How to select suitable jurisdiction for starting FX Broker activity

How to select suitable jurisdiction for starting FX Broker activity?

Retail FX (Retail foreign exchange) is financial activity with currency transactions, which is increasingly being conducted online using the Internet, and this sector is extremely attractive for investors and entrepreneurs.

One of the key factors implying the foregoing attractiveness is the simplicity with which the person can actually start own brokerage activity.

In previous years, in order to start brokerage activity, expert technologies and market knowledge were usually required, combined with significant amount of free capital, but to date, progress in the sphere of technologies and enhancement of opportunities for obtaining regulatory licenses have significantly reduced costs and “time-to-market”.

The present article provides for brief overview of the latest trends regarding the start of brokerage activities, as well as information on the most prevalent jurisdictions for obtaining license for financial activities, including associated variants and costs. Pay attention that there are no recommendations in the article concerning the method to which you should follow in relation to the regulation, but information is provided regarding the variants available for you.

Before starting new business in Forex or compiling detailed business plan for setting up FX broker, it is necessary to primarily receive answers to the following questions:

1) What income do you plan to receive?
Low (less than $100 thousand), Average ($100-$500 thousand) or High (more than $1 million)

2) Which markets and/or regions do you plan to orient on?

•  USA (NFA License is obligatory) or Japan

• Europe or the Russian Federation

• Asia

• Australia (ASIC License is mandatory), etc.

3) What financial risks are you ready and, what is more important, able to undertake?

The answer on the foregoing question will apparently determine the model of activity you should select, namely: Market Maker/Dealing Desk (sometimes referred to as “B Book”) or full STP. With STP, all turnover and risks are transferred directly to the bank or the liquidity provider.

It should be taken into account that the requirements for the regulatory capital are usually higher for the Market Maker/B Book model, because the risk is assumed independently. For example, the Financial Conduct Authority (FCA) of the UK requires that the regulatory capital for the STP license shall be 125,000 euros and for the Market Maker license - 730,000 euros in addition to the application and annual fees.

4) What business model are you going to apply? The main model of brokerage activity in the Forex market (vanilla type FX Brokerage) or the model of the Fund Manager's activity, or a combination of the two above-mentioned business models?

In some jurisdictions, a separate fund manager license is required, and in others, it is not. For example, Cyprus has a separate registration process as a fund manager.

5) Do you have an existing client base, possibly from an existing Forex-related business "White Label"?
If the answer to the abovementioned question is "yes", then you can decide to select less expensive and less burdensome regulatory jurisdiction, even if this jurisdiction may not be universally accepted as an authoritative regulatory environment in comparison with similar FCA of the UK or the Australian Securities and Investments Commission.

Further, let’s compare regulatory jurisdictions for starting brokerage activity, based on the following five different categories:

1) Initial requirement for capital

2) Time for registration

3) Requirement of existence of legal office and/or personnel

4) Ongoing expenses

5) Overall reputation among retail traders and industry in general

Variant 1

High requirements for capital (more than $20 million), Significant expenses from core activities, serious and detailed reporting requirements

Examples: the USA, Japan, and Switzerland

If you intend to get customers from the USA or Japan, then keep in mind that you need to put aside at least $ 20+ million as authorized capital (contributions from clients are not calculated as the authorized capital). In addition, there are high monthly/annual fees (the National Futures Association of the United States (NFA) usually charges more than $ 100,000 per year), detailed daily/monthly reporting requirements and quite often monthly regulatory compliance reviews by the regulator without prior notification. Obligatory requirement is physical office location in the territory of the state and materially responsible (and licensed) employees, as well as strict observance of all existing rules. These control and supervision bodies have also limited access to leverage, 50:1 in the case of the National Futures Association, and also introduced strict trading principles. In Switzerland, for obtaining FX broker license, you should obtain banking license, and the CEO must be recommended by previous/reliable participants of the board.

Time for registration: 1-2 years.

Variant 2

Recognized jurisdictions with good reputation, moderate to high requirements for capital, moderate expenses, insignificant reporting requirements

Examples:

lCyprus Securities and Exchange Commission

lFinancial Conduct Authority (UK)

lMalta Financial Services Authority

lAustralian Securities and Investments Commission

Indicated jurisdictions usually require from 100,000 euros to 1 million Australian dollars (in Australia) in the authorized capital.

The physical location of the office within the territory of the jurisdiction is mandatory requirement along with nominated and resident employees. It is necessary to provide relevant and detailed daily, monthly and annual reports.

Time for registration: Cyprus - 3-6 months, the UK - from 7 months to 1.5 years, Malta - from 6 to 10 months, Australia - from 6 months to 1.5 years.

