How to Find the Best Jurisdiction for Your Forex Company
August 1, 2018
Retail Forex trading is a competitive niche but also a profitable one for Forex brokers. It is no wonder more and more brokers are coming to this business.
Changes in technologies needed to open a business as well as in regulatory licenses have increased the demand for such businesses and reduced the lagging time between planning the business and starting to operate it.
Before even starting to look for a jurisdiction for the newly created company, it is mandatory to identify the markets that are planned to target: USA, Europe, Russia, Asia, Australia, and so. Based on the answer, there are different possibilities to license a business.
Moving forward, the model the business is being built upon matters too: if the business is going to be a market maker or an STP broker instead. This will result in different costs to associated to starting the business, as the regulator will require a “collateral” from the broker, according to the risk taken.
For example, the capital requirements for a market maker are more than five times the ones required for an STP license. This is, of course, different from a regulator to a regulator, but it can be considered a rule of thumb in the business.
Some jurisdictions require a fund managers license too, depending on the type of the brokerage intended to be started. The following are things to consider before deciding for the jurisdiction of your Forex company: the time taken to incorporate the business, capital requirements, monthly fixed and variable expenses, and so on.
These are normal things to look for when opening any business, whatever the business is. On top of these, for operating a brokerage house, the licensing requirements play an important role.
The cheapest way to incorporate a business is to use one of the low moderated jurisdictions, like Seychelles, Belize, etc. Within six months the business can be incorporated, and in most places, a physical presence in the form of an office is needed.
Costs are around one-hundred thousand dollars for capital requirements and another twenty-thousand or so for starting to operate. There are two drawdowns: there is little protection for the customers and, if you plan to target European traders, think again.
This is because the European Banks do not allow deposits in these companies that are considered off-shore. Therefore, not a good option for a brokerage house that targets European traders.
The most expensive but strongly regulated jurisdiction is in the United States, Japan, and Switzerland. More than twenty million dollars are needed for capital requirements only, and client deposits are not counted, as they should be segregated.
Only the yearly NFA license in the United States costs more than the capital requirements in Belize, to give you an example. Therefore, if the starting capital is an issue, this is a defining element that will influence the decision as to where chose the jurisdiction for your brokerage house. Add to this between one and two years needed to incorporate the business, which is the longest time possible.
CySEc (Cyprus), FCA (UK), MFSA (Malta), ASIC (Australia), are options preferred by most new businesses. Reasons for this are ranging from lower capital requirements (from 100k to one million in Australia) and acceptable reporting required.
It is no wonder more than half of brokerage houses are unlicensed or having problems with their license, and Forex traders must be aware of this before opening a trading account with them.