How were securities firms previously regulated?
Securities firms were regulated in the Federal Act on Stock Exchanges and Securities Trading (SESTA) and in the corresponding Stock Exchange Ordinance (SESTO). They required a FINMA authorization for their activities and were supervised by FINMA. The SESTA regulated the conditions for granting a authorization, the corresponding conduct duties and other requirements for securities firms, whereby reference was made in part to the provisions of the Banking Act (Banking Act).
Why are securities firms in the German version of FinSA&FinIA called “Wertpapierhäuser” instead of “Effektenhändler”?
According to the Federal Council Dispatch on FinSA and FinIA (p. 24) on FinSA&FinIA, the term “Effektenhändler ” is misleading. In FinSA&FinIA, “Effektenhändler ” are therefore now referred to as “Wertpapierhäuser”.
Which law regulates the licensing requirements for securities firms?
The FinIA; also, under this securities firms require a authorization from FINMA for their activities and are directly supervised by FINMA (art. 5 para. 1 in conjunction with art. 61 para. 3 FinIA).
What happened to the SESTA after FinSA&FinIA came into force?
Since a large part of the SESTA had already been transferred to the Financial Market Infrastructure Act (FMIA), the SESTA was completely repealed with FinSA&FinIA.
What are the main duties of securities firms under FinSA?
Do all securities firms according to SESTA classify as securities firms according to FinIA?
According to art. 41 FinIA, the term “securities firm” includes the previous categories of client trader, principal trader and market maker (cf. also “Who is considered a securities firm requiring an authorization?“). The previous securities firms categories of the issuing house and the derivatives house are not included in the FinIA as securities firms, but the corresponding activities still require an authorization as a bank or securities firm (art. 12 FinIA).
Who is considered a securities firm requiring an authorization?
Pursuant to art. 41 FinIA, a securities firm is defined as a commercial entity that
- trades in its own name for the account of the client with securities (called client dealer);
- trades in securities on its own account, mainly on the financial market and (i) could thereby jeopardize the functioning of the financial market, or (ii) acts as a member of a trading venue (referred to as a principal trader); or
- trades in securities for its own account on a short-term basis and quotes prices for individual securities publicly on an ongoing basis or upon request (referred to as market maker).
What is meant by "professional activity"?
In the FinIA, the concept of professional activity is defined in the general provisions as any independent economic activity aimed at permanent gains (Art. 3 FinIA). For securities firms, the term is further specified in Art. 65 FinIO. In particular, trading in securities in one’s own name for the account of clients shall only be considered a professional activity if accounts are maintained or securities are held directly or indirectly for more than 20 clients (Art. 65 para. 1 FinIO). However, for the purposes of this provision, domestic and foreign banks and securities firms, other state-supervised companies, shareholders and partners with qualified shareholdings and persons with economic or family ties to them, as well as institutional investors with professional treasury operations (Art. 65 para. 2 FinIO) are not deemed to be clients.
Where are the licensing requirements for securities firms according to FinIA regulated?
The licensing requirements for securities firms can be found on the one hand under the general provisions in art. 7 f. of the Swiss Code of Obligations. FinIA. Then the special part of the FinIA in art. 41 ff. FinIA sets out special licensing requirements for securities firms.
What organisational requirements does FinIA place on the overall management body and the business management of a securities firm?
Members of the overall management body of client traders and market makers may not be members of business management at the same time. A strict personnel separation applies here (Art. 66 para. 3 FinIO). No such requirements apply to principal traders. In addition, the management of all securities firms must consist of at least two persons and all securities firms must be represented by a person who is resident in Switzerland and is either a member of the overall management body or of the business management (art. 66 paras. 1 FinIO).
What other basic requirements does FinIA place on the internal organisation of a securities firm?
Securities firms must ensure an internal separation of functions between trading, asset management and processing. As in the past, client traders and market makers who are not primarily active in the financial sector must legally separate securities trading in order to allow adequate supervision by the supervisory authority (art. 67 FinIO).
Securities firms must define the main features of risk management and have an appropriately equipped risk management system and effective internal control in place, in particular to ensure compliance. The risk management and compliance functions are to be functionally and hierarchically separated from the operational business units (art. 68 para. 1-3 FinIO).
Client traders and market makers also set up an internal audit department independent of the management, which has sufficient resources and unlimited auditing rights (art. 68 para. 4 FinIO).
