CySEC’s circular – Guidelines on complex debt instruments and structured deposits

The Cyprus Securities and Exchange Commission (CySEC) issued a circular on 19 December 2018 reminding Cyprus investment firms and alternative investment fund managers (Regulated Entities) of the European Securities and Markets Authority (ESMA) Guidelines (Guidelines) on complex debt instruments and structured deposits (the Circular).

Circular’s content

The Circular aims to remind Regulated Entities that the Guidelines are applicable from 3 January 2017 and the purpose of the Guidelines is to specify the criteria for the assessment of:

  • debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved; and
  • structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term.

Further, they clarify the concept of “embedded derivatives” in order to provide an overall framework for the application of Article 25(4) (a) of MiFID II in relation to debt instruments.

Guidelines’ purpose

ESMA expect the Guidelines to strengthen investor protection and to promote greater convergence in the classification of “complex” or “non-complex” financial instruments or structured deposits for the purposes of the appropriateness test/execution-only business in accordance with Article 25(3) and 25(4) of MiFID II.

Within the Guidelines, ESMA provides a non-exhaustive list of examples of debt instruments that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved and complex structured deposits for the purpose of Article 25(4)(a)(ii), (iii) and (v) of MiFID II.

The CySEC circular can be found here.

The ESMA Guidelines can be found here.

If you have any questions, please contact Katerina Katsiami or your usual Harneys contact.