Cyprus & the FTX collapse – Safeguarding of Clients’ Funds

The FTX bankruptcy filings caused a chain reaction across regulators and supervisory bodies across the globe, with Cyprus being no exception. On 11/11/2022 the Cyprus Securities and Exchange Commission (CySEC) announced that the license of the Cyprus Investment Firm FTX (EU) Ltd with number 273/15, is suspended in whole, due to suspicions of alleged violations of the Cyprus Investment Services and Activities and Regulated Markets Law.

According to CySEC’s announcement, the suspicion is founded on that FTX (EU) Ltd did not appear to comply (a) with its authorisation conditions in relation to the suitability of the members of the management body, and (b) with its organisational requirements for safeguarding the clients’ assets. The decision for the license suspension was reached for the purpose of protecting investors and the orderly operation of the market.

For as long as the suspension of the authorisation is in force:

1. FTX (EU) Ltd is not permitted to:

• Provide/carry out investment services/activities.
• Enter into any business transaction with any person and accept any new client.
• Advertise itself as a provider of investment services.

2. FTX (EU) Ltd, if this is consistent with existing clients’ wishes, may:

• Complete all its own transactions and those of its clients which are before it, in accordance with client instructions.
• Return all funds and financial instruments which are attributable to its clients.

It is to be seen in the next days what safeguards as to clients’ funds FTX (EU) Ltd and its management have put in place.

An announcement on FTX (EU) Ltd’s website (https://ftx.com/eu) states that “Following recent events, all onboarding of new clients, deposits and withdrawals has been suspended until further notice”.

Once again, during financial crisis, the adequacy of the management and the duty to safeguard clients’ funds, come to the spotlight and will be subject to scrutiny not only by CySEC, but also probably in proceedings that may be brought by clients personally or as a class to seek remedies.