CySEC Guides Brokers to Do Due Diligence when Selecting Liquidity Providers

CySEC has just published its fifth consultation paper for the year when it comes to regulating the activities of Cyprus Investment Firms. The Cypriot watchdog has turned its sights towards Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term providers (LPs) and more specifically towards the ways which brokers use to conduct their due diligence. The news comes right after brokers regulated in Cyprus were guided to stop using high-pressure sales tactics and give investment advice to their clients.

According to CySEC, brokers should be less reliant on a single liquidity provider and should exercise “due skill, care and diligence” when selecting every counterparty. The consultation paper issued by the regulator points out that while the over-reliance on a single LP is not forbidden, brokers should not be over-reliant.

All of this comes a little less than a year after some brokers on the island were faced with an obligation to report to CySEC about their collateral withdrawal issues regarding a particular counterparty - Fortress Prime. With the regulator getting worried about the exposure of brokers to counterparty risk, the mandate for due diligence was just a matter of time.

The Fortress Prime case appears to have prompted the CySEC to outline special requirements for Liquidity Providers Liquidity Providers A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on Read this Term located outside of the European Union.

Brokers may have to put up €2 million if they want unregulated LP

First and foremost the CySEC outlines that LPs which are not located in an EU member country should be regulated a regulated investment firm in a third country. Furthermore, the counterparty has to possess a valid investment firm authorization and it has to present to the broker a verifiable way in which the capital base of the LP can be assessed.

Should a broker be willing to use a liquidity provider which is not regulated, it will have to obtain proof that the firm in question is clearing all of its trades with an EU regulated company. Alternatively the LP will have to demonstrate that it has at least 10 per cent capital ratio.

If the LP is not able to demonstrate the 10 per cent capital requirement, brokers also have the option to park additional capital of least €2,000,000 more on their balance sheet.

All in all, CySEC has just issued a whole document which is based on the lack of due diligence of brokerages who have signed up Fortress Prime as their liquidity provider. The events from a year ago, when clients started experiencing issues with withdrawals from the unregulated company based in Dubai, are forcing the regulator to take action.