Regulations, 2017

L.N. 398 of 2017

Investment Services Act

(Cap. 370)

Investment Services Act (Control of Assets) (Amendment)

Regulations, 2017

IN EXERCISE of the powers conferred by article 12 of the

Investment Services Act, the Minister responsible for the regulation of

financial services, acting on the advice of the Malta Financial Services

Authority, has made the following regulations:-

(1) The title of these regulations is the Investment

Services Act (Control of Assets) (Amendment) Regulations, 2017, and

these regulations shall be read and construed as one with the

Investment Services Act (Control of Assets) Regulations, hereinafter

referred to as "the principal regulations".

(2)

These regulations shall come into force on the 3rd January

2018.

Immediately after sub-regulation (2) of regulation 1 of the

principal regulations there shall be added the following sub-regulation

"(3) The objective of these regulations is to implement the

relevant provisions of Articles 1(3) and (4) and Articles 2 to 8 of

the Commission Delegated Directive (EU) 2017/593 of 7 April

2016 supplementing Directive 2014/65/EU of the European

Parliament and of the Council with regard to safeguarding of

financial instruments and funds belonging to clients, product

governance, obligations and the rules applicable to the provision

or reception of fees, commissions or any monetary or non-

monetary benefits.".

Regulation 2 of the principal regulations shall be amended

as follows

(a)

Sub-regulation (2) thereof shall be amended as

follows

(i) immediately before the definition "assets",

there shall be inserted the following definition

" "the Act" means the Investment Services

Act;";

(ii)

immediately after the definition "assets", there

shall be inserted the following definition

" "Commission Delegated Directive" means

Commission Delegated Directive (EU) 2017/593 of 7

April 2016 supplementing Directive 2014/65/EU of

the European Parliament and of the Council with

regard to safeguarding of financial instruments and

funds belonging to clients, product governance

obligations and the rules applicable to the provision

or reception of fees, commissions or any monetary or

non-monetary benefits, as amended from time to

time;";

(iii) immediately after the definition "customer",

there shall be inserted the following definitions

" "Directive 2009/65/EC" means Directive

2009/65/EC of the European Parliament and of the

Council of 13 July 2009 on the coordination of laws,

regulations and administrative provisions relating to

undertakings for collective investment in transferable

securities (UCITS), as amended from time to time

and includes any implementing measures that have

been or may be issued thereunder;

"Directive 2013/36/EU" means Directive 2013/

36/EU of the European Parliament and of the Council

of 26 June 2013 on access to the activity of credit

institutions and the prudential supervision of credit

institutions and investment firms, as amended from

time to time and includes any implementing measures

that have been or may be issued thereunder;"; and

(iv) immediately after the definition "Investment

Services Rules", there shall be added the following

definitions

" "MiFID" means Directive 2014/65/EU of the

European Parliament and of the Council of 15 May

2014 on markets in financial instruments and

amending Directive 2002/92/EC and Directive 2011/

61/EU, as amended from time to time, and includes

any implementing measures that have been or may be

issued thereunder;

"professional client" means a client meeting the

criteria laid down in Annex II of MiFID;

"qualifying money market fund" means a

collective investment undertaking authorised under

Directive 2009/65/EC, or which is subject to

supervision and, if applicable, authorised by the

competent authority under the Act, and which

satisfies all of the following conditions

(a) its primary investment objective

must be to maintain the net asset value of the

undertaking either constant at par (net of

earnings), or at the value of the investors’ initial

capital plus earnings;

(b) it must, with a view to achieving

that primary investment objective, invest

exclusively in high quality money market

instruments with a maturity or residual maturity

of no more than 397 days, or regular yield

adjustments consistent with such a maturity,

and with a weighted average maturity of 60

days. It may also achieve this objective by

investing on an ancillary basis in deposits with

credit institutions

Provided that for the purposes of

paragraph (b), a money market instrument shall

be considered to be of high quality if the

collective

investment

scheme

or

the

management company on behalf of the

collective investment scheme performs its own

documented assessment of the credit quality of

money market instruments that allows it to

consider a money market instrument as high

quality. Where one or more credit rating

agencies registered and supervised by ESMA

have provided a rating of the instrument, the

internal assessment carried out by the collective

investment scheme or the management

company on behalf of the collective investment

scheme shall have regard to, inter alia, those

credit ratings;

(c) it must provide liquidity through

same day or next day settlement;

"Regulation

(EU)

2015/2365"

means

Regulation (EU)

2015/2365 of the European

Parliament and of the Council of 25 November 2015

on transparency of securities financing transactions

and of reuse and amending Regulation (EU) No 648/

2012 as amended from time to time;

"retail client" means a client who is not a

professional client as defined in Annex II of MiFID;

"securities financing transaction" means

transactions as defined in Article 3(11) of Regulation

(EU) 2015/2365;"; and

(b) immediately after sub-regulation (2) thereof, there

shall be inserted the following new sub-regulation

"(3) Words and expressions used in these regulations

which are also used in the Act but which are not defined

herein shall have the same meaning as in the Act.".

