Regulatory Disclosures
Client Categorization
The law which provides for the provision of investment services, the exercise of investment activities, the operation of regulated markets and other related matters following the implementation of the Markets in Financial Instruments Directive (MiFID) governing all EU member states, requires the categorization of clients. eToro (Europe) Ltd. has proceeded with the new categorization of clients as retail clients, professional clients or eligible counter parties in accordance with the Law. All Clients are categorized as Retail Clients when opening a trading account and have the highest level of protection (such as eligibility to the Investor Compensation Fund, Best Execution, and Safeguarding Clients Assets etc). Clients are allowed to request to be reclassified in writing or eToro (Europe) Ltd. may categorize them otherwise, according to the specifications, conditions, and procedures of MiFID.“Retail Client” is a client who is not a professional client or an eligible counter party. “Eligible Counter party” is a professional client or legal entity who provides investment services that involve the reception and transmission or the execution of orders. Clients under this category have the lowest level of protection. “Professional Client” is a client who possesses the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that they incur. In order to be considered a professional client, the client must comply with the following criteria: Α. Categories of clients who may be considered to be professionals: The following shall be regarded as professionals in relation to all investment services and activities and financial instruments:
- Entities which are required to be authorized or regulated to operate in the financial markets. The list below should be understood as including all authorized entities carrying out the characteristic activities of the entities mentioned: entities authorized by a member state under a European Community Directive; entities authorized or regulated by a member state without reference to such Directive; and entities authorized or regulated by a non Member State
- Large undertakings meeting two of the following size requirements, on a proportional basis:
- National and regional governments, public bodies that manage public debt, central banks, international and supranational institutions such as the World Bank, the Internal Monetary Fund, the European Central Bank, the European Investment Bank and other similar international organizations.
- Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitization of assets or other financing transactions.
They must however be allowed to request non professional treatment and eToro (Europe) Ltd. may agree to provide a higher level of protection.
It is the responsibility of the client, considered to be a professional client, to ask for a higher level of protection when it deems it is unable to properly assess or manage the risks involved. This higher level of protection will be provided when a client who is considered to be a professional enters into a written agreement with eToro (Europe) Ltd. to the effect that it shall not be treated as a professional for the purposes of the applicable conduct of business regime.
Β. Clients who may be treated as professionals on request: Clients other than those mentioned above, including public sector bodies and privateindividual investors, may also be allowed to waive some of the protections afforded by the conduct of business rules of eToro (Europe) Ltd. eToro (Europe) Ltd. is therefore allowed to treat any of the above clients as professionals provided the relevant criteria and procedures are fulfilled. Such as that the client is capable of making his own investment decisions and understanding the risks involved (fitness test). The company reserves the right to decline any of the above requests for different categorization Requests for more information and re-categorization shall be submitted to
http://www.etoro.com/application/help/contact.aspx
Best Execution and Order Handling Policy
1. INTRODUCTION
1.1 eToro (Europe) Ltd. (“the Company”) is an Investment Firm regulated by the Cyprus Securities and Exchange Commission (“CySEC”) with license number 109/10.
1.2 This Policy is issued pursuant to, and reflects Compliance with, the European Directive 2004/39/EC Of 21 April 2004 on Markets in Financial Instruments (MiFID) and with the implementation in Cyprus legislation on Investment Services and Activities and Regulated Markets Law of 2007 – Law 144(I)/2007 (the “Rules”) that apply to the Company. It is not intended to create third party rights or duties that would not already exist if the policy had not been made available and it does not form part of any contract between the Company (or any of its affiliates) and any client or prospective client.
1.3 What follows is an overview on how trades and orders are executed, the factors that can affect an execution’s timing and the way in which market volatility plays a part in handling orders when buying or selling a financial product.
1.4 Upon acceptance of a client order and when there is no specific client instruction regarding the execution method, the Company will endeavor to execute that order in accordance with the Best Execution policy.
1.5 Nevertheless, whenever there is a specific instruction from a client, the Company shall execute the order following the specific instruction. In fact, any specific instructions from a client may prevent the Company from taking the steps that it has designed and implemented in the execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions.
1.6 This Policy is available to clients upon request and is also made available on our Website. The Company reserves the right to amend or supplement this Policy at any time.
