Looking around at providers of CFD and Forex trading you will often find in the small print that they are regulated by CySec, short for the Cyprus Securities and Exchange Commission. For example high profile retail CFD provider eToro is regulated by CySec. As foreign regulation is often a worry for some people due to worries about the possibility of lack of regulatory oversight, we are going to take a look at CySec (and in the future other regulatory bodies).
CySec was launched in 2001 under section 5 of Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law of 2001 as public corporate body. The formation of CySec can be seen as one of the preemptive steps that the state of Cyprus undertook before joining the Euro in 2004. When in 2004 Cyprus joined the European Union they became part of MiFID (Markets in Financial Instrument Directive) allowing companies based in Cyprus access to all the markets in Europe. This has led a large number of retail FX companies to decide to base themselves in Cyprus. Traditionally Cyprus has been a tax haven and though membership of the EU has eroded its status as a Tax haven somewhat, it can be still been seen as a rather beneficial jurisdiction to operate from a tax point of view.
Some have also contended that CySec has one the weakest regulatory regimes within MiFID and that explains in popularity with Retail FX providers. I don’t have enough legal knowledge to determine if this is true. Though numerous familiar names have received fines from CySec for not compiling to the regulations required by those who operate under Cypriot law and some less well known organisations have licences withdrawn. For those who want to find out the rulings and regulatory decisions that CySec has made simply check their website at CySec.gov.cy.
If you take a look at the ruling against Easy Forex Trading Ltd made in 2009, it appears that CySec offer some serious regulation with Easy Forex being fined on multiple accounts of breaching the Cypriot regulation. Though some might question whether 45,000 Euros is an appropriate fine for such serious breaches of regulation. It should be noted that a number of changes in legislation where made between 2007 and 2010 in order bring Cyprus in line with the broad European Financial regulation framework.
Whether you feel safe trading under an account in Cyprus is probably a matter of personal judgement. I would recommend taking a look at the CySec site before undertaking financial transactions with a company regulated by CySec to check for previous regulatory breaches. It appears to me that CySec works reasonably well as regulatory body but probably has looser regulation than say the FSA (Financial Services Authority) the UK regulator. It should also be noted that tax reasons may be one of the contributing reasons why some Retail FX providers chose Cyprus as a base.