Demetra Kalogerou, Chairman of Cyprus Securities Exchange Commission, discussions CySEC’s mission, the process of licensing forex brokers, forex scams, payments and how Covid-19 affects FX trading and the crypto industry
Could you tell us more about your professional background?
I am chairman of the Securities and Exchange Commission in Cyprus, a position I have had the privilege of holding since September 2011. CySEC is the independent regulator responsible for overseeing the investment services market, transferable securities transactions conducted in the Republic of Cyprus and the collective investment and asset management sector. As head of CySEC, I am also a member of the Supervisory Board, the leading body of the European Securities and Markets Authority. My additional responsibilities include membership of the Cyprus Supervisory Committee.
Much of my professional career has been dealing with the fallout from the global financial crisis of 2008, culminating with the Cypriot banking development in 2013. As a result, between September 2013 and June 2014, I worked as a member of the Resolution Authority with the Minister of Finance and the Governor of Cyprus Central Bank who monitored and helped implement the dissolution of financial institutions in Cyprus.
Before that, I was senior manager of the Cyprus Stock Exchange (CSE). My duties included overseeing transactions in transferable securities and the various CSE markets. We monitored compliance with listed public companies as well as helping to research and develop new products, all to promote the end goal of ensuring that the Cypriot capital market is a robust and reliable place to do business. With restraint, it was a great training ground for the work we do at CySEC, where I am able to bring my 15 years of experience to make sure those involved in the financial markets are doing the right thing; and consistently.
What is the mission, goals, responsibilities of the Cyprus Securities and Exchange Commission?
CySEC’s mission is to effectively monitor the companies regulated in Cyprus to ensure that investors are protected and the securities market in Cyprus is developing with sound integrity. By putting investor protection first, we are working to achieve our vision that the Cypriot securities market should be one of the safest and most reliable investment destinations in Europe.
CySEC’s responsibility is the continuous reform of the regulatory and regulatory framework in the Cypriot securities market. We work to implement and enforce both national legislation as well as directives and regulations created at EU level; in line with pan-European and national supervisory priorities and planning. CySEC plays an active role at EU level and contributes and collaborates on decision-making in the sectors most important to the Cypriot market. This includes the activities of Cyprus Investment Companies and the growing Asset Management Sector.
Could you elaborate on the process of licensing, registering, authorizing forex brokers? What are the rules for receiving a CySEC license? And how can a CySEC license compare to other forex jurisdictions, e.g. UK (FCA) or Switzerland (FINMA)?
EU financial regulation applies uniformly to all EU Member States, except for certain discretionary powers in the smaller Member States provided for in the respective EU legislation. As a result, investment firms domiciled in one of the EU Member States must comply with the same rules and, in turn, 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 are doing the same.
The EU licensing process aims to ensure that the applicant complies with the European regulatory framework designed to ensure adequate protection of investor rights. Companies that apply for a CySEC license to offer forex trading product services must take several steps. The initial application phase provides a detailed description of the company outlining 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 of business conduct, best execution and retention of clients’ financial instruments and funds. These are critical pillars of investor protection legislation.
For the application to progress, companies must provide comprehensive documentation ranging from their registration certificate, an organizational chart with the names of directors and records of non-bankruptcy, and criminal record checks for all board members. We require companies to provide two years of audited accounting, as well as a referral from the firm’s independent auditor.
Companies need to outline their procedures and policies to prevent money laundering and terrorist financing, and in fact sign a specific statement that they have completed – and provide evidence on how to maintain all relevant controls and balances in this regard.
In the end, we require business executives and owners to conduct a thorough personal vetting, so we are comfortable with a thorough understanding of how the individuals responsible for a company wishing to provide forex services – and any other investment service for that matter – will conduct their business. The vetting includes legally binding statements of past financial and personal nature and is accompanied by two references.
Trading in the global currency market has risen to $ 6.6 trillion, according to the Bank for International Settlements, making it a sweet spot for scammers and forex scams. What can investors do to identify / avoid crypto and currency fraud and fraud?
