Choosing a Suitable Regulatory Jurisdiction for an FX Broker Start-Up

The world of online Retail FX has become increasingly competitive and congested but, regardless, the industry remains extremely attractive to investors, insiders and entrepreneurs alike. One key factor adding to the attraction is the ease by which a person can actually start their own brokerage. In past years, starting a brokerage normally required expert technology and market knowledge combined with a significant amount of free capital but today, advances in technology and an increase in the options available for regulatory licenses have greatly reduced the cost and the “time-to-market”.

With this article I hope to provide you with a high level overview of the recent trends regarding start-up brokerages as well as information on the most common regulatory jurisdictions, including their associated options and costs. Please note that I am not providing advice on the path you should take with regard to regulation but merely information on the options available to you.

Before embarking on a new venture in FX or drawing up a detailed business plan to set up an FX Broker, one should first ask oneself the following questions:

1) What is the annual revenue potential of such a business in today’s environment?

Low, (under $100k), Average ($100-$500k) or High (over $1million)

2) Which markets and/or regions are you are planning to target?

  • USA (NFA License is mandatory) or Japan
  • Europe or Russia
  • Asia
  • Australia (ASIC license is a must have), and so on

3) What financial risks are you willing and, more importantly, able to take?

The answer to the above question will most likely determine whether you should utilize the Market Maker / Dealing Desk model (sometimes called “B Book”) or opt for full STP instead. With STP, all trade flow and risk is passed through directly to a bank or liquidity provider.

It should be noted that Regulatory capital requirements are generally higher for the Market Maker / B Book model due the fact that risk is taken “in-house”.  As an example, the UK FCA requires EUR125k of regulatory capital for an STP license and EUR730k capital for a Market Maker license in addition to application and annual fees.

4) What type of the business do you intend to run? A vanilla type FX Brokerage or a Fund Manager or, perhaps, a combination of both?

In some jurisdictions, a separate fund manager license is required while in others it is not. Cyprus, for example, has a separate process for registration as a Fund Manager.

5) Do you have an existing client base, perhaps from an existing FX “White Label” business?

If the answer to the above question is “yes” then you may decide to opt for a less expensive, less burdensome regulatory jurisdiction even though that jurisdiction may not be generally accepted as a reputable regulatory environment when compared with the likes of the UK’s FCA or Australia’s ASIC.

I will now attempt to compare regulatory jurisdictions for the startup brokerage based on the following five different categories:

  1. Initial capital requirement
  2. Time to incorporate
  3. Requirement of a physical office and/or personnel
  4. Ongoing expenses
  5. Overall reputation among retail traders and industry in general

Option 1: High Capital Requirements ($20 million+), Significant Operating Expenses, Intensive and Detailed Reporting Requirements

Examples: USA, Japan, and Switzerland

If it’s your intention to source US or Japanese clients, then bear in mind that you will need to set aside a minimum of $20+ million as regulatory capital (client deposits do not count towards regulatory capital). In addition to this, there are the high monthly/annual membership fees (the NFA in the US typically charges over $100k annually), extensive daily/monthly reporting requirements and quite often, unannounced, monthly compliance reviews by the regulator. A physical office location along with accountable (and licensed) staff members are mandatory requirements as is the strict compliance to all current regulations. These regulatory bodies have also restricted available trading leverage, 50:1 in the case of the NFA, and implemented strict trade guidelines. In Switzerland, a banking license is necessary in order to become a licensed FX Broker and the firm’s CEO has to be recommended by previous/vetted board members.

Time to incorporate: 1-2 years.

Option 2: Reputable and Recognized Regulatory Environments, Moderate to High Capital Requirements, Moderate Expenses, Moderate Reporting

Examples: CySEc (Cyprus), FCA (UK), MFSA (Malta), ASIC (Australia).

The above-listed jurisdictions generally require anywhere from EUR 100,000 to, in Australia, AUD 1 million of regulatory capital. A physical office location within the jurisdiction is mandatory along with nominated and resident employees. Reasonable, but detailed daily, monthly and annual reporting required.

Time to incorporate: Cysec 3-6 months, FCA 7 months to1 ½ years, MFSA 6 to 10 months, ASIC 6 months to 1 1/2 years.

