Cypriot regulator tells firms trading in crypto assets to revisit risk management procedures
The Cyprus Securities and Exchange Commission (CySEC) today issued a circular to provide guidance to the Cyprus Investment Firms (CIFs) on issues relating to crypto assets.
CIFs, which trade in crypto assets, and/or in financial instruments relating to crypto assets, are advised to revisit their risk management procedures and strategies and ensure that all risks associated with this product are duly taken into consideration. The regulator notes that, considering the nature of crypto assets, CIFs should also examine taking mitigating measures against operational, cybersecurity and reputational risks.
When a CIF acts as the counterparty to its clients’ trades by taking the opposite position to each client’s transaction in crypto assets, and/or in financial instruments on crypto assets, the CIF is subject to Counterparty Credit risk and Market Commodity Risk. This is because the CIF is acting as a market maker for its clients.
In addition, CySEC advises CIFs to assess the risks linked to trading in crypto assets, and/or in financial instruments relating to crypto assets, for their own account or for their clients within the Internal Capital Adequacy Assessment Process (ICAAP). The assessment and discussion of the risks associated with the activity in crypto assets should be included together with a sensitivity analysis that shows how the risks identified affect the CIFs’ projections.
Moreover, any mitigations should also be discussed, stating any additional capital that should be held in relation to the identified risks.
CySEC also tells CIFs to disclose within their Pillar III disclosures any material crypto-asset holdings and include information on:
- the exposure amounts of different crypto-asset exposures,
- the capital requirement for such exposures and
- the accounting treatment of such exposures.
Let’s note that the CySEC circular is issued less than two months after the UK Financial Conduct Authority (FCA) announced that it would ban the offering of CFDs on cryptocurrencies to retail traders. Apparently, the Cypriot regulatory climate is getting more complex for crypto asset firms but, yet, is not so harsh as the one in the UK.