Types of jurisdictions for opening Forex-companies

Opening a new brokerage company or investment fund, there is always a logical question - where is it best to register and obtain a license to conduct this activity. By analyzing various factors such as the complexity and time limits for obtaining a license, as well as the cost and requirements associated with reporting and reputation, all offshore jurisdictions can be conditionally divided into several main categories. Taking into account the above criteria, graduation of jurisdictions can be carried out from the first to the fifth level.

Before making a decision to register, a Forex broker needs to answer a few questions.

First of all, it is necessary to find out in which geographic region the company will concentrate its activity. It should be understood that although most brokers position themselves as "online providers", the lack of an appropriate license to provide brokerage services in the foreign exchange market or to conduct marketing activities can lead to significant fines or termination of activities.

The second question that should be asked is in what timeframes it is necessary to open a company and start operations. Then find out which business model the broker is going to use. To date, there are several different business models:

• model of fully automated conducting of transactions with financial instruments;
• model of management of trading operations, mixed model;
• model of money management.

It is also necessary to have a clear understanding of:

1. How important factors are the jurisdiction and availability of a license for existing and future customers?
2. In which bank will the corporate account be opened?
3. What amount of liquid assets are available for a new company?
4. And what sum is the broker willing to spend on legal services?

Depending on the answers to these questions, several variants of different jurisdictions should be considered. Nevertheless, it must be borne in mind that you are also responsible for the speed and effectiveness of the registration process. In order for it to pass quickly and smoothly, it is necessary to properly prepare and timely provide all the documentation, to respond quickly and to satisfy all requests.

To settle the Forex market in the context of protecting citizens from fraud, many countries have created private or public organizations, which are often supported by the government. For example, the United States, represented by the Commodity Futures Trading Commission and the National Futures Association, as well as Japan, where the Office of Financial Regulation and Supervision is concerned with the protection of citizens, are considered to be the countries with the most stringent regulatory authorities and belong to the jurisdictions of the First level.

In order to obtain a license in these countries, it is obligatory to open local representative offices and pay significant membership fees ($ 125,000 and more per year). It is also necessary to prove the availability of $ 20 million in free funds (excluding customer deposits) on the account and comply with strict local rules for reporting and the quality of the services provided. It should be noted that in October 2013, the company IBFX was fined $ 600,000 for not providing proper reports on transactions.

The UK, which authorized body is the Financial Services Authority, and Australia, where the regulatory policy is established by the Australian Securities and Investments Commission, can be attributed to second-level jurisdictions. These states are characterized by lower requirements for the necessary initial capital and reporting. Nevertheless, the local representative office needs to have an amount of $ 100,000 of available funds in the account without taking into account the customers' funds. The process of obtaining a license usually takes a year with financial costs of approximately $ 35,000- $ 50,000.

Cyprus, on which territory the Cyprus Securities and Exchange Commission operates, as well as Malta, represented by the Financial Services Authority, and New Zealand formally have a certain level of protection for clients of Forex companies. These countries can be referred to the third-level jurisdictions. They put forward demands for opening a local office, although they are distinguished by simplified reporting, reasonable tax rates and facilitated process of opening a corporate bank account. The required initial capital depends on the type of license, starting from the amount of $ 30,000, on average, the cost is about $ 35,000 for the provision of legal services with a time frame of 6 months after the completion and provision of all documentation. One of the features of the company's registration in these countries is that they often work with European clients.

The British Virgin Islands and Belize are fourth-level jurisdictions. Usually, clients of brokerage companies do not distinguish between the Seychelles and Belize / British Virgin Islands and consider all these territorial zones to be "offshore". Obtaining of licenses and registration process are quicker and easier there and take only 3-4 months, although depending on the compliance of the documentation with the requirements of the regulatory body, the process can take up to 1 year. Of the potential benefits, of course, we should mention the simpler process of opening a corporate bank account. The cost of the company for a new broker will be about $ 20,000- $ 30,000.

All other suitable offshores where the Forex license is not mandatory, for example, the Seychelles or St. Vincent is considered to be the fifth-level jurisdictions. It is possible to become the owner of a new Forex-company in these regions only within a week and with the costs of several thousand dollars. The advantages and disadvantages of registering a company in these jurisdictions are quite obvious. Although it should be noted that this type of registration is important in the carrying out the first steps by new Forex broker.

Recently there has been a tendency for companies to be registered and obtain a license to conduct Forex activities in the Baltic countries, such as Latvia. They can be classified as a separate category of jurisdictions. The registration of companies in Latvia is especially popular among beginner brokers, who are aimed at European and post-Soviet countries. Latvia is a member of the European Union and has a reputation as a state with stable legal and serious banking systems, although the registration process takes place relatively quickly (approximately 2-3 months) and the subsequent opening of a bank account is relatively simple.

After analyzing the process of registration of Forex-companies, it is possible to highlight some of their features:

• 95% of Forex companies start their business without a license with a simple registration as a legal entity in Seychelles, Saint Vincent, Nevis or other offshore jurisdictions;
• The cost of registration in countries that are in the category of the fourth level and higher is 5-6 times higher, these states require the presence of local representation, payment of a reasonable percentage of taxes (from 10%);
• Temporary registration of Forex companies in countries that do not belong to the category of countries of the fifth level vary within 6 months.

The business plan elaborated by the new company is also of great importance when selecting a jurisdiction. It is necessary to think about such issue as: who will be the first customers of the company? If there are customers who are already familiar with the owners and previously worked with representatives of the company, as representing brokers, the registration will not be of decisive importance for them.

As a rule, brokers receive financial licenses much later: for example, Admiral Markets received a license from the Financial Services Authority in 2013, although the company has been successfully operating in the market since 2008. The Russian Alfabank still uses offshore registration for the Forex department in the British Virgin Islands.

Thus, making the decision on selecting the jurisdiction is extremely important for the owners of the future company and this article is aimed at giving food for reflection and helping to make the right and wise decision.