DFSA and DIFC Latest Developments

The DFSA released two Consultation Papers in June 2017 - No. 113 “Capital Requirements Review” and 114 “Liquidity Requirements Review” - explaining the proposed changes to Capital and Liquidity requirements for DFSA authorised firms. The DFSA has now reviewed the comments that they received from Firms and amended the papers with the proposed legislative changes. These changes will come into force on 1st January 2018.

Both the Prudential – Investment, Insurance Intermediation and Banking, and the Islamic Finance Rules modules have been updated with rule-making instruments. Please refer to CCL’s June Regulatory Update for further insight on both.

The DFSA has released a Consultation Paper regarding its wide range of changes to the DFSA Funds Regime. Consultation Paper No 115 proposes to bring in enhancements to the fund regime that reflect the movement and development towards the DFSA and DIFC meeting international standards. The DFSA has aimed to reflect changes that tailor the regime, but which still take account of DIFC specific factors and requirements of the UAE and GCC.

The main enhancements include:

  • Removing the current limits on the number of investors which a DIFC fund can have. Currently only a Public Fund can have 101 or more investors, with an Exempt Fund being limited to 100 or fewer investors, and a Qualified Investor Fund (“QIF”) to 50 or fewer investors. The proposals will not change the current approach to regulation of these funds, based on the type of investors (e.g. Public Funds, being open to retail investors, face greater regulatory requirements). These proposals will give fund managers more flexibility in structuring Funds.
  • Introducing a new class of specialist funds for Exchange-Traded Funds (ETFs). These open-ended funds, listed and traded on exchanges, are popular with both retail and institutional investors in other jurisdictions. Their introduction would give fund managers greater choice of the type of Funds they could offer in, or from, the DIFC.
  • Introducing a new model for internal management of an Investment Company, where such a company can be internally managed by its licensed sole Corporate Director. This is a model available in the European Union and the proposals introduce it with some adjustments to suit the DIFC regime.

The changes have been proposed to bring the DFSA fund regime up to international standards through its measures in order to enhance liquidity risk management in open-ended funds. Similar standards have been brought in by the Financial Stability Board and the International Organisation of Securities Commissions.

The DFSA has censured Mr Prabhakar Kamath, a former Finance Officer of a DFSA Category 4 Authorised Firm, for submitting an inaccurate financial report to the DFSA.

As per the DFSA’s prudential requirements Mr Kamath was required to submit monthly financial reports to the DFSA and, as per the PIB Rules, the firm was required to maintain an amount of liquid assets which exceeded its Expenditure Based Capital Minimum, which was 600,000 USD.

In May 2015, Mr Kamath submitted its monthly financial report to the DFSA and reported that the firm’s current account balance remained the same as the previous month therefore continuing to meet the Liquid Assets Requirement. However, in fact, the firm’s current account balance was significantly less than the required $600,000.

The mistake came as Mr Kamath did not review the necessary monthly financial statements and therefore could not verify the balance of liquid assets. The DFSA has stated that Mr Kamath clearly failed in his responsibilities as Finance Officer, failing to “exercise sound judgment and diligence in carrying out his duties as the Firm’s Finance Officer” and failing “to take reasonable care to ensure that the business of the firm for which he was responsible, complied with legislation application in the DIFC”.

While in previous cases, the DFSA has imposed a fine in these circumstance, owing to specific circumstances of the case and other parties’ involvement, as well as Mr Kamath’s cooperation with the DFSA, the DFSA has imposed a Censure on Mr Kamath rather than a fine or other sanction.

Further information

If you would like to discuss these updates in more detail, please contact

Clare Curtis (CCurtis@cclcompliance.com)

ADGM and FSRA Latest Developments

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has set out guidance regarding virtual currencies and Initial Coin/Token Offerings.

The Guidance is targeted at any firms or individuals within the ADGM considering the use of Initial Coin or Token Offerings to raise funds. It is also aimed at those considering transacting in or general use of virtual tokens of currencies. As the FSRA adopts a “technology neutral” approach to cryptocurrencies, this means that they generally permit virtual tokens being used as mechanism to enable or facilitate a Regulated Activity to be carried out. They are, however, constantly monitoring the situation so this can be subject to change.

Regarding Initial Coin Offerings (ICO) whether an ICO will be regulated under the Financial Services Market Regulations (FSMR) rules will be assessed on a case by case basis. If the tokens used in an ICO are assessed to resemble and have similar characteristics of a Security, then the FSRA may deem the tokens as a Security (and therefore considered Security Tokens). Subsequently, an issuer seeking to launch an ICO should contact the FSRA at the earliest opportunity.