2. FINANCIAL PRODUCTS TO WHICH THIS POLICY APPLIES
2.1 The financial products to which this Policy applies are all of the products offered by the company.
2.2 The trading conditions of the above products are available on the Company’s official web site at www.etoro.com
3. COMPANY’S APPROACH TO BEST EXECUTION
3.1 The Company identifies and seeks to obtain the most favorable terms reasonably available when executing an order on behalf of a client.
3.2 To do this, the Company relies on three basic components:
- state‐of‐the‐art technology for routing, monitoring and executing orders;
- careful consideration of the elements of order execution;
- regular and rigorous examination of the overall execution quality.
3.3 When executing a buy or sell order, the Company always considers:
- the classification of the client as retail or professional;
- the nature of the client order;
- the characteristics of the financial instruments that are subject to that order;
- the characteristics of the execution venues to which that order can be directed.
4. THE ROLE OF TECHNOLOGY IN EXECUTING CLIENTS’ ORDERS
4.1 The Company uses automated systems to route and execute client orders. When clients’ orders are received by the Company, it is automatically executed
4.2 For OTC financial instruments, the Company may trade against its own proprietary desk or will route the orders to other market maker firms. Many of these firms also provide automated executions of orders.
5. THE ELEMENTS OF OUR BEST EXECUTION POLICY
5.1 Routing determinations are based on five main criteria and are regularly reviewed by the Company. Hence to determine the best way to execute an order for a client the Company takes into consideration:
(1) Speed and Likelihood of the Execution. Due to the levels of volatility affecting both price and volume, the Company seeks to provide client orders with the fastest execution reasonably possible.
(2) Price Improvement and Overall Consideration of Costs. Orders are routed to market makers and/or market centers where opportunities for price improvement exist.
(3) Size Improvement. In routing orders, the Company seeks markets that provide the greatest liquidity and thus potential for execution of large orders.
(4) Overall Execution Quality. When determining how and where to route or execute an order, the Company’s traders draw on extensive day‐to‐day experience with various markets and market makers, focusing on prompt, sequential and reliable execution.
(5) Clients’ specific instructions. The Company will always execute client orders in accordance with the instructions given by that client or on its behalf. Consequently, if a client requires an order to be executed in a particular manner and not in accordance with the Company’s best execution principles set forth herein, the client must clearly state his/her desired method of execution when he/she places the order. To the extent that a client instruction is not comprehensive, the Company will determine any non‐specified components of the execution in accordance with these best execution principles.
5.2 The Company invites the clients to bear in mind that the duty of best execution not only relates to price but also involves the consideration of various factors including cost, speed and likelihood of execution and settlement. Even if a trade appears not to have been executed at the best possible price, it does not necessarily constitute a violation of the duty of best execution.
6. REGULAR REVIEW OF EXECUTION QUALITY AND OF EXECUTION VENUES
6.1 The Company regularly evaluates the overall quality of its order executions. The Company studies the quality of executions for listed and OTC retail market orders.
6.2 The Company’s Management periodically evaluates the execution quality and makes recommendations regarding order routing practices.
7. EXECUTION VENUES CURRENTLY CHOSEN
7.1 Execution Venues are the entities with which the orders are placed or to which the Company transmits orders for execution. For the purposes for the financial instruments provided by the Company, the Company act as a principal or an agent on the Clients behalf; therefore the Company is not always the sole Execution Venue of the Client orders. The Company might transmit the Client order in the external market (other liquidity providers) if the order is for the financial instrument provided by the Company.
7.2 The Company acknowledges that the transaction entered in Financial Instruments with the Company are not undertaken on a recognized exchange, rather they are undertaken through the Company’s Trading Platform, and accordingly, they may expose the Client to greater risks that regulated exchange transactions. Therefore the Company may not execute an order, or it may change the opening (closing) price of an order in case of any technical failure of the trading platform or quote fees. The Client is obliged to close an open position of any given Financial Instruments during the opening hours of the Company’s Trading platform. The Client also has to close any position with the same counter party with whom it was originally entered into, thus the Company.
7.3 The Company places significant reliance to the above execution venue(s) based on the above mentioned factors and their relevant importance. It is the Company’s policy to maintain such internal procedures and principles in order to act for the best interest of its client and provide them the best possible result ( or “best execution”) when dealing with them.