Additional Information:

Among the licenses available, Cyprus one is still the easiest and fastest to obtain due to the following factors:

A) the legal process does not cause problems;

B) there are many local consulting companies for records-keeping activities;

C) Cyprus is a member of the European Union, which allows applicants to obtain the license and save significant amount on taxes and fees, as well as on the passportization of activities in the EU;

D) Cyprus has became more attractive at the beginning of this year, when it lowered its requirements for the authorized capital of the licensed company to EUR 125 thousand.

E) For comparison, it will take almost twice as long to obtain the same type of license in Malta for the same amount.

The Australian license still remains a "dark horse" with good reputation for Retail FX brokers. Very few brokers have this license, which makes everyone think that this jurisdiction is either too complex to obtain license, or is not attractive enough. Licenses of Great Britain and Malta are widely known, generally accepted and, therefore, there is a market for resale of old licenses.

Variant 3

Jurisdictions with low to moderate requirements, low requirements for capital, low to moderate operating costs, minimum reporting requirements.

Examples: Belize, the British Virgin Islands, Seychelles, New Zealand (being considered), Labuan, Bulgaria

If you have $100,000 for authorized capital and approximately $20,000 for payment for registered agents and registration fees, and there may be variants that are worth considering. Obvious disadvantage is the fact that reduced requirements of legislation are generally perceived as providing lower protection for the client.

Time for registration:

• Belize - from 4 to 8 months;
• British Virgin Islands - from 3 to 7 months;
• Seychelles - from 2 to 6 months;
• Labuan - from 1 to 3 months;
• Bulgaria - 2 to 4 months.

One of the biggest licensing problems in any of the jurisdictions of this variant is that European banks forbid clients from the European Union to make deposits to the banks of these countries, as the countries mentioned in Variant 3 and Variant 4 (except for Bulgaria) are considered as "offshore" ones and potential for the implementation of mechanisms to evade taxes. Therefore, it is necessary to consider the geographical location of the target clients before engaging in business in any of these jurisdictions.

Another disadvantage is the comparison of the registration time with the received corporate benefits/advantages of the company’s brand. In most cases, the licensing of financial activities in these jurisdictions (the countries listed in Variants 3 and 4) may take as long as in the jurisdictions listed in Variant 2, while providing only half of the benefits for the new broker.

For each jurisdiction, with the exception of Belize, the location of the company's physical office in the territory of the jurisdiction is required.

Additional Information:

The full STP license obtained within the territory of the jurisdiction of the Malaysian island of Labuan is a progressive trend among FX Brokers, as it a) does not provide for mandatory initial authorized capital in the amount of $100,000 b) allows you to open a corporate account in a bank with a good reputation c) requires availability of inexpensive physical "address".

By the way, the reason that the Seychelles is included in variant 3 is that now license for currency brokerage activity is required there, as well as a rather expensive physical office.

Variant 4

Jurisdictions with low requirements or completely unregulated jurisdictions: no capital requirements, no license required, no reporting required

Examples: Saint Vincent, Marshall Islands

In fact, the above countries are those that used to be called "old good offshore". in order to register there, the person will be required to:
 A) provide certified copies of passports and proof of residence for the owners;
 B) do not have your bank account in the company name.

Time for registration: 5-10 business days

Additional Information:

The biggest legal defect for the new enterprise is the opening corporate bank account, with most banks claiming that they will not work with unlicensed FX Brokers. Add to the foregoing the fact that local agents will never provide bank account guarantees for offshore FX broker.

The biggest shortcoming of obtaining license in any of these jurisdictions is that there is no protection offered to the client, whether in the form of trade authorization or security of funds. As a rule, brokers have serious problems there with attracting genuine and knowledgeable clients to their business proposals.

In conclusion, it should be noted that more than half of FX Brokers are still not regulated or under-regulated, but they still manage to attract business representatives due to a number of different reasons, and certain of them are listed below:

• In some regions, traders are not experienced enough and do not try to get regulated enterprises
• Unlicensed brokers may offer deals and "additional terms and conditions" that may seem more attractive due to the lack of regulatory body and supervision
• Unlicensed (or poorly licensed) broker may attract clients because owners or representatives are well known in the industry (for example, bloggers or seemingly successful traders)
• They can have expanded and loyal network of Introducing Brokers who want to do business at their own discretion. (Good example is the social trading network created by InstaForex in Indonesia, which allowed them to capture up to 30%, if not more, of the local market share)
• Broker can work mainly with managers of small funds that connect traders with brokers, whom they consider to be the most convenient (or offering the highest commission and discounts!!)

In the end, it is your responsibility to consider all aspects of your business model and determine which jurisdiction and license will ultimately best suit the model in the future.

Lawyers of Law&Trust International will help you with starting the activity of FX broker. For additional information regarding the abovementioned issues, as well as other points of interest, please contact our specialists. Consultations are possible during personal conversation in the office of the company, as well as by phone or in chat.