of EMIR is to increase transpaency and reduce systemic and counterparty risk in the OTC derivatives market” explained Mr Constantinou.

“The main obligations are to report to trade repositories, ensure that clearing obligations are met, and a considerable focus on risk mitigation for uncleared trades and requirements for centralized counterparties and trade repositories” he said.


Mr Constantinou then explained the challenges that face companies, which is really the most important facet that needs imparting, and a facet that was not covered by any regulator thus far, including Ms Kalogerou this morning.

Mr Constantinou described in great detail how to select a trade repository or third party from which to report trades to a repository, and advised firms to look closely at fee structure and integration of trade repository services when budgeting for MiFID II compliance.

Very valuable information indeed. He then explained “Collecting and interpreting certain EMIR data fields is very much a point that needs covering by firms. Some of the trade data was not captured at all by companies before EMIR was introduced. To collect and store the data, technology and underlying processes in firms will need to be changed or upgraded.”

Mr Constantinou explained how to generate a Unique Transaction Identifier, which is a globally unique identifier for individual transactions in financial markets. USIs were introduced in late 2012 in the U.S. in the context of Dodd-Frank regulation, where reporting of transactions to Trade Repositories first became mandatory.

European financial market regulations followed suit, with reporting to Trade Repositories under EMIR requiring UTIs from February 2014 on. The use of the UTI is also mandatory for regulatory reporting under REMIT. Strictly speaking, the term USI is specific to the U.S. regulation, while UTI is specific to EU regulations. In practice, both terms are used interchangeable, in particular within large trading firms reporting under both regimes.

Mr Constantinou’s perspective is that when generating a unique UTI, where multiple parties are involved in one trade, the reporting should be delegated to another party so that the reconciliation wouldn’t be an issue. If firms tried to reconcile on their own, they may breach the EMIR regulation by generating incorrect or duplicate UTIs.

Additionally, he explained that counterparty data reporting is now far more comprehensive and under MiFID II and EMIR, it needs to include received collateral for open exposures which is broken down into to initial, variation and margin and excess collateral.

In terms of looking back at prior transactions, Mr Constantinou stated that an extension of time limit for reporting historic transactions has now been made, so that firms can report their historic transactions to a trade repository within a 5 year time frame, which is is an increase over the previous 3 year period that was allowed. These are transactions opened after August 16 2012 and closed before Feb 12 2014.

Best Execution and price ambiguity.

In London recently, FinanceFeeds discussed how pricing should be considered to be ‘Best Execution’ by regulators under MiFID II. It could, for example, be in the customer’s interest to execute internally, or to send trades to a specific liquidity provider if they have multiple relationships, and if doing so, how this can be viewed as in the customer’s interest, or the brokers interest with so many factors that are not displayed to the regulator, for example, favorable deals given to brokers by liqudity providers that would encourage the broker to execute there, even if another provider with which the broker has a relationship is giving a better execution for the customer.

This was not touched on at all by CySec this morning, however Mr Constantinou did throw some degree of light on it.

“Firms that are now required to use a centralized counterparty must use the settlement price for cleared trades for valuation and pricing. This way, the regulator can see via an impartial body what the price was, and match it accordingly.”

Quite simply, for those wishing to future proof their business, as well as take their part in ensuring that the Cyprus based retail FX industry’s bona fide entities – who have a great deal to be proud of – continue to uphold a high standard, then regulatory technology firms such as MAP S Platis, Point Nine, Cappitech or TRAction FinTech are the right ports of call, because quite clearly, we as an industry cannot rely on the regulatory chiefs to impart this knowledge.

If it were not for the industry-grown experts, it would be a case of EU government fines and difficult PR wranglings.


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