8. PRICE VOLATILITY
8.1 Volatility is one factor that can affect order execution. When clients place a high volume of orders with brokers, order imbalances and backlogs can occur. This implies that more time is needed to execute the pending orders. Such delays are usually caused by the occurrence of different factors: (i) the number and size of orders to be processed, (ii) the speed at which current quotations (or last‐sale information) are provided to the Company and other brokerage firms; and (iii) the system capacity constraints applicable to the given exchange, as well as to theCompany and other firms.
8.2 In order to minimize such a risk, the Company has in place procedures and arrangements which to the furthest extent possible provide for the prompt, fair and expeditious execution of client orders.
9. EFFECTS ON ORDER EXECUTION
9.1 Clients should be aware of the following risks associated with volatile markets, especially at or near the open or close of the standard trading session:
- Execution at a substantially different price from the quoted bid or offer or the last reported sale price at the time of order entry, as well as partial executions or execution of large orders in several transactions at different prices.
- Opening prices that may differ substantially from the previous day’s close.
- Locked (the bid equals the offer) and crossed (the bid is higher than the offer) markets, which prevent the execution of client trades.
10. ALTERNATIVE TYPES OF ORDERS
10.1 Given the risks that arise when trading in volatile markets, you may want to consider using different types of orders to limit risk and manage investment strategies.
(1) Market order. With a market order the client instructs a broker to execute a trade of a certain size as promptly as possible at the prevailing market price. Financial institutions are required to execute market orders without regard to price changes. Therefore, if the market price moves significantly during the time it takes to fill a client’s order, the order will most likely be exposed to the risks outlinedabove, including execution at a price substantially different from the price when the order was entered.
(2) Limit order. With a limit order, the client sets the maximum purchase price, or minimum sale price, at which the trade is to be executed. As a limit order may be entered away from the current market price, it may not be executed immediately. A client that leaves a limit order must be aware that he/she is giving up the certainty of immediate execution in exchange for the expectation of getting an improved price in the future. Limit orders may be routed to an exchange without human intervention.
(3) Stop order. Different from a limit order, a stop order allows selling below the current market price or buying above the current market price if the stop price is reached or breached. A stop order is therefore a “sleeping” order until the stop price is reached or breached. When the stop price is reached or breached, the stop order is converted to a market order. See section 10.1(1) for market orders.
(4) Trailing Stop Order. The trailing stop order is a stop order as described in 10.1(3) but the trailing stop price moves according to parameters set by the client. This way the trailing stop can be used to sell if price drop more than a specified distance from the highest price traded, or to buy if the price trades above a set level form the lowest traded price.
Complaint Handling Policy
An investment firm must deal with any expression of dissatisfaction about any financial services activity provided by the Company. eToro (Europe) Ltd. predefined Complaint Handling Policy sets out the process employed by eToro (Europe) Ltd. when dealing with complaints received by clients. Your queries should be addressed to our Customer Support Department to href="http://www.etoro.com/application/help/contact.aspx">http://www.etoro.com/application/help/contact.aspxor on the phone 00 357-250-25060, by fax 442-030-311-342 or to the Client’s assigned Account Manager. Your query should be in writing and should include at least your identifying information including your full name, username, the nature and description of the complaint, including the date and time the issue arose. Please note that complaints which fail to contain all the relevant information may not be handled within our regulator response time. Typically, your query will be handled by our support department or by your account manager. Any complaint shall be thoroughly examined and reviewed by our support department, applicable account manager and our compliance officer with the aim of resolving the compliant in a fair and professional manner. Clientswill be informed on the time frame of the investigation and the response will be given as soon as practical. We encourage you to contact us if you have any questions regarding our Complaint Handling Policy.