Immediately after sub-regulation (3) of regulation 5 of the Amends

principal regulations, there shall be inserted the following sub- regulation

the principal

regulations

regulations.

"(4) Security interests, liens or rights of set-off over

instruments or money belonging to a customer and enabling a

third party to dispose of the customer’s instruments or money in

order to recover debts that do not relate to the customer or

provision of services to the customer are not permitted except

where this is required by the applicable law in a third country

jurisdiction in which the money or instruments belonging to the

customer are held.

(5) Where a subject person is obliged to enter into

agreements that create such security interests, liens or rights of

set-off, it shall disclose that information to customers indicating

to them the risks associated with those arrangements.

(6) Where security interests, liens or rights of set-off are

granted by the subject person over instruments or money

belonging to the customer, or where the subject person has been

informed that they are granted, these shall be recorded in

customer’s contracts and the subject person’s own accounts to

make the ownership status of customer’s assets clear, such as in

the event of an insolvency.".

Regulation 7 of the principal regulations shall be amended Amends

regulation 7 of

as follows

the principal

regulations.

(a) in the English text of sub-regulation (3) thereof, for

the words, "distinct form", there shall be substituted the words,

"distinct from";

(b) sub-regulations (4) to (6) thereof shall be renumbered

as sub-regulations (6) to (8) respectively;

(c) immediately after sub-regulation (3) thereof, there

shall be added the following new sub-regulations (4) and (5)

"(4) The subject person shall maintain accurate

records and accounts in a way that ensures accuracy, and in

particular their correspondence to the instruments and

money held for the customers and that they may be used as

an audit trail.

"(5) The subject person shall conduct, on a regular

basis, reconciliations between its records and accounts and

those of any third parties with whom customer’s

instruments and money have been deposited in accordance

with regulations 8 and 9.";

(d) in the English text of sub-regulation (6) thereof, as

renumbered, for the words, "form the assets", there shall be

substituted the words, "from the assets"; and

(e) immediately after sub-regulation (8) thereof, as

renumbered, there shall be inserted the following new sub-

regulations

"(9) The subject person shall take the necessary

steps to ensure that any customer instruments deposited

with a third party in accordance with regulation 8 are

identifiable separately from the financial instruments

belonging to the subject person and from the instruments

belonging to that third party, by means of differently titled

accounts on the books of the third party or other equivalent

measures that achieve the same level of protection.

(10) The subject person shall take the necessary

steps to ensure that the money belonging to the customer

deposited in accordance with regulation 9 with a central

bank, a credit institution or a bank authorised in a third

country or a qualifying money market fund, are held in an

account or accounts separately identifiable from any

accounts used to hold money belonging to the subject

person.

(11) The subject person shall implement adequate

organisational arrangements to minimise the risk of the loss

or diminution of assets belonging to the customer, or of

rights in connection with those assets, as a result of misuse

of the assets, fraud, poor administration, inadequate record-

keeping or negligence.

(12) If, for reasons of applicable law, including the

law relating to property or insolvency, a subject person

cannot comply with the provisions of this regulation to

safeguard customers’ rights to satisfy the requirements of

Articles 16(8) and (9) of MiFID, the subject person shall

implement arrangements to ensure that customers’ assets

are safeguarded to meet the objectives outlined in this

regulation.

(13) The competent authority shall issue Investment

Services Rules providing requirements which have an

equivalent effect in terms of safeguarding customers’ rights

if the applicable law of the jurisdiction in which the money

or instruments belonging to the customer are held prevents

the subject persons from complying with the provisions of

sub-regulation (9) or (10) of this regulation

Provided that when relying on such equivalent

requirements as prescribed in sub-regulations (9) or (10),

the subject persons shall inform customers that in such

instances they do not benefit from the provisions envisaged

under MiFID and the Commission Delegated Directive.".

Regulations 8, 9, 10, 11 and 12 of the principal regulations Renumbering of

shall be renumbered as regulations 15, 16, 17, 18 and 19 respectively. regulations

10, 11 and 12 of

the principal

regulations.

Immediately after regulation 7 of the principal regulations, Adds

regulations 8 to

there shall be inserted the following new regulations

14 to the

principal

regulations.

(1) A subject person may deposit

instruments held by it on behalf of its customers into an

instruments with

account or accounts opened with a third party.