From a regulatory perspective, issuances of Securities will see no difference in regulatory treatment. Firms who are seeking to raise funds in a regulated and transparent manner using new business models are encouraged to engage with the FSRA. If the requirements for Offers of Securities with these ICOs fall under the same rules as generic Securities then there will still be an obligation to publish a prospectus from the Issuer. However, some Offers of Securities may fall under Exemptions, where it can be offered without a prospectus.

In order to help identify ICOs under the correct regulatory rules, firms should contact the FSRA, as not all ICOs constitute an Offer of Securities. The FSRA also reminds individuals and firms that virtual currencies are extremely volatile, transactions are unregulated, and thus are considered high-risk investments. For further information, it is suggested to read the full Guidance published by the FSRA.

The ADGM and YES BANK have signed an MoU to further develop the exchange business between the FinTech ecosystems of the UAE and India. From a regulatory perspective, there is focus on the ADGM’s Regulator Laboratory, which will see FinTech Firms applying for programmes and technological advances within the ADGM Reg Lab in order to further financial innovation and regulatory developments. This has been seen as a move to further scale up the Indian FinTech and Regulatory ecosystem and support the ADGM’s focus and development plan.

The ADGM has release Consultation Paper No. 4 of 2017 inviting discussion and feedback regarding its plans to revise the “Prudential – Investment, Insurance Intermediation and Banking” Rulebook. The changes have been proposed to bring the Rulebook closer in line with the Basel Committee on Banking Supervision prudential regime.

Proposals include:

  • the introduction of capital requirements through implementation of the Countercyclical Capital Buffer, Credit Valuation Adjustment and Central Counterparties frameworks
  • the ability of certain capital instruments to absorb losses at the Point of Non-Viability
  • full implementation of the Leverage Ratio floor
  • the disclosure of the Leverage Ratio and the Liquidity Coverage Ratio
  • the introduction of new reporting requirements, and further miscellaneous amendments that will provide greater clarity to financial institutions operating in ADGM.

The Consultation Paper reflects the ongoing efforts to bring the ADGM’s prudential regime up to an international recognised standard.

ESCA (The Emirates Securities and Commodities Authority) and the ADGM have signed an MoU to enhance cooperation to foster financial innovation that serves the needs of the capital markets in the UAE. From a regulatory perspective, the Agreement is intended to drive economic development and growth in the UAE but also provide a framework for both bodies to share and exchange information regarding regulatory approaches to financial innovation. Both bodies are fully committed to setting high-level regulatory standards and to keep contributing to fair and transparent markets, and this Agreement has been signed to reflect this ongoing cooperation.

The French Regulator for Financial Services, the Authorité Des Marchés Financiers (AMF) and the ADGM have signed a cooperation agreement to promote innovation in financial services in France and the United Arab Emirates. Both regulators have a common interest in FinTech and building innovative functions in their respective markets. This cooperation agreement enables both the AMF and FSRA to support and refer innovation projects and FinTech start-ups to the ADGM’s FinTech Regulatory Laboratory and the AMF’s Fintech, Innovation and Competitiveness team, to both strengthen technological innovation and regulatory innovation.

Both bodies have a large interest in creating and supporting projects that will help navigate the regulatory system and monitor market developments to identify and propose ways to address emerging regulatory issues.

The new “communication channel” seeks to open a new window of opportunity for knowledge sharing and “enable FinTech firms to extend their global reach and learn from their foreign counterparts”.

Further information

If you would like to discuss these updates in more detail, please contact

Clare Curtis (CCurtis@cclcompliance.com)

Middle East Regulatory Updates

Saudi Arabia is planning to issue regulations that will allow select non-resident strategic foreign investors to own direct stakes in listed companies.

A cooperation agreement was signed by The Kingdom’s Capital Market Authority and the Saudi Arabian General Investment Authority (SAGIA) to collaborate on setting up the necessary regulatory framework to open up the stock market to foreign investors. The idea follows plans for listed companies to have access to new markets and provide economic growth to these companies.

The move follows other market reforms, such as the introduction of short-selling and a change in the settlement cycle, which has been introduced to attract foreign investment and facilitate Saudi Arabi’s inclusions on international indices.

These reforms come under Vision 2030 which plans to diversify Saudi’s income away from oil and attract foreign investment.

Further information

If you would like to discuss these updates in more detail, please contact:

Clare Curtis (CCurtis@cclcompliance.com)

International Developments

The French Regulator, the Authorité Des Marchés Financiers, has launched a new initiative focused on Initial Coin Offerings (ICOs). The two-prong effort around the funding model is intended to develop a regulatory position on cryptocurrencies. While the AMF is deliberating what approach to commit to and accepting consultations from the public until December, one of its projects is the new programmes called UNICORN (Universal Node to ICO Research & Network) which aims to develop a framework for carriers of ICO projects to develop their operations and ensure protection of all investors and stakeholders wishing to participate. The plan is for UNICORN to help build and develop its legal and economic expertise on ICOs and virtual currencies.