Conflicts of Interests Policy
This Policy is issued in accordance with and reflects compliance with the EU directive 2004/39/EC on Markets in Financial Instruments (MiFID) and the implementation in Cyprus legislation on Investment Services and Activities and Regulated Markets Law of 2007 – Law 144(I)/2007 that apply to eToro (Europe) Ltd. This Policy is only for informational purposes and is not intended to, and does not create third party rights or duties that would not already exist if the Policy had not been made available. The Policy does not form part of any contract between eToro (Europe) Ltd. (or any of its affiliates) or any Client or prospective Client. This Policy demonstrates that eToro (Europe) Ltd. is taking all reasonable steps to identify and avoid conflicts of interest situations that may arise between eToro (Europe) Ltd. and its employees and its Clients or among its Clients during the course of the provision of investment services.It is the duty of the Compliance Officer to develop and maintain this Policy so as to prevent and resolve potentialconflicts of interest. For the purposes of identifying the types of conflict of interest which may arise in the course of providing investment and ancillary services or a combination thereof and whose existence may damage the interests of a Client, eToro (Europe) Ltd. need to take into account, by way of minimum criteria, the question of whether eToro (Europe) Ltd. or a relevant person, or a person directly or indirectly linked by control to eToro (Europe) Ltd., is in any of the following situations, whether as a result of providing investment or ancillary services or investment activities or otherwise:
a) eToro (Europe) Ltd. or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the Client
b) eToro (Europe) Ltd. or that person has an interest in the outcome of a service provided to the Client or of a transaction carried out on behalf of the Client, which is distinct from the Client’s interest in that outcome
c) eToro (Europe) Ltd. or that person has a financial or other incentive to favour the interest of another Client or group of Clients over the interests of the Client
d) eToro (Europe) Ltd. or that person carries on the same business as the Client
e) eToro (Europe) Ltd. or that person receives or will receive from a person other than the Client an inducement in relation to a service provided to the Client, in the form of monies, goods or services, other than the standard commission or fee for that service
eToro (Europe) Ltd. shall maintain policies, controls and procedures to manage the identified conflicts of interest. eToro (Europe) Ltd. shall undertake ongoing monitoring of business activities to ensure that internal controls are appropriate, some of which are detailed below:
a) Effective procedures to prevent or control the exchange of information between relevant persons engaged in activities that may cause a conflict of interest where the exchange of that information may harm the interests of clients.
b) The separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of eToro (Europe) Ltd.
c) The removal of any direct link between the remuneration of relevant persons engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities.
d) Measures to prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out investment services or activities.
e) Measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate investment or ancillary services or activities where such involvement may impair the proper management of conflicts of interest.
eToro (Europe) Ltd. shall also have in place Chinese Walls procedures: No communicating of information and data between the various business units of eToro (Europe) Ltd. and especially, whether eToro (Europe) Ltd.’s officers and employees have access to data in the possession of business units to which such access is not permitted, so that to prevent the flow of confidential information in a way that which adversely affect the interest of the Clients. Where a conflict of interest arises, eToro (Europe) Ltd. will, if made aware of it, disclose it to a client or potential client prior to undertaking investment business for that client. If eToro (Europe) Ltd. does not believe that disclosure is appropriate to manage the conflict, we may choose not to proceed with the transaction or matter giving rise to the conflict. eToro (Europe) Ltd. reserves the right to review and/or amend its Policy whenever if deems this necessary/appropriate.
Investors Compensation Fund
eToro (Europe) Ltd. is a member of the Investor Compensation Fund for Customers of Cypriot Investment Firms (CIFs) and other Investment Firms (IFs) which are not credit institutions (the “Fund”). The Fund was established under the Investment Firms (IF) Law 2002 as amended (the “Law”) and the Establishment and Operation of an Investor Compensation Fund for Customers of CIFs Regulations of 2004 (the “Regulations”), which were issued under the Law. The object of the Fund is to secure any claims of Covered Clients against members of the Fund and the Fund exists to compensate Covered Clients for any claims arising from the failure by a member of the Fund to fulfill its obligations regardless of whether that obligation arises from legislation, the client agreement or from wrongdoing on the part of the member of the Fund. A failure to fulfill its obligations consists of the following:
- A failure to return to a Covered Client funds owed to them or funds which belong to them but are held by a member of the Fund, directly or indirectly, in the framework of the provision by the member of the Fund to the client of a covered service and which the client has requested that the member of the Fund returns in exercise of their relevant right; OR
- A failure to hand over to a Covered Client financial instruments that belong to them and which the member of the Fund holds, manages or keeps on its account, including the case where the member of the Fund is responsible for the administrative management of the said financial instruments.
The payment of compensation which will be initiated where:
- The member of the Fund is unable to meet client claims provided that this inability is resultant from its financial circumstances which show no realistic prospect of improvement in the near future; OR
- A judicial authority has on reasonable grounds directly related to the financial circumstances of the member issued a ruling with the effect that investors’ ability to lodge claims against it are suspended.
