How can a firm from outside the EU serve clients in Cyprus?

MiFIR gives a third-country firm an EU-wide route for serving eligible counterparties and per se professional clients without opening a branch. ESMA enters the firm in its public register of third-country firms only if four conditions are met. The Commission has adopted an equivalence decision finding that the home country's legal and supervisory framework has equivalent effect. The firm is authorised in its head-office country for the services concerned and is subject to effective supervision and enforcement there. ESMA and the home authority have cooperation arrangements. And the firm has arrangements to send ESMA yearly information on its EU business.

The exam material lists three conditions. Since 26 June 2021, the Investment Firms Regulation (EU) 2019/2033 has added the fourth, on yearly reporting. The cooperation arrangements must cover at least the exchange of information, prompt notice to ESMA when the home authority finds that a registered firm is breaching its authorisation or other law, and coordination of supervision, including on-site inspections where needed. Since the same date they must also set out how ESMA's requests for information are handled.

A registered firm must tell its EU clients, in writing and prominently, that it may serve only eligible counterparties and professional clients and is not supervised in the EU, naming its home supervisor. It must offer to submit disputes to an EU court or arbitral tribunal, and it keeps order and transaction data for 5 years. As far as could be established when this note was reviewed, the Commission has adopted no equivalence decision under this regime, so the register route is unused in practice.

Cyprus used the MiFID II option to require a branch when a third-country firm serves retail clients or clients treated as professional on request, unless the client starts the service on its own exclusive initiative. CySEC, or the Central Bank of Cyprus for a bank, must authorise the branch in advance. The firm must be authorised and supervised at home, with the FATF recommendations taken into account, and the two authorities must have a cooperation arrangement. The branch needs sufficient initial capital and managers who meet the Law's management requirements. Cyprus and the home country must have a tax information agreement to the OECD standard, and the firm must belong to an investor compensation scheme under Directive 97/9/EC. The authority decides within 6 months of a complete application.

For eligible counterparties and per se professional clients, CySEC Directive DI87-04 fills the gap left by the missing equivalence decision. The firm must be authorised and effectively supervised in its head-office country and must set up a branch in Cyprus that meets Law 87 Articles 40 and 41 and is authorised under Article 42. CySEC or the Central Bank oversees the branch, which follows the Law's organisational and conduct rules and MiFIR's transparency and reporting rules, and is treated no more favourably than EU firms. Since 5 November 2021 each branch reports its scale, turnover, exposures, investor-protection arrangements, risk policy and governance every year, and the two authorities send ESMA a yearly list of third-country branches.

A firm that provides a service at the client's own exclusive initiative needs no branch authorisation for that service. The initiative must really be the client's: approaches made through affiliates or agents count as the firm's own solicitation. One client's request also does not open the door to marketing. The firm may not offer that client new categories of products or services except through a branch.

If the Commission later adopts an equivalence decision so that a Cyprus branch firm meets the ESMA conditions, and the firm serves no retail or elective professional clients, it may choose to keep its branch or to register with ESMA. It notifies CySEC of its choice. National regimes such as DI87-04 may continue for up to 3 years after an equivalence decision is adopted. Who counts as a professional client or an eligible counterparty is explained in How are clients categorised as retail, professional or eligible counterparties?.