(2) The subject person shall exercise all due

skill, care and diligence in the selection, appointment

and periodic review of the third party and of the

arrangements for the holding and safekeeping of those

instruments.

(3) The subject person shall, in particular, take

into account the expertise and market reputation of the

third party as well as any legal requirements or market

practices related to the holding of instruments that

could adversely affect the rights of its clients.

(4) Where the subject person proposes to

deposit customer instruments with a third party, the

subject person shall only deposit instruments with a

third party in a jurisdiction where the safekeeping of

instruments for the account of another person is

subject to specific regulation and supervision and that

third party is subject to this specific regulation and

supervision.

(5) The subject person shall not deposit

financial instruments held on behalf of customers with

a third party in any jurisdiction that does not regulate

the holding and safekeeping of instruments for the

account of another person unless one of the following

conditions is met

(a) the nature of the instruments or of the

investment services connected with those

instruments requires them to be deposited with a

third party in that third country; or

(b) the instruments are held on behalf of a

professional client and that professional client

requests the subject person, in writing, to deposit

them with a third party in that third country.

(6) The provisions of sub-regulations (4) and

(5) shall also apply when the third party has delegated

any of its functions concerning the holding and

safekeeping of instruments to another third party.

(1) A subject person shall, on receiving

any customer money, promptly place such money with

any of the following

(a) a central bank;

(b) a credit institution authorised in

accordance with the provisions of Directive 2013/

36/EU;

(c) a bank authorised in a third country; or

(d) a qualifying money market fund

Provided that this sub-regulation shall not

apply to a credit institution authorised under

Directive 2013/36/EU in relation to deposits

within the meaning of the aforementioned

Directive and held by that institution.

(2) Where the subject person does not deposit

customer money with a central bank, it shall exercise all

due skill, care and diligence in the selection,

appointment and periodic review of the credit

institution, bank or money market fund where the

money are placed and the arrangements for the holding

of such money. The subject person shall furthermore,

consider the need for diversification as part of its due

diligence.

(3) Where the subject person deposits customer

money in accordance with sub-regulation (2), it shall, in

particular, take into account the expertise and market

reputation such institutions or money market funds with

a view to ensuring the protection of the rights of its

customers as well as any legal or regulatory

requirements or market practices related to the holding

of customers’ money that could adversely affect such

rights.

(4) The subject person shall ensure that

customers give their explicit consent to the placement

of their money in a qualifying money market fund.

Furthermore, for the purposes of ensuring that this right

to consent is effective, the subject person shall inform

customers that money placed with a qualifying money

market fund will not be held in accordance with the

requirements for safeguarding customer money

prescribed in the Commission Delegated Directive and

these regulations.

(5) Where the subject person deposits customer

money with a credit institution, bank or money market

fund of the same group as the subject person, it shall

limit the money deposited with any such group, entity

or combination of any such group entities so that

money does not exceed 20% of all such monies.

(6) The requirement prescribed in sub-

regulation (5) can be waived by the Authority where the

subject person is able to demonstrate that, in view of

the nature, scale and complexity of its business, and

also the safety offered by the third parties considered in

sub-regulation (5) and including in any case the small

balance of customer money the subject person holds,

the requirement prescribed in sub-regulation (5) is not

proportionate.

(7) The subject person shall periodically review

the assessment made in accordance with sub-regulation

(6) and shall notify the initial and reviewed assessments

to the competent authority.

(1) A subject person shall not enter into

arrangements for securities financing transactions in

respect of instruments which it holds on behalf of a

customer nor shall the subject person otherwise use

such instruments for its own account or for the account

of any other person or customer of the subject person,

unless both of the following conditions are met

(a) the customer has given his prior

express consent to the use of the instruments on

specified terms, as clearly evidenced in writing

and affirmatively executed by signature or

equivalent; and

(b) the use of that customer’s instruments

is restricted to the specific terms to which the

customer consents.

(2) The subject person shall not enter into

arrangements for securities financing transactions in

respect of instruments which are held on behalf of a

customer in an omnibus account maintained by a third

party, nor shall the subject person otherwise use

instruments held in any such account for its own

account or for the account of any other person, unless,

in addition to the conditions set prescribed in sub-

regulation (1), at least one of the following conditions

is met

(a) each customer whose instruments are

held together in an omnibus account has given

prior express consent in accordance with sub-

regulation (1)(a); or

(b) the subject person has in place systems

and controls which ensure that only instruments

belonging to customers who have given prior

express consent in accordance with sub-

regulation (1)(a) are so used.

(3) The records of the subject person shall

include details of each customer on whose instructions

the use of instruments has been affected as well as the

number of instruments belonging to each customer who

has given his consent, so as to enable the correct

allocation of any loss.

