van Cutsem Wittamer Marnef & Partners​ LEADING GLOBAL NETWORK MACKRELL INTERNATIONAL IN CHAMBERS GUIDE AS FOR EIGHTH YEAR RUNNING.

Investment Services

Investment Services​

Investment Services in Malta are regulated by the Investment Services Act and the rules established by the Malta Financial Services Authority (“MFSA”). Under the new regime introduced by Directive (EU) 2019/2034 on the prudential supervision of investment firms (“IFD”) and Regulation (EU) 2019/2033 on the prudential requirements of investment firms (“IFR”) (collectively the “IFS Package”), the categorisation of investment services shifts from a service-based categorisation to a quantitative-based categorisation, as follows:

  1. Class 1 investment firms are determined on the basis of two cumulative requirements. Firstly, the investment firm must deal on own account and/or underwrite financial instruments and/or place financial instruments on a firm commitment basis. Secondly, the investment firm must have a total consolidated asset which is equal to or in excess of EUR 15 billion. Furthermore, investment firms with a consolidated asset value which is equal to or in excess of EUR 30 billion are classified as systematically important and are subjected to direct European Central Bank (“ECB”) supervision.

    The Capital Requirements Directive (“CRD”) and Capital Requirements Regulation (“CRR”) remain applicable to Class 1 and Class 1 Minus investment firms.

  2. Class 1 Minus (sub-class) investment firms are also determined on the basis of two cumulative requirements. Firstly, the investment firm must deal on own account and/or underwrite financial instruments and/or place financial instruments on a firm commitment basis. The second requirement for a Class 1 Minus investment firm is that it must have a total consolidated asset which is equal to or in excess of EUR 5 billion but less than EUR 15 billion. However, unlike Class 1 investment firms, the classification as a Class 1 Minus investment firm is not automatic, but is subject to the discretion of the MFSA.

  3. Class 2 investment firms have no specific requirements that they must satisfy to be classified as such. A Class 2 investment firm is a residual class, and investment firms which do not fall under a Class 1, Class 1 Minus, or Class 3 are classified as Class 2 investment firms.

  4. Class 3 investment firms must always satisfy the following cumulative requirements to be classified as such:

    • Assets under management are less than EUR 12 billion;
    • Client orders handled are less than either EUR 100 million per day for cash trades or EUR 1 billion per day for derivatives;
    • Assets safeguarded and administered are zero;
    • Client’s money held are zero;
    • Daily trading flow is zero;
    • Net Position Risk or Clearing Margin Given is zero;
    • Trading Counterparty Default is zero;
    • The on- and off-balance sheet total of the investment firm is less than EUR 100 million; and
    • The total annual gross revenue from investment services and activities of the investment firm is less than EUR 30 million calculated as an average on the basis of the annual figures from the two-year period immediately preceding the given financial year.

The IFS Package has replaced the existing framework for investment firms as set out in the CRR Package. However, a number of investment firms are still required to apply the CRR Package. For example, both Class 1 and Class 1 Minus investment firms must apply the CRR Package in its entirety. A Class 1 investment firm would be reclassified as a credit institution under the CRD IV and CRR. This is because such investment firms have business models and risk profiles similar to significant credit institutions, and their activities expose them to significant credit risks and risks to financial stability. Furthermore, Class 1 Minus investment firms will remain subject to the CRD IV and CRR, but unlike the former they are not required to be reauthorised as credit institutions.

Also important to note is that both the Markets in Financial Instruments Regulation (“MiFIR”) and the Markets in Financial Instruments Directive (“MiFID”) are still applicable in their entirety.

Risk Factors

One of the new additions by the IFR Package is the quantitative indicators to reflect the risks faced by investment firms. There are three groups of these risks, called K-Factors:

  1. Risk to the Client;

  2. Risk to the Market; and

  3. Risk to the Investment Firm.

To calculate their K-Factors, Class 1 investment firms have to calculate their own funds requirements as per the CRR. Class 2 investment firms are required to calculate their K-Factors when assessing their own funds requirements. Class 3 investment firms have to either apply the Fixed Overheads Requirement or the Permanent Minimum Capital Requirement, as per the IFR.

Initial Capital

Under the IFD, new initial capital requirements for investment firms depending on the services and activities performed by the investment firm are set out as follows:

  1. For investment firms that perform dealing on own account and underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis, the initial capital shall be that of EUR 750,000;

  2. For investment firms that perform reception and transmission of orders in relation to one or more financial instruments, execution of orders on behalf of clients, portfolio management, giving investment advice, and placing of financial instruments without a firm commitment basis, and that do not hold client money or assets belonging to its clients, the initial capital shall be that of EUR 75,000

  3. For investment firms that perform operations of an Organised Trading Facility (“OTF”), the initial capital shall be that of EUR 750,000; and

  4. For investment firms that perform activities other than those specified above, the initial share capital shall be that of EUR 150,000
Our Services

We have extensive experience in assisting investment services licence holders, and our services include:

  1. Structuring, legal, and regulatory advice;

  2. Assisting with the entire autorisation, registration, or notification process;

  3. Drafting of all internal policies and internal procedure manuals;

  4. Reviewing and/or drafting of necessary documentation;
  5. Liaising with the competent Maltese authorities on an ongoing basis;

  6. Assisting with the company incorporation; and

  7. Advising to ensure compliance with all the Anti-Money Laundering (“AML”) requirements and establishing effective Know Your Client (“KYC”) procedures.