Additional Information:

Of the licenses available here, the CySec one is still the easiest and the fastest to obtain due to the following factors: a) the legal process is smooth, b) there are plenty of local consulting firms to manage the paperwork, c) CySEC is still considered a European offshore, thus allowing its licensees to potentially save considerably on taxes and d) CySEc became more attractive earlier this year when it lowered its initial capital requirement to EUR125k.To compare, it will take almost twice as long to obtain the same type of license in Malta for the same amount of money.

The ASIC license is still a reputable “hidden gem” for Retail FX clients. Very few brokers have it, leading everyone to think that this jurisdiction is either too hard to get or not attractive enough. The UK (FCA) and Malta (MFSA) are widely known and established and therefore a market for reselling old licenses does exist.

Option 3: Low to Moderate Regulatory Environments, Low Capital Requirements, Low to Moderate Operating Expenses, Minimal Reporting.

Examples: Belize, BVI, Seychelles, New Zealand (under review), Labuan, Bulgaria

If you have $100k available for regulatory capital and around $20k to pay in initial agent and incorporation fees, then these might be options worth considering. One obvious downside is the fact that the less stringent regulatory oversight is generally perceived to provide lower protection for the client.

Time to incorporate: Belize 4 to 8 months, BVI 3 to 7 months, Seychelles 2 to 6 months, Labuan 1 to 3 months, Bulgaria 2 to 4 months.

One of the biggest issues with licensing in any of these is that European banks prohibit deposits to these locations from clients within (citizens of) the European Union, as those countries listed under Option 3 and Option 4 (with the exception of Bulgaria) are considered “offshore” and potential vehicles for tax evasion. One should therefore definitely consider the physical geographical location of the targeted client base before moving ahead with any of these jurisdictions.

Another disadvantage comes when comparing incorporation time against gained corporate/brand benefits. In most cases, incorporation here (countries listed under Options 3 and 4) can take as long as in those regulatory environments listed in Option 2, whilst providing only half the benefits to the new broker.

A physical office is required for each jurisdiction, with the exception of Belize.

Additional Information:

The full STP Labuan License is a growing trend among FX Brokers as it a) doesn’t tie up the initial $100k capital b) allows the opening of a corporate account with a reputable bank c) requires a low-cost physical “address”. (Advanced Markets has actually done some in-depth research into these trending jurisdictions so if you would like to find out more, please fill out form below and we’ll send you that information).

By the way, the reason that the Seychelles is included under option 3 is that a license is now required there for an FX brokerage, as well as quite an expensive physical office.

Option 4: Low, Non-Regulated Jurisdictions: No Capital Requirement, No License, No Reporting

Examples: St. Vincent, Marshall Islands

In reality these are what used to be called “good old offshores”, and they are simply just that. To register there a person will be asked for a) the certified copies of passports and proof of residence for the owners b) not to have your bank account in the company name

Time to incorporate: 5-10 business days

Additional Information:

The biggest legal disadvantage for the new entity is opening the corporate bank account, with most banks claiming that they will not work with unlicensed FX brokers. Add to that the fact that local agents will never guarantee a bank account for an offshore FX broker.

The biggest disadvantage in acquiring a license in either of these locations is that there is no protection offered to the client, whether that be in the form of trade resolution or safety of funds. Brokers regulated here tend to have serious issues in attracting genuine, knowledgeable clients to their business offering.

To conclude, I should point out that over half of FX Brokers are still not regulated, or are poorly regulated but still manage to attract business due to various rationale, some of which are listed below:

  1. In some regions, traders are not sophisticated enough and don’t seek out regulated firms
  2. Unlicensed brokers may be able to offer deals and “add-ons” that may seem more attractive due to the absence of a regulatory body and oversight
  3. An unlicensed (or poorly-licensed) broker may attract clients due to the fact that their owners, or spokespersons, are well-known in the industry (for example bloggers or seemingly successful traders)
  4. They may have an extended and loyal network of Introducing Brokers willing to send business their way. (a good example is the social trading network created by InstaForex in Indonesia, that allowed them to capture 30%, if not more, of the local market share. Many traders commented that they opened there because their friend traded there).
  5. A broker may work mostly with small fund managers who are placing traders with the brokers that they feel most comfortable with (or the ones offering the highest commissions and rebates!!)

At the end of the day, the onus is on you to evaluate all aspects of your business model and to determine which regulatory license and jurisdiction ultimately works best for that model going forward. I wish you luck on that journey.

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