(4) The subject person shall take appropriate

measures to prevent the unauthorised use of customer

instruments for its own account or the account of any

other person, such as

(a) the conclusion of agreements with

customers on measures to be taken by the subject

person in case the customer does not have enough

provision on its account on the settlement date,

such as borrowing of the corresponding securities

on behalf of the customer or unwinding the

position;

(b) the close monitoring by the subject

person of its projected ability to deliver on the

settlement date and the putting in place of

remedial measures if this cannot be done; and

(c) the close monitoring and prompt

requesting of undelivered securities outstanding

on the settlement day and beyond.

(5) The subject person shall adopt specific

arrangements for all customers to ensure that the

borrower of customer instruments provides the

appropriate collateral.

(6) The subject person shall monitor the

continued appropriateness of the collateral referred to

in sub-regulation (5) and take the necessary steps to

maintain the balance with the value of customer

instruments.

(7) The subject person shall not enter into

arrangements which are prohibited under Article 16(10)

of MiFID.

(1) The subject person shall properly

consider the use of title transfer collateral arrangements

in the context of the relationship between the

customer’s obligation to the subject person and the

customer’s assets subjected to title transfer collateral

arrangements by the subject person. The subject person

shall furthermore be able to demonstrate that it has

carried out such considerations.

(2) When considering, and documenting, the

appropriateness of the use of title transfer collateral

arrangements, the subject person shall take into account

all of the following factors

(a) whether there is only a very weak

connection between the customer’s obligation to

the subject person and the use of title transfer

collateral arrangements, including whether the

likelihood of a customer’s liability to the subject

person is low or negligible;

(b) whether the amount of customer

money or instruments subject to title transfer

collateral arrangements far exceeds the

customer’s obligation, or is even unlimited if the

customer has any obligation at all to the subject

person; and

(c) whether all customers’ instruments or

money are made subject to title transfer collateral

arrangements, without consideration of what

obligation each customer has to the subject

person.

(3) Where using title transfer collateral

arrangements, the subject person shall highlight to

professional clients and eligible counterparties the risks

involved and the effect of any title transfer collateral

arrangement on the customer’s instruments and money.

(1) The subject person shall appoint a

single officer of sufficient skill and authority with

specific responsibility for matters relating to the

compliance by the subject person with its obligations

regarding the safeguarding of customer instruments and

money.

(2) The subject persons shall decide, whilst

ensuring full compliance with Commission Delegated

Directive, whether the appointed officer is to be

dedicated solely to this task or whether the officer can

discharge responsibilities effectively whilst having

additional responsibilities.

The subject person shall ensure that its

Reports by external

external auditors report at least annually to the

competent authority on the adequacy of the subject

person’s arrangements under Article 16(8), (9) and (10)

of MiFID and Chapter II of the Commission Delegated

Directive as transposed in these regulations.

(1) The subject person shall make

information pertaining to customers’ instruments and

money readily available to the following entities

(a) the competent authority;

(b) appointed insolvency practitioners;

and

(c) the resolution authority.

(2) The information to be made available in

terms of sub-regulation (1) shall include the following

(a) related internal accounts and records

that readily identify the balances of money and

instruments held for each customer;

(b) where customer money are held by the

subject person in accordance with regulation 9, as

well as details of the accounts where customer

money are held and the relevant agreements with

those entities;

(c) where instruments held by the subject

person in accordance with regulation 8, as well as

details of accounts opened with third parties and

the relevant agreements with those entities;

(d) details of third parties carrying out any

related outsourced tasks and details of any

outsourced tasks;

(e) key individuals of the subject person

involved in related processes, including those

responsible for oversight of the subject person’s

requirements in relation to the safeguarding of

customer assets; and

(f) agreements relevant to establish

customer ownership over assets.".

8. In sub-regulation (2) of regulation 15 of the principal

regulations, as renumbered, for the words "regulation 9", there shall be

substituted the words, "regulation 16".

9. Immediately following regulation 19 of the principal

regulations as renumbered, there shall be inserted the following

"Part 4

Administrative Penalties, other administrative measures and Appeals

(1) Where a person falling within the

scope of these regulations fails to comply with any

provisions of such regulations or any rules issued

thereunder further implementing such regulations, the

competent authority may, by notice in writing and

without recourse to a court hearing, impose on such

person an administrative penalty and other

administrative measures in accordance with the

provisions of the Investment Services Act and Banking

Act (MiFID and MiFIR Administrative Penalties,

Measures and Investigatory Powers) Regulations, 2017.

(2) A right of appeal to the Financial Services

Tribunal shall lie from the decisions which the

competent authority shall take under these regulations

and the provisions of article 19 of the Act shall apply

mutatis mutandis.".

€1.17