A well founded claim by the client against the member must exist. Covered Services: Covered Services are the services listed on eToro (Europe) Ltd.’slicense (109/10) issued by CySEC (Cyprus Securities and Exchange Commission).<br style="display: block;" /> The fund does not cover institutional or professional investors and the total payable compensation to each covered client may not exceed EUR 20,000, irrespective of the number of accounts held, currency and place of offering the investment service. Covered Clients All eToro (Europe) Ltd. clients are covered by the Fund unless they fall within the following categories
- The following categories of institutional and professional investors:
- States and supranational organizations.
- Central, federal, confederate, regional and local administrative authorities
- Enterprises associated with eToro (Europe) Ltd. Managerial and Administrative staff.
- Shareholders of eToro (Europe) Ltd. whose participation directly or indirectly in the capital of the member of the fund amounts to at least 5% of its share capital, or its partners who are personally liable for the obligations of the member of the Fund, as well as persons responsible for the carrying out of the financial audit of the member of the Fund as provided by the Law, such as qualified auditors.
- Investors having in enterprises connected with eToro (Europe) Ltd. and in general of the group of companies to which eToro (Europe) Ltd. belongs, positions or duties corresponding to the ones listed in paragraphs 4 and 5 above.
- Second-degree relatives and spouses of the persons listed in paragraphs 4, 5 and 6 as well as third parties acting for the account of these persons.
- Apart from investors convicted of a criminal offence pursuant to the Prevention and Suppression of Money Laundering Activities Law of 1996 -2000, investor-clients of eToro (Europe) Ltd. responsible for facts pertaining to eToro (Europe) Ltd. that have caused its financial difficulties or have contributed to the worsening of its financial situation or which have profited from these facts.
- Investors in the form of a company which due to its size is not allowed to draw a summary balance sheet in accordance with the Companies Law or a corresponding law of a Member State.
Prerequisites for Initiating the Compensation Payment Procedure: The Fund initiates the compensation payment procedure when at least one of the following prerequisites is fulfilled:
(a) The Cyprus Securities and Exchange Commission has determined that eToro (Europe) Ltd. is for the time being unable to meet its obligations arising from its investors-customers’ claims, in connection with the covered services it has provided, as long as such inability is directly related to eToro (Europe) Ltd.’ financial position which has no realistic prospect of improvement in the near future; OR
(b) A Court, based on grounds directly related to the financial position of eToro (Europe) Ltd., has made a ruling which has the effect of suspending the investors-customers‘ ability to lodge claims against eToro (Europe) Ltd..
Upon issuance of a decision by the Cyprus Securities and Exchange Commission or by the Court on the commencement of the compensation payment procedure, the Fund publishes in at least three national newspapers an invitation to the covered customers to make their claims against eToro (Europe) Ltd. arising from covered services, designating the procedure for the submission of the relevant applications, the deadline for their submission and their content. Calculating the Amount of Payable Compensation: The amount of compensation payable to each Covered Customer is calculated in accordance with the legal and contractual terms governing the relation of the Covered Customer with eToro (Europe) Ltd., subject to the rules of setoff applied for the calculation of the claims between the Covered Customer and eToro (Europe) Ltd. The calculation of the payable compensation derives from the sum of total established claims of the Covered Customer against eToro (Europe) Ltd., arising from all Covered Services provided by eToro (Europe) Ltd. and regardless of the number of accounts of which the customer is a beneficiary, the currency and place of provision of these services. The Fund is obliged to pay to each Covered Customer – claimant the compensation within three months from sending to the Cyprus Securities and Exchange Commission the minutes with the compensation beneficiaries. For any further information regarding the Fund, please refer to the offices of the Administrative Committee of the Fund, at the following address: Administrative Committee of the Investor Compensation Fund for Customers of CIFs and other IFs: 32 Stasikratous Street, 4th floor P.O. Box 24996, 1306 Nicosia E-mail address: investmentfirms@cysec.gov.cy Fax no.: 22 375762
Anti Money Laundry Policy
Cyprus enacted the appropriate legislation and has taken effective regulatory and other measures by putting in place suitable mechanisms for the prevention and suppression of money laundering and terrorist financing activities. Moreover, Cyprus is committed to apply all the requirements of international treaties and standards in this area and, specifically, those deriving from the European Union Directives. Under the current Law, which came into force on 1 January 2008, the Cyprus legislation has been harmonized with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/ΕC). As a licensed Investment Firm, eToro (Europe) Ltd. shall follow the regulations therefore must ensure that appropriate measures are taken to combat money laundering.
