by Anya Aratovskaya, VP of Institutional Sales at Advanced Markets and Fortex, Inc.
The FX Landscape has changed dramatically this year, mostly due to the implementation of MiFID 2 regulations, and rulings by ESMA, in Europe alongside additional government scrutiny of the Chinese FX Market and the exposure of failed profit-sharing models. As a result, we are seeing quite a few licensed FX Brokers for sale, as well as acquisitions within the industry. Therefore, I want to provide you with a comprehensive comparison of regulatory jurisdictions in order to bring you up to speed with the latest trends.
5 groups of jurisdictions for startup FX Brokers
I will start by forming five groups of jurisdictions for startup FX Brokers, based on how difficult it is to establish an FX company within each, as well as the cost and time.
1. The US “FDM” License is still one of the most expensive and difficult to get and support. There were only 2 licensed retail brokers and 1 pending application as of September 1st, 2018.
2. FSA (Japan), ASIC (Australia), MAS (Singapore), FCA (UK)
The Japanese FSA has proven to be a strict regulator, but one can still manage to acquire a license utilizing the knowledge of on-the-ground industry veterans.
The Singapore MAS issued six new leveraged Foreign Exchange trading licenses this year, despite quite strict capital requirements.
ASIC, on the other hand, has only issued only one license during the last 2 years, making it even closer to the top tier of regulatory jurisdictions where the retail FX brokerage is concerned.
FCA (UK) is moving at its regular pace. It takes a year on average to acquire an FX license there, especially since the UK is perceived by many to be the most desired regulatory jurisdiction for retail FX.
FCA(UK) is one of the most acceptable licenses for retail FX Brokerages, as it has a lower capital requirement and a relatively straightforward, though strict, compliance process.
3. MFSA (Malta), CYSEC (Cyprus)
MFSA (Malta) is one of the top destinations for Multi Funds (definitely worth looking at if you are a Fund Manager), but less attractive for FX Brokers (there were only two licensed retail brokers last time I checked).
CYSEC (Cyprus): MIFID 2 and the recent ESMA rulings on leverage have definitely taken their toll on Cyprus-regulated brokers with several CYSEC-licensed brokers for sale this year due to increased operational costs and reduced leverage.
New Zealand is no longer hosting FX brokerages and is now home to many payment processors and custodial services.
4. FSA (Labuan), VSDL (Vanuatu) – are among the most popular and inexpensive jurisdictions with retail broker licenses however, neither are viewed favorably when it comes to regulatory compliance and adherence to international standard regulatory requirements. FSC (BVI) could be placed on that group as well, although a license there will cost you almost 2 times more as in Labuan or Vanuatu.
The South African FSB could be mentioned here, as many retail FX brokers are actively trying to diversify on the African continent after seeing a decline in Chinese FX volumes.
5. The rest are offshore a.k.a. International Business Companies - St. Vincent, Marshall Islands, and so on, often created by ex-IBs and ex-employees of retail FX Brokerages to serve their own network of clients. All are viewed with much skepticism by market counterparties and banks.
Bank accounts are somewhat hard to get for groups 4 and 5. Labuan and Vanuatu FX Brokers tend to use South East Asian Banks. Many companies from the 5th group are operating with the help of PSPs should they have no luck working with banks in Georgia, Kazakhstan, South Africa, or the island banks.
Some alternative jurisdictions that may be interesting for you to check out during the FX Jurisdiction search would be Belarus, Georgia, and Luxemburg. DGCX (UAE) members are also allowed to offer margin FX and I am sure that your legal agent will be able to provide more in-depth data.
It’s definitely worth remembering the old saying, “you get what you pay for”. By seeking a license in one of the top jurisdictions, you are showing a desire to be fully compliant and that you are looking out for the best interests of your clients especially where regulatory protection is concerned. A license in one of the lesser-known, less-regarded jurisdictions will often send the opposite message.
Please consider my short overview a personal opinion. Always use a LICENSED legal agent with verifiable references.
Please click the link in the source section below to download the FX Jurisdiction Comparison guide.