France is hoping to carry on adopting an accommodative stance toward the blockchain use and is encouraging developer teams to get in touch. Its idea is to follow in the steps of jurisdictions such as Canada who has given regulatory approval to two ICOs so far.

The Australian Parliament is to vote on new Bitcoin and cryptocurrency laws to strengthen the country’s anti money-laundering laws. The new laws propose the financial intelligence regulator AUSTRAC to have new powers to police digital currency exchanges – whereby traders buy and sell Bitcoin, Ethereum and other cryptocurrencies.

New exchanges will need to be regulated and it will become an offence for an unregistered person to provide cryptocurrency exchange services. These businesses will need to establish, implement and maintain an AML/CTF program and report threshold transactions and suspicious matters to AUSTRAC as well as keep appropriate records. Currently, the law does not require virtual currency exchanges to ask for any form of identification from customers who open accounts - although some exchanges do already ask for identification this is not a requirement by law.

While exchanges realise the expensive compliance cost this will entail, generally, it has been met with support to target a growing money laundering problem in cryptocurrency transactions.

Malta’s regulator the Malta Financial Services Authority (MFSA) has published a proposed rulebook to regulate Professional Investor Funds. A form of FinTech which would permit investment opportunity in cryptocurrencies through funds. While investor protection is still the overriding priority alongside the integrity of the financial market, Malta is keen to be one of the first financial markets exploring the official regulation of virtual currency investment funds. Now legislation is restricted for Professional Investor Funds to Investment Companies with Variable Capital as well as Private Company structures, both of which require a board of directors, responsible for the overall business performance and its legislation. The proposed rulebook is intended to fuel discussion and recommendations from the public and firms to help change the cryptocurrency landscape and hopefully becoming a key player in the new attention to cryptocurrency within the global financial markets.

The Swiss Financial Market Supervisory Authority (FINMA) has observed a market increase in Initial Coin Offerings in Switzerland, “a process where individual capital, or investors, are investing in a company or aggregating capital to a company under a common funding cause”.  As a result, FINMA has released Guidance on the topic and there are also several investigations into whether regulatory provisions have been breached. FINMA has identified several key areas that concern the authority with virtual currencies, concerns that many regulatory authorities have identified:

  • Provisions on combating money laundering and terrorist financing
  • Banking law provisions
  • Provisions on securities trading
  • Provisions set out in collective investment scheme legislation

While many aspects of market law should cover some areas of ICO campaigns, FINMA is still considering various models and cases.  It has also identified and been made aware of several ICO procedures that have potentially breached regulatory rules. These are each being investigated by FINMA, and enforcement proceedings will continue if they have been found to circumvent financial market law.

Further information

If you would like to discuss these updates in more detail, please contact:

Nigel Pasea (NPasea@cclcompliance.com)

Enforcement Action

The UK Regulator, the Financial Conduct Authority (FCA) has fined Merrill Lynch International (MLI) £34,524,000 for failing to report 68.5 million exchange traded derivative transactions over a period of 2 years, from 2014 to 2016.

Under the European Markets Infrastructure Regulation (EMIR), firms are required to report exchange traded derivative transactions to help authorities assess and address the risk in financial systems. After the 2008 financial crisis, firms were required to report these transactions to increase transparency within the financial markets.

The fine illustrates the importance of having transparent, up to date and efficient transaction reporting systems within firms, and the correct systems and controls to ensure that these are resourced and perform properly.

Merrill Lynch were open and cooperative with the FCA investigation and were quick to fix the breach and agreed to settle at an early stage of the investigation, receiving a 30% reduction in their overall fine.

Regulators in Europe and Asia are investigating Standard Chartered Plc over the role staff may have played in transferring from Guernsey to Singapore, $1.4billion of private bank client assets.

Employees raised questions about the timing of the transactions and whether the source of customers’ funds has been properly vetted to the bank before the bank conducted an inquiry and notified regulators. The assets were moved before Guernsey adopted the Common Reporting Standard and is consequently, the Singapore and Guernsey financial regulators are investigating the chronological order of events to establish whether the bank broke rules in evading tax.

Investigators are probing whether Standard Chartered carried out sufficient customer due diligence with Guernsey staff, and highlighted suspicious disparities between the earning of some customers against the balances in their accounts, as well as noticing that customers with links to the military were not being treated as politically exposed and therefore not being subject to enhanced due diligence.

While the bank has made attempts to improve its compliance controls in recent years, this new investigation has dampened efforts to improve its overall systems and controls.

Further information

If you would like a more detailed discussion on these or other enforcement actions, please contact:

Clare Curtis (CCurtis@cclcompliance.com)

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