Capital Adequacy
With accordance to the CySEC’s regulations, every Investment Firm must have own funds, which are at all times more than or equal to the sum of its capital requirement, when there is a minimum requirement set forth by law, under which no Investment Firm can operate. An Investment Firm must have in place sound, effective and complete strategies and processes to asses and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they might be exposed. These strategies and processes are subject to regular internal review and to the CySEC’s review, to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the Firm.
Safeguarding of Clients Assets
For the purposes of safeguarding clients’ rights in relation to financial instruments and funds belonging to them, an Investment Firm must keep such records and accounts as are necessary to enable it at any time and without delay to distinguish assets held for one client from assets held for any other client, and from its own assets. Such separation of accounts is being supervised both internally and externally, by the CySEC. We operate only with reputable payment institutions and payment providers such as Barclays’, Commerzbank and other first tier banks.Pillar 3 Disclosures
Risk Management Disclosures – 2011
Scope of the risk management report
To present you the work and activities undertaken by the Risk Manager of the Company during the period from the 1st of January 2011 to the 31st of December 2011, for the evaluation and management of the various risks faced by the Company. The Report has been prepared in accordance with the relevant provisions of Law 144(I)/2007, as amended (hereinafter, the “Law”), Law 188(I)/2007 (consolidated with Law 58(I)/2010) and the relevant Directives and Circulars issued by the Cyprus Securities and Exchange Commission (hereinafter, the “CySEC”).
Executive Summary
The work of the Risk Manager during the period under review was to ensure that the Company’s policies and procedures in place, relating to the management of the various risks faced by the Company, were followed, as well as to assess and restructure the said policies and procedures, when and as it was deemed necessary. Managing risk effectively in a multifaceted organisation, operating in a continuously changing risk environment, requires a strong risk management culture. To this end, the Company has established an effective risk oversight structure and the necessary internal organisational controls to ensure that the Company identifies and manages its risks adequately, establishes the necessary policies and procedures, sets and monitors relevant limits and complies with the relevant legislation.
1. ANALYSIS OF THE RISKS FACED BY THE COMPANY
The Company is exposed to credit risk, operational risk, foreign exchange risk, interest rate risk, funding liquidity risk, money laundering and terrorist financing risk, compliance risk, reputation risk, online fraud risk and information and technology risk. The analysis of the risks included in this Section of the Report describes each type of risk, the measures and policies taken by the Company to manage these risks and the standing of the Company with respect to each risk, as applicable.
1.1 Credit Risk
Credit Risk arises when failures by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date. The Company has no significant concentration of credit risk and implements the standardised approach for credit risk.
Cash balances are held with highly rated financial institutions and the Company has policies in accordance with the relevant legislation, to limit the amount of credit exposure to any financial institution, the company also developed internal policy which reviews on weekly basis and examine the rates of the financial institutions and limit its assets according to the risk rate of the institutions. The risk of default of these credit institutions is quite low, based on the relevant calculations in the Company’s capital requirements.
Further to the above the Company has policies to diversify risks and to limit the amount of credit exposure to any particular counterparty in compliance with the requirements of the CySEC Directive DI144-2007-06. The Company uses the Standardized Approach to Credit Requirements for the calculation of its credit risk.
1.2 Operational Risk
Operational risk means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk but excludes strategic and reputational risk. The following list presents some event types, included in operational risk, with some examples for each category:
- Internal Fraud – misappropriation of assets, intentional mismarking of positions, bribery.
- External Fraud – theft of information, hacking damage, third-party theft and forgery.
- Employment Practices and Workplace Safety – discrimination, workers compensation, employee health and safety.
- Clients, Products, & Business Practice – market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning.
- Business Disruption & Systems Failures – utility disruptions, software failures, hardware failures.
- Execution, Delivery, & Process Management – data entry errors, accounting errors, failed mandatory reporting, negligent loss of Client assets.
The Company manages operational risk through a control-based environment in which processes are documented and transactions are reconciled and monitored. This is supported by continuous monitoring of operational risk incidents to ensure that past failures are not repeated. For the calculation of operational risk in relation to the capital adequacy returns, the Company uses the Basic Indicator Approach.