Do securities firms have to document their internal organisation?
What legal form must a securities firm have according to FinIA?
A securities firm domiciled in Switzerland must have the legal form of a commercial enterprise (i.e. a company limited by shares, limited liability company, general partnership, limited partnership or partnership limited by shares) (art. 42 FinIA).
May a FinIA securities firm accept deposits from the public?
In principle, the professional acceptance of deposits from the public is also under the FinIA reserved for banks (art. 1 para. 2 Banking Act), although this principle has recently been subject to restrictions (cf. “Companies accepting deposits from the public / Fintech companies“).
Already under the applicable law, client traders were permitted to accept deposits from the public which served solely to process client transactions if no interest was paid on them (art. 5 para. 3 let. c Banking Ordinance). art. 44 para. 2 FinIA now explicitly authorizes client traders to accept deposits from the public as part of their activities, irrespective of interest paid thereon. Any returns generated on the capital market may now be passed on to investors by a client trader by means of interest (Federal Council Dispatch on FinSA and FinIA, p. 128).
How high must the minimum capital and own funds of a securities firm be according to FinIA?
As before, the minimum capital of a securities firm must be CHF 1.5 million and fully paid up (art. 45 FinIA). The ordinance regulates the requirements in detail (art. 69 FinIO).
Securities firms which, in the course of their activities maintain processing accounts for clients themselves or with third parties must comply with the provisions of the Capital Adequacy Ordinance of June 1, 2012. The other securities firms must permanently hold own funds of at least one quarter of the fixed costs of the last annual accounts, but not more than CHF 20 million. The calculation of fixed costs is governed by the ordinance (art. 70 FinIO).
What are the FinIA's liquidity requirements for securities firms?
Securities firms which maintain processing accounts for their clients themselves or with third parties within the scope of their activities must comply with the provisions of the Liquidity Ordinance of November 30, 2012. The other securities firms must invest their funds in such a way as to ensure sufficient liquidity at all times (art. 71 FinIO).
Do FinIA special provisions apply to foreign-controlled securities firms?
The provisions of the Banking Act on foreign-controlled banks pursuant to art. 3bis – 3quater Banking Act (art. 43 FinIA) apply mutatis mutandis to foreign-controlled securities firms.
FINMA must be notified of all facts that indicate foreign control. Foreign-controlled securities firms in particular require an additional authorization from FINMA. This must be renewed if foreigners with qualified shareholdings change.
When is a securities firm considered foreign-controlled?
A securities firm is deemed to be foreign-controlled if foreigners with qualifying participations (at least 10% of the capital or votes; cf. art. 3 para. 2 let. cbis Banking Act) directly or indirectly hold more than half of the votes in the securities firm or otherwise exercise a controlling influence over it (cf. art. 3bis para. 3 Banking Act).
Foreigners are (i) natural persons who are neither Swiss citizens nor have a residence permit in Switzerland and (ii) legal entities and partnerships which have their registered office abroad or, if they have their registered office in Switzerland, are controlled by a foreigner pursuant to (i) (cf. art. 3bis para. 3 Banking Act).
In what other areas does banking law apply to securities firms?
As under the previous regulation under the SESTA, the FinIA in relation to securities firms refers in many places to the provisions of banking law, which apply analogously to securities firms as well, in particular with regard to the following:
- securities firms which are foreign-controlled (art. 43 FinIA);
- additional capital for crisis prevention and management (art. 47 FinIA);
- accounting, in particular with reference to the Banking Ordinance of April 30, 2014 (art. 48 FinIA);
- group and conglomerate supervision (art. 49 para. 3 FinIA), whereby the securities firm dominated financial group and the securities firm dominated financial conglomerate are defined in the FinIA (art. 49 para. 1 and 2 FinIA);
- own funds and liquidity, if securities firms, as part of their activities on behalf of clients, themselves or with third parties, have accounts for the processing of securities transactions (cf. How high must the minimum capital and own funds of a securities firm be according to FinIA?” and “What are the FinIA’s liquidity requirements for securities firms?“); and
- insolvency law measures (art. 67 FinIA).
What supervisory audit regime does FinIA provide for securities firms?
Does the FinIA provide for changes in the recording and reporting duties of securities firms?
No, the corresponding provisions were transferred from the SESTA. For securities firms that are participants in a trading venue, the corresponding duties under the FMIA are applied unchanged.