The Malta Financial Services Authority, inspired by Regulation (EU) No 575/2013 (“the CRR”) and Directive 2013/36/EU (“the CRD”) has just introduced the regulatory framework for ‘CRR Local Firms’ within the Maltese MiFID Investment Firms.
A ‘Local Firm’ is defined under Article 4(1)(4) of CRR as:
“a firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets.”
In light of the fact that Local Firms intend to carry on the regulated activity of dealing on own account they qualify as MiFID Investment Firms and consequently they are required to obtain a Category 3 investment services licence. Notwithstanding, Article 30 of the CRD, requires Local Firms to have an initial capital of EUR 50,000 if they use any passporting rights in terms of MiFID (either on a cross-border basis or through the establishment of a branch). Furthermore, such firms shall be required to have their Financial Resources Requirement at least equal to an initial capital.
Another particularity of the Category 3 licence granted to a Local Firm is that it will specifically prohibit such licence holders from holding and/or controlling clients’ monies. In addition, on the basis that Local Firms do not service any external clients, any rules or rulebooks in relation to clients (including the conduct of business obligations), and/or client monies and/or assets under MiFID II would not be applicable. Nonetheless, other MiFID prudential rules would still remain applicable and such firms would still be subject to the MFSA’s on-going monitoring and supervision.
In addition to the required documentation in support of a Category 3 licence application, a Local Firm must submit to the MFSA a number of other documents, namely:
i. A certified statement signed by the applicant’s management board, compliance officer, and, if applicable, the management board of its parent company confirming that the proprietary trader will comply with and is able to continue complying with the definition of ‘Local Firm’ in terms of Article 4(1)(4) of the CRR on an ongoing basis. In this statement, the management board shall also declare that they will immediately inform the Authority should the entity would not be able to continue doing so and/or intend to change its operations;
ii. A certified legal opinion endorsed by the applicant’s management board and, if applicable, the management board of its parent company issued by an independent, external third party or an internal legal department confirming that the proprietary trader will comply with and is able to continue complying with the definition of Local Firm in Article 4(1)(4) of the CRR on an ongoing basis; and
iii. Sufficient written evidence showing how the proprietary trader complies with the definition of a ‘Local Firm’ in its internal operating manuals (e.g. the trading strategy, hedging and off-setting strategies, and the investment policy) (applicable only to existing entities).
For further information, please refer to the Circular issued by the MFSA.