1.3 Foreign Exchange Risk
Foreign exchange risk is the effect that unanticipated exchange rate changes have, on the Company. In the ordinary course of business, the Company is exposed to minimal foreign exchange risk, which is monitored through various control mechanisms. The foreign exchange risk in the Company is effectively managed by setting and controlling foreign exchange risk limits, such as through the establishment of maximum value of exposure to a particular currency pair as well as through the utilization of sensitivity analysis. The Company is mainly exposed to the fluctuation of the Euro versus the United States Dollar (USD), due to the fact that Major Company’s assets are denominated in Euro whereas the reporting currency is the USD. The Risk Manager monitors these risks with the assistance of the accounting function and based on the fluctuation of the relevant exchange rates, the necessary hedging activities are undertaken.
1.4 Interest Rate Risk
Interest rate risk is the risk that the value of financial instruments (including currencies) will fluctuate due to changes in the market interest rates. The Company is exposed to interest rate risk in relation to its bank deposits.
Interest rate risk is the risk that the value of financial instruments (including currencies) will fluctuate due to changes in the market interest rates. The Company is exposed to interest rate risk in relation to its bank deposits.
However, the Company’s income and operating cash flows are substantially independent on changes in market interest rates due to the fact that the Company, other than cash at bank which attracts interest at normal commercial rates, it has no other significant interest bearing financial assets or liabilities.
Nonetheless, the Risk Manager monitors these risks with the assistance of the accounting function and based on the fluctuations of the relevant rates, the necessary hedging activities is undertaken, the review is being done on weekly basis by the accounting function
During 2011, the interest rate risk has been minimal, due to the generally low level of key interest rates such as those set by the United States Federal Reserve and the European Central Bank, in addition to the fact that these levels have not fluctuated significantly during the period under review.
1.5 Funding Liquidity Risk
Funding liquidity risk is the possibility that, over a specific horizon, the Company will be unable to meet its demands/needs for money (i.e. cash) through mismatch of assets and liabilities. During the period under review, the Company was not exposed to funding liquidity risk.
Policies and procedures for the measurement and management of the Company’s net funding position and requirements, on an ongoing and forward-looking basis, have been established in order to mitigate the funding liquidity risk. Furthermore, the Company has considered, alternative scenarios and the assumptions underpinning decisions concerning the net funding position were reviewed regularly by the Risk Manager.
1.6 Money Laundering and Terrorist Financing Risk
Money laundering and terrorist financing risk mainly refers to the risk that the Company may be used as a mean to launder money and/or finance terrorism. The Company has established policies, procedures and controls in order to mitigate the money laundering and terrorist financing risks.
1.7 Compliance Risk
Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with, laws, bylaws, regulations, prescribed practices, internal policies, and procedures, or ethical standards. This risk exposes the Company to financial loss, fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to diminished reputation, reduced Company value, limited business opportunities, reduced expansion potential, and an inability to enforce contracts. In general the Company has enhanced the compliance of all departments according to regulatory requirements.
Compliance risk is limited to a significant extent due to the supervision applied by the Compliance Officer, as well as the monitoring controls and systems applied by the Company.
1.8 Reputation Risk
Reputation risk is the current or prospective risk to earnings and capital arising from an adverse perception of the image of the Company by Clients, counterparties, shareholders, investors or regulators. Reputation risk could be triggered by poor performance, the loss of one or more of the Company’s key directors, the loss of large Clients, poor Client service, fraud or theft, Client claims, legal action, regulatory fines and from negative publicity relating to the Company’s operations whether such fact is true or false.
The Company has policies and procedures in place when dealing with possible Client complaints in order to provide the best possible assistance and service under such circumstances. The possibility of having to deal with Client complaints is low, compared to the high amount of the Company’s Clients, as the Company does its best to provide high quality services to its Clients and has the appropriate procedures in place. In addition, the Company’s Board members and Senior Management is comprised of experienced professionals who are recognized in the industry for their integrity and ethos, and, as such, add value to the Company.
In the few occasions which the Company had dealt with Client complaints, the Company has successfully resolved the relevant complaints.
1.9 Online Fraud
Online fraud could occur when Clients illegally use the credit cards or other online payment methods of others in order to fund their accounts with the Company. This risk exposes the Company to monetary loss and to potential implications with the credit cards’ issuers.
The Company has developed robust risk management technology to identify fraudulent transactions. To this end, the Company employs the Risk Rule Engine Alerting and Flagging System to prevent and identify online fraud.
