What is CySEC regulation? – Definition & explanation

Countries have financial regulatory institutions that ensure the financial markets are safe. This is due to the rising cases of brokers using fraudulent means to manipulate the trading process for investors such that they lose their funds during trading or when they deposit. 

In Cyprus, the regulatory institution is the Cyprus Securities and Exchange Commission, abbreviated as (CySEC). This body regulates financial markets such as derivatives ensuring market participants dealing with any financial assets follow the guidelines stipulated in Section 5 of the Securities and Exchange Commission’s law of 2001. 

What is Cyprus Securities and Exchange Commission (CySEC) regulation?

It is an independent committee in Cyprus with the responsibility of regulating the securities and exchanges, including all the operations that take place in the financial markets. It is a committee of five members that the ministers appoint to oversee these functions. 

Since Cyprus is in the EU, it complies with the Markets in Financial Instruments Directive (MiFID) laws. The MiFID laws work by regulating the stock markets within the EU to provide a safe and transparent trading environment for its members. 

History of the CySEC:

It was founded in 2001 out of the Cyprus Securities and Exchange Commission laws. It is when Cyprus saw the need of regulating financial markets. In 2004 Cyprus became a member of the EU countries, and CySEC was affected since Cyprus changed its currency to Euros. 

Around that time, CySEC implemented MiFID laws since it was part of the European Union. In 2012 it added binary Options as one of the derivatives regulated in CySEC. Not many countries have recognized Binary Options as a financial instrument. 

It, therefore, became one of the pioneers that encouraged the trading of Binary Options. 

Tasks of CySEC: 

• It offers regulation to the stock market in Cyprus, including all the operations taking place in this market. 
• To offer licenses to forex brokers, dealers, traders, and trading advisors of any financial market working within Cyprus. 
• To check license requests’ and ensure that the applicants meet the qualifications for application and meet standard service provision requirements before obtaining a license. 
• To collect data on any financial institutions in Cyprus that will help them to perform their regulatory functions efficiently. 
• To enforce rules and guidelines that traders and trading institutions such as brokers and trading firms have to follow as per the Cyprus Securities and Exchange Commission laws of 2001. 
• To monitor operations carried out by financial institutions regulated and licensed under it and ensure that services provided are per industrial standards.
• To investigate reported cases of manipulative prices, unfair practices, and breaking laws implemented by its committee. 
• To implement sanctions and penalties on trading brokers or any market participants. That includes following and revoking trading licenses from trading brokers and agencies. 
• To ensure that they carry out audits and that the regulated bodies under CySEC have to collect relevant financial account data as recommended by CySEC and submit them for review. 
• To offer guidelines that trading entities have to follow when trading. They are responsible for changing and implementing policies as stipulated by CySEC laws. 
• To ensure that forex brokers have segregated funds for client deposits that don’t mix with the broker’s institutional funds. 
• Forex brokers require a minimum of 750,000 Euros as capital to ensure that the forex broker has security for the client funds against financial crisis. 
• To share critical data when required by other regulatory authorities have the permit to regulate the financial markets in Cyprus. 
• Forex brokers have to acquire Negative Balance Protection for their users. It helps prevent the trader’s account balance from being wiped out in a losing trade. 
• It also has low leverage for traders within the EU as per the ESMA guidelines for regulatory bodies in the EU. Brokers regulated by CySEC can only offer leverage up to 1:30 except for professional traders who have a higher limit. 
• Brokers registered under CySEC get required to offer an investor compensation fund of 20,000 Euros. It means that the broker faces financial constraints, and it can compensate the trader for up to 20,000 euros.
• CySEC is dedicated to client safety, and this is why brokers have to apply the Know Your Client Safety policy. It is under Anti-money laundering policies regulating traders from using the financial markets to launder money acquired illegally. 

Advantages of CySEC regulation 

• It is among the tier one regulatory institution, and agencies with licenses are reliable because of the strict regulation in the EU regarding monetary policies. 
• It allows licensed agencies to access the Cyprus market. CySEC regulates financial markets.
• It has strict regulations which offer traders a transparent and secure trading environment for the traders and brokers that trade in the US. 
• Traders in Cyprus can stay safe from fraud by checking the regulation of their brokers before registering a trading account.

Disadvantages of the CySEC regulation

CySEC had criticism before about the service provider, and some traders complained of a slow response from the institution. It has, however, improved its functions and has better services. 

Conclusion 

CySEC is a regulatory institution known for offering regulation services, and many trading brokers work to get licensed under it. It has been in the market for some time, and its performance has increased after Cyprus joined the EU. 

CySEC has tightened its regulation such that it has become more difficult to license and start trading. However, these regulations make CySEC regulations among the best in Cyprus and the European Union.