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Types of Jurisdictions for Forex Companies

Boston, MA March 21, 2014

 

juristdictionsWhen starting a new Forex brokerage or an investment fund, a logical question arises - what is the best location to incorporate and license the future business. I will conditionally divide the jurisdictions into several main categories, ranking them from Level One to Level Five. We will be taking into consideration the complexity and the time frame to obtain the license, as well as the cost and requirements relating to physical representation, reporting and reputation.


Before I briefly explain various options for incorporation, I would like to provide examples of some questions that a future Forex broker has to answer before making a decision about the registration.


1) In which geographic region will the company concentrate its activities?

Notice: Although most brokers position themselves as “online providers”, the absence of the respective license while providing forex services or conducting marketing activities may lead to significant fines or closure of the operation.


2) How soon does the company have to be launched?


3) Which business model is the broker going to apply? (STP, DD, mixed, Money Manager)


4) How important is the jurisdiction and licenses for the existing and future clients?


5) In which bank will the corporate account be established?


6) What amount of liquid assets are available to the new company (in our example, liquid assets means cash)? And what amount is the broker ready to spend on legal services?


Depending on the answers to these questions, the following choices of jurisdictions should be considered. Keep in mind, however, that you are also accountable for the speed, efficiency and expeditiousness of your regulation process. Whether in a level one jurisdiction or a level 5 jurisdiction, all processes will go much smoother if you have all documentation properly prepared and timely submitted.  The faster you react and satisfy all requests, the faster your regulation will proceed.


In the context of defending the citizens from fraud, many countries have established private or state organisations to regulate the Forex market. Generally, such organizations are actively supported by the government. The examples of the countries with the most rigorous regulators include the USA (CFTC, NFA) and Japan (FSA Japan). I refer to these jurisdictions as the regulators at the first level.


To obtain the license, it is necessary to prove the availability of $20 million of free capital (clients’ deposits not included); Very stringent reporting requirements are in place, as well as a high quality of provided services (Note: in October 2013, IBFX was fined $600,000 for not providing proper reports on the transactions). The presence of the local offices and significant membership fees (from $125,000 a year) are also compulsory.


Great Britain (FCA) and Australia (ASIC) are referred to as second-level  jurisdictions with lower requirements relating to the initial capital required and more committed to reporting. Nonetheless, in my experience, the process of obtaining a license typically takes a year on average with costs of approximately $35,000-$50,000. A local office is required along with the availability of $100,000 of non-client funds.


If a broker plans to use the Dealing Desk model, which does not forward the deals to third parties, a general requirement would be the availability of a high amount of disposable funds. In the case of the FCA, the required capital for such a model is more than $1 million, while for the Straight-Through Processing model it is only $100,000.


Virtually offshores, but formally regulators with a certain level of protection for the clients of Forex companies - Cyprus (CySec), Malta (MFSA) and New Zealand (FSP) - can be referred to as the third-level jurisdictions.


These jurisdictions require the availability of the local office, simplified reporting and reasonable taxes. The initial capital required starts from $30,000 depending on the type of the license, but the price and length of the process remains on par with the second-level jurisdiction. On average, the cost is approximately $35,000 for legal services with a time frame of 6 months, once all the paperwork is completed and submitted,  before obtaining the license.


An important feature of legal registration of the company in these countries is dealing with the European clients and a simplified process of opening a corporate bank account.


I would refer to BVI and Belize as the fourth-level jurisdictions. Although these countries have official regulation and licenses, the clients of the brokerages normally do not differentiate between the Seychelles and Belize/BVI. For the clients, all of these areas are considered to be “offshore”. Obtaining the licenses and the incorporation process will go faster - typically 3-4 months (this timeline, however, can be extended to up to 1 year depending on how fast you can turn in requirement documentation to the regulator) and will cost a beginner broker about $20,000-$30,000. Of all the potential advantages, a less painful process of opening a corporate bank account is certainly worth mentioning.


To the fifth-level jurisdictions, I would categorize all the rest of the desirable offshores, where a Forex license is not compulsory - for example, the Seychelles or St Vincent. After a week and a few thousand dollars,  you are an owner of a new Forex company. The advantages and disadvantages are obvious. In defense of these offshores,  I can say that this type of registration is essential in taking the first steps for a new Forex broker. As in any new business, it is impossible to predict how successfully the company will perform and $20,000-$30,000 for many newcomers is a significant amount that could be spent on marketing.


Incorporating a company and obtaining a license to conduct a Forex business in the Baltic countries, such as Latvia, for instance, should be referred to in a separate category. However, I have seen this to be a recent trend. To date, many of my clients register their companies there because the registration process is fairly short (around 2-3 months) and the subsequent opening of the bank account is relatively easy. At the same time, Latvia is a part of the European Union and holds a reputation for having an organized legal system as well as a serious banking system. Registration in Latvia is especially popular among the beginner-brokers, who target European and post-Soviet countries.


In conclusion, I will provide several random examples from my own experience.


- 95% of Forex companies start WITHOUT licenses from the most simple incorporations in Seychelles, St Vincent, Nevis or other offshore jurisdiction.

- registration in the countries above the fourth-level category costs 5-6 times more, requires the presence of the local office and the payment of a reasonable percentage of taxes (from 10%)

- the average time it takes to register in countries in other than the fifth-level category is 6 months.


When choosing a jurisdiction, a very important consideration is the business plan created by the new company. Who would be the first clients of the company? (If they are existing clients, who are already familiar with the owners and have previously worked with the company representatives as IB, then the registration would not be of critical importance to them).  


Usually, brokerages obtain their significant financial licenses much later: for example, Admiral Markets obtained an FCA license in 2013, although the company has been actively and successfully operating since 2008. One of the most famous banks in Russia - Alfa - is still using an offshore registration for the Forex department in the British Virgin Islands. Alpari and Robo Forex previously had a New Zealand office for a long period of time.


As you can see, making a decision about the choice of the jurisdiction is critical for the owners of the future company and, hopefully, after reading this article, some of the questions about this complex decision have been answered. At the very least, this will provide food for thought and open up a dialogue to make a wise decision.
 
This information is based on personal experience and should not be construed as legal advice or formal recommendation.

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