Investor demand for trading in high-risk speculative financial instruments remains very high. As a result, the most important thing investors should do when considering an investment is to look into the company offering the product or service and consider whether it may be appropriate to seek independent professional advice from another regulated entity. CySEC has a complete list of all the companies it regulates on its easy-to-control website. If a company is not listed by CySEC or another EU competent authority and fraudulently claims to be a licensed company, investors will not have the same protection they would have with a regulated entity. It is critical that investment firms classify their clients appropriately, and those who qualify as professional investors – and thereby market more sophisticated and often higher risk products and services – are indeed professionals. This marketing process should be fair and not misleading.
CySEC periodically updates its “Warnings” page on the back of the latest information we have about widespread fraud and nasty operators. Investors are encouraged to keep an eye on this site so they are aware of the types of scams and scams being attempted.
Typically, investors should be especially vigilant if they feel under pressure to make a decision to invest quickly (such as a fixed-term offer); are offered a return on their investment that sounds too good to be true and is told about products or services that do not adequately explain the risk of losing money.
Forex trading is inherently speculative and companies must maintain 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 with fraud appear as CySEC officers or representatives in an attempt to deceive investors. For this reason, CySEC has issued several communications informing the public that they will never send unsolicited correspondence to investors or members of the public, nor request any personal data, financial or otherwise.
How does Covid-19 affect FX trading and the crypto industry?
Like similar companies around the world, Cypriot investment firms are facing dramatically increased and prolonged market volatility. The unprecedented market activity has thrown investor protection into sharp control, as CIFs have had to provide for large intra-day movements, often, increased trading volumes and in some cases liquidity problems. Robust systems, appropriate technology and prudent risk management are very important during such turbulent periods.
All CIFs have implemented plans to continue their business operations. Their employees work safely and remotely.
With regard to the FX market itself, Contracts for Difference (CFDs) and crypto products, there were financial instruments related to European and US stocks and indices that suffered from low liquidity, exacerbated by European and US trading stops. From contacting the CIFs, we are aware that traders are trying to navigate the unpredictable market; CIFs see CFD spreads on indices and commodities rising due to low liquidity. Lookups in FX have not witnessed the same extreme variations.
Can you provide more information on the most popular payment methods among merchants? Do they use cryptocurrencies?
Customers of companies that fall under our mandate predominantly finance their accounts using fiat currencies. Businesses use different methods of financing, including bank transfers and wire transfers through payment service providers. CySEC’s position on companies that accept crypto assets as a means of payment and / or as collateral for margin transactions is that this is a risky practice.
There are three main reasons. Firstly, the cryptoassets market is very unstable and very unpredictable. Some cryptoassets experience high levels of intraday volatility and in some cases high levels of intra-time or even intra-minute volatility, leading to price gaps. Such price gaps provide the crypto-asset as a high-risk security risk and can result in unintended margin close-outs for investors’ trading margin.
Second, and unlike cash transactions (which are also high-risk transactions) that require the physical presence of the respective person, cryptoasset transactions are performed externally. This reduces the barrier to this type of transaction to be performed, thereby increasing the frequency of a high-risk transaction. This poses a significant operational risk to the system.
Finally, where cryptoassets are used as a form of payment, there is an increased risk of money laundering and terrorist financing. We expect the incorporation of cryptoassets in the context of EU AML legislation through the 5th EU AML Directive in conjunction with our proactive engagement with such companies in 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 unregulated high-risk market with the highly regulated investment services sector is likely to create an AML congestion risk.
As a result, we do not encourage regulated companies to participate in such activities and share ESMA’s position on the inherent risks they pose to investor protection. However, CySEC is constantly evaluating this rapidly evolving sector, and our approach to this may be reconsidered once we have a clear overview of crypto device compliance culture.
About Demetra Kalogerou
Demetra Kalogerou is the Chair of the Securities and Exchange Commission in Cyprus, a position she held since September 2011. As a Head of CySEC, she is also a member of the Supervisory Board, the European Securities and Markets Authority. Ms. Kalogerou is also a member of the Supervisory Committee of Cyprus. Between September 2013 and June 2014, she worked as a member of the Resolution Authority with the Finance Minister and Governor of the Central Bank of Cyprus, overseeing and assisting in the dissolution of financial institutions in Cyprus following the Cyprus Bank Insurance in 2013. Prior to her current role, she was senior manager of the Cyprus Stock Exchange (CSE). There, she oversaw tradable securities transactions, monitored the compliance of listed public companies, and helped research and develop new products.
About Cyprus Securities Exchange Commission