Advisors and Brokers

Investment advice consists of giving, offering, or agreeing to give a personal recommendation to an investor or potential investor, in relation to one or more transactions with respect to financial instruments. The Investment Services Act (“ISAct”) clarifies that a personal recommendation refers to a recommendation that is considered as suitable for the investor or which is given after taking into consideration the circumstances of the investor and must constitute a recommendation to undertake one of the following:

  1. To buy, sell, subscribe for, exchange, redeem, hold, or underwrite a particular instrument;

  2. To exercise or not to exercise any right conferred by a particular instrument to buy, sell, subscribe for, exchange, or redeem an instrument; and

  3. To select one or more instruments by reference to which benefits are wholly or partly payable under a contract of insurance falling within the meaning of Class 3 – ‘linked long term’ – of the Second Schedule of the Insurance Business Act, Chapter 403 of the Laws of Malta.

Hence, this investment service should be differentiated from guidance, where in such case the client would be given information about investments rather than a specific course of action.

It is also important to note that a recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public.

Multilateral Trading Facilities

A Multilateral Trading Facility (“MTF”) is a multilateral system which brings together multiple third party buying and selling interests in financial instruments in the system and in accordance with non-discretionary rules, in a way that results in a contract. Since the rules must be non-discretionary, the operator of the MTF must establish clear rules delineating how the system operates and the characteristics that determined the final trade.

Recently there has been an increased interest in MTFs, especially in relation to how digital financial instruments can be traded on such platforms, and Malta offers an attractive environment within which to structure MTFs.

Organised Trading Facilities

An OTF which has been introduced by means of MIFID II, means a multilateral system which is not a regulated market or an MTF, and in which multiple third-part buyers and sellers are able to interact in the system in a way that results in a contract.

By contrast with the operation of an MTF, only bonds, structured finance products, emission allowances, or derivatives are allowed to be traded on an OTF. Furthermore, since the order execution is carried out on a discretionary basis, this discretion must be exercised in either, or both, of the following:

  1. The placing/retracting of client orders; or

  2. Matching of client orders.

In doing so, the operator must comply with established criteria in relation to investor protection, including those relating to information to clients, efficient execution, and best execution.

Systematic Internalisers

A system internaliser is a Maltese investment firm which, on an organised, frequent, and systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF, or an OTF and which is not an MTF.

The frequent and systematic basis shall be measured by the number of Over the Counter (“OTC”) trades in financial instruments carried out by the Maltese investment firm on own account when executing client orders. The substantial basis is measured by the size of the OTC trading carried out by the investment firm in relation to the total trading of sch firm in a specific financial instrument. In terms of Maltese law, the definition of systematic internaliser shall only apply where the pre-set limits for a frequent and systematic basis and for a substantial basis are both crossed or where the investment firm chooses to opt-in under the systematic internaliser regime.

It shall be noted that the systematic internaliser is a counterparty and not a trading venue. This means that the systematic internaliser operates a bilateral system and is not allowed to bring together third party buying and selling interests in the same manner as an MTF.

Placing of Financial Instruments

Placing of financial instruments refers to the activity of marketing and making available, to specified persons or to existing holders, newly-issued financial instruments or instruments that are issued but not listed on any trading venue.

In terms of the ISAct, in order to carry out the activity of ‘placing of financial instruments with or without a firm commitment basis’, an investment firm needs to apply to the MFSA to obtain an Investment Services Licence.

It is important to note that the term ‘without a firm commitment basis’ implies that such activity is done without any obligation on the investment firm to purchase from the issuer some or all the financial instrument that it may not succeed in placing with third parties. The placing of financial instruments may relate to different financial instruments, including transferable securities, units in collective investment schemes, money market instruments, and derivative instruments.

Tied Agents

The Investment Services Act (Tied Agents) Regulations describe a Tied Agent as a natural or legal person who under the full and unconditional responsibility of only one Investment Services Licence Holder or European Investment Firm and on whose behalf it acts, promotes investment and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or instruments, places instruments and/or provides investment advice to clients or prospective clients in respect of those instruments or services.

The investment firm wishing to appoint a Tied Agent to carry out business in Malta or elsewhere shall apply to the MFSA for registration of such Tied Agent and shall provide a confirmation that the Tied Agent is of good repute and has the competence to deliver the services and to communicate accurately all relevant information regarding the proposed service to the potential clients.

Passporting

Passporting is the exercise by a company of its rights to carry on activities and services regulated under EU legislation in another EEA State on the basis of authorisation or registration in its home EEA State. The activities may be carried on through an establishment of a branch in the host state (establishment passport) or on a cross-border services without using an establishment in the host state (service passport). Typically, a notification letter must be provided to the MFSA prior to carrying out any activities or services in the host state, however different licences may have different passporting requirements and therefore it is paramount that advice is sought prior to passporting any activities.

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