Why Forex Regulation is Important to Brokers

Forex Regulation is Important for Brokers

Forex regulation is such a hot topic at the moment. It’s fueling so many changes in the forex and CFD trading industry. In particular, ESMA and now ASIC are the biggest movers and shakers of the regulatory landscape. The European Securities and Markets Authority has already significantly changed the industry with its product intervention powers. The Australian Securities and Investment Commission is in the late stages of making the decision to follow ESMA.

Regulation is significant to traders because it assures them that their trading partner has undergone some checks and balances from an official authority. What a lot of traders might overlook is that regulation also benefits brokers and helps them to run their business.

Brokers need regulation not just to look reliable in front of their clients but also business partners. Banks and payment providers avoid doing business with FX brokers. The payment companies that do cooperate with forex brokers do so very carefully. Online investing is considered a high-risk industry and a lot of banks don’t want to take the risk. The way brokers reduce the perceived risk is by carefully choosing the jurisdiction they operate the company from and where they will be regulated. Besides looking great for banks and payment institutions, they also need to consider how they are going to keep clients safe while at the same time, deliver the services they want. 

FCA Regulation for Forex Brokers

It’s no secret that the UK, London, in particular, is a major hub for financial services. Having dominated the space for hundreds of years, it will come as no surprise that the UK has the experience to regulate and stability which investors crave. Contrary to what you may think, getting regulation in any jurisdiction these days is no easy feat. A 730k license in Cyprus under CySEC isn’t any easier to get than under the FCA, and the obligations are the same. However, running a business in Cyprus is undoubtedly far cheaper than in most areas of the UK and especially London. Because of this, Cyprus became an attractive country to operate a Forex business and provide services to most of Europe and the rest of the world.

London South BankUncertainty over Brexit has made it unclear if Cyprus Investment Firms can still provide services to UK clients. It’s unlikely that Brexit will affect the prestige of the UK and London in particular. The stability that London offers is the envy of the world, and that won’t change overnight.

The UK is an important market on its own. Even if passporting rights to provide services to the EU are changed or removed, it could be argued that a UK license still makes sense. An FCA license is respected all around the world. We asked Mike to elaborate on his opinion of getting an EU license, despite already being in the position that most EU regulated brokers are trying to get.

Cayman Islands Regulation by CIMA

Michael Turck Photo

Many people conclude that the Cayman Islands is an offshore option for brokers to enjoy a relaxed business atmosphere and aren’t bothered by the burden of regulation. While the Cayman Islands is a well-known tax haven, their approach to regulating capital markets is quite strict. The Cayman Islands is where Tradeview Forex has been regulated since 2004 while having the majority of its staff based in their Manhattan office in New York. We’ve reached out to Michael Turck, Global Head of Sales and Liquidity at the popular FX broker Tradeview Forex to elaborate on this opinion about forex regulation.

“The Cayman Islands is a British owned territory located in the Caribbean Sea. Indeed, the Cayman’s don’t have a corporate tax policy, making it an ideal place for multinational corporations. Instead of taxes, offshore corporations pay an annual licensing fee directly to the government. However, this is not due to a lack of oversight; it’s by design. CIMA (Cayman Islands Monetary Authority) performs their due diligence on the firms regulated there. Every year we are thoroughly audited by CIMA and must oblige by their rules and regulations, just like any other jurisdiction. We are also required to have a third party auditor run a review on our policies and procedures and make sure we are following them correctly. Being audited is a lengthy process which typically takes up the first few months of each calendar year!”

Flag of Cayman IslandsLabuan Forex Broker Regulation

Tradeview Forex has recently established an entity in Labuan, as have several other forex brokers. Due to heavy restrictions on offering leverage, cooperating with Introducing Brokers and PAMM managers, brokers need to find jurisdictions which allow them to provide the services that their clients are accustomed.

“Labuan is a beautiful island located on the coast of Borneo. The island is just north of Brunei. Labuan is a federal territory of Malaysia and has been designated as a financial centre and free trade zone by the Malaysian government. The reason why we chose Labuan is for extra regulatory licensing and to establish new banking relationships. Labuan provides our clients with an opportunity to trade with specifications that they prefer and offers us an opportunity to give extra protection to new and old clients.”

Is European Forex Regulation Still Needed

Considering ESMA has imposed very tight rules on how much leverage can be offered to retail forex traders, most brokers are moving to jurisdictions which don’t have such limitations on trading conditions. While most brokers started from either UK, Malta, Cyprus or Australia, it’s natural for them to migrate offshore. Meanwhile, Tradeview Forex has been regulated in Cayman since 2012 but does not yet have any license in Europe, which is, of course, a very mature and sophisticated market with an abundance of choice. We ask Michael Turck if European regulation is important to Tradeview considering the current restrictions and uncertainties in the EU.

“Tradeview has undergone some significant changes in 2019. In particular, our client base, AUM and turnover have grown significantly. This growth means we have more clients, across a wider demographic which we need to protect. Most importantly, we have the resources to do it. The most significant change is regarding the prioritization of getting new licenses in the right places. We are focusing on thoroughly researching all the possibilities. A new license can open doors as well as close some doors. It can improve the services we offer to our clients in one area but deteriorate services in another area.”

Why is Forex Regulation Important

Forex regulation inspires trust within the industry. It gives brokers a framework to abide by, so they don’t have to guess the right way to do things. A license means that a government authority has vetted the people who own and run a company. The author confirms that these people are not criminals and are competent to run this type of business. After all, we are discussing a company responsible for holding your money and providing access to investments and financial markets. Besides this, the license helps brokers to make meaningful partnerships and maintain them, such as with banks and payment providers. We asked Michael to offer a few words on why Tradeview thinks regulation is essential.

“We have concluded that extra regulatory oversight is beneficial for the client and us. Therefore we would like to offer our clients with as many options as possible. With the addition of these new regulations and licenses, Tradeview will be able to position itself as one of the top brokers in the world in terms of fund safety and customer service! We feel that having more options for our clients would only be beneficial and not harmful. We are excited to go the extra mile for our clients and seek the safest and secure places in the world for our clients to trade!”

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