Following an alert/flag by the Company’s Risk Rule Engine Alerting and Flagging System, the Company investigates the relevant account(s) to establish whether the transaction(s) in question are indeed fraudulent. In case the Company establishes that fraud activity has been performed, the Company then refunds the funds to the original mean of payment (i.e. to the real payment account holder).
In addition Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. The Company continues to work with credit card issuers to ensure that its services, including customer account maintenance, comply with these rules. There can be no assurances, however, that the Compny’s services are fully protected from unauthorized access or hacking.
When there is unauthorized access to credit card data that results in financial loss, there is the potential that the Company could experience reputational damage and parties could seek damages from the Company.
1.10 Information Technology Risk
Information Technology (hereinafter, “IT”) risk could occur as a result of inadequate information technology and processing, or arise from an inadequate IT strategy and policy or inadequate use of the Company’s IT. Specifically, the company recruited an IT Manager, policies have been implemented regarding improved backup procedures, software maintenance, hardware maintenance, improved security policies, use of theinternet, anti-virus procedures and monitoring systems. Materialization of this risk has been minimized to the lowest possible level.
2. CAPITAL MANAGEMENT
This is the risk that the Company will not comply with capital adequacy requirements or may not be able to continue as a going concern. The primary objective of the Company with respect to capital management is to ensure that the Company complies with the imposed capital requirements of Section 67 of the Law with respect to its own funds and that the Company maintains strong capital ratios in order to support its business, to maximize shareholders’ value and to optimise its debt and equity balance. The Company must have own funds which are at all times more than or equal to the sum of its capital requirements. In addition, the Company must not fall below the level of its initial capital in any case. Furthermore, CySEC requires every Cyprus Investment Firm to maintain a minimum ratio of capital to risk weighted assets of 8%. The capital adequacy ratio expresses the capital base of the Company as a proportion of the total risk weighted assets. CySEC may impose additional capital requirements for risks which are not covered by Pillar I of Basel II. The Company is further required by the Law to report on its capital adequacy on a monthly basis. The Senior Management as well as the Risk Manager monitor such reporting and have policies and procedures in place to help meet the specific regulatory requirements. This is achieved through the preparation (on a monthly basis) of accounts to monitor the financial and capital position of the Company.The Company manages its capital structure and makes adjustments to it in light of the changes in the economic and business conditions and the risk characteristics of its activities. The capital adequacy ratio of the Company is 13.05 %.
3. OTHER MATTERS
3.1 The Ongoing Financial Crisis
The Company’s business primarily involves the offering of investment services relating to non-deliverable foreign exchange, mainly to Retail Clients. Despite the ongoing uncertainty over the global economic conditions and the volatility of the financial markets during the period under review, the activity level of the retail foreign exchange market has endured the financial crisis relatively better than most other investment firms involved in other type of investment services and/or financial instruments, and, as such, the Company’s business has not been significantly affected by the ongoing financial crisis. Nevertheless, the Company is closely monitoring the effects of the ongoing global financial crisis, and it is ready to take the relevant actions when and where necessary.
3.2 Data Retention Policy
The Company pays particular attention to its data retention. To this end, the Company conducts frequent backups with respect to all the Company’s IT systems for all types of data and information and stores these backups at a safe remote location outside the Company’s head offices.
4. TRAINING
During the period under review, a number of the Company’s employees, including the Risk Manager, have attended a one day In-House AML Workshop as well as courses on the applicable Compliance legislation and its relevant procedures. In addition, financial controller and management attend on few days in house sessions of advanced Capital adequacy Workshop . Further to this, the Risk Manager has provided advice and assistance, when it was required, to the Company’s personnel through one-to-one sessions, as applicable and in addition any new employee receive training sessions from the relevant department related to risk issues. Furthermore, due to the nature of the Risk Manager function, the Risk Manager receives information through various online sources with respect to the modern risk management practices and any potential new risks. To present you the work and activities undertaken by the Risk Manager of the Company during the period from the 1st of January 2011 to the 31st of December 2011, for the evaluation and management of the various risks faced by the Company. The Report has been prepared in accordance with the relevant provisions of Law 144(I)/2007, as amended (hereinafter, the “Law”), Law 188(I)/2007 (consolidated with Law 58(I)/2010) and the relevant Directives and Circulars issued by the Cyprus Securities and Exchange Commission (hereinafter, the “CySEC”).
