Cyprus’ retail FX industry will likely become a target for ESMA unless a higher level of operation is adopted among smaller MT4 firms.
Cyprus has become a very important mainstay of the FX and retail online trading industry with rapid development having taken place since the turn of this decade.
Low taxation, a favorable business environment and the ability to position retail brands very easily within the realms of a MiFID and EMIR-controlled European jurisdiction with very little bureaucracy has led to a fabulous island having become even more attractive as a place of business, with over 180 retail FX firms, as well as a highly skilled and knowledgeable international talent base, which has been joined over recent years by ancillary service providers, the world’s two most significant retail trading platform developers, integration and liquidity management companies, prime of prime brokerages, professional services consultancies, charting and analytics providers and regulatory technology and reporting entities.
In short, the Eastern Mediterranean island whose lifestyle has attracted expatriates from many nations for several years has become home to an enviable and fully comprehensive ecosystem within the retail FX industry to the point at which it outstrips all other regions outside New York and London.
So what is the Achilles heel?
Indeed, the Cyprus FX industry has not only evolved into a complete and rounded top-to-bottom enterprise, but has majored on specific aspects. This, in turn, may be its downfall unless the companies which are now well established on the island make significant future-proofing provisions and begin to examine how to approach the next decade and elevate Cyprus into the elite league of regions synonymous with more than just also-ran white label products.
One of the many attractions of operating from Cyprus is that there are minimal entry barriers. To establish a brand in Cyprus, gain CySec regulation which is akin in terms of ability to rule correctly to the Financial Conduct Authority in London in that licensees are subject to the same criteria and regulatory capital requirements, and that whilst CySec does not have restitution or criminal prosecution powers over transgressors, nor does the FCA.
Additionally, CySec is subject to the European Securities and Markets Authority (ESMA)’s rulings and is under the MiFID and EMIR infrastructure and financial market operational rulings. This status and very straight forward framework is easily established via several of the specialist consultancies and lawyers on the island, meaning that firms can establish and operate very efficiently, and be in business in a matter of weeks in order to approach a worldwide market with multilingual support and skilled staff.
Now is the time to move this on toward funds and multi-product platform development in order that Cyprus’ FX industry can elevate toward a high caliber of retail customer.
In North America, where the vast majority of retail trading platforms are engineered toward futures, ETFs, ECPs and access to derivatives venues with a centralized exchange as well as OTC products, the average deposit for OTC trading is $6600 and in many cases, exchange listed derivatives platforms have a minimum deposit amount of $50,000.
Leverage does not exist when trading funds or via derivatives exchanges, and leverage is the bugbear of many global regulators, especially with regard to OTC products.
Cyprus accelerated to prominence very quickly, however even today, there are a large number of almost identical products available via almost identical MetaTrader 4 white label platforms which are being operated by companies which simply paid $5000 for a MetaTrader 4 white label license, took a retail price feed from a nearby retail brokerage rather than lodged the necessary capital with a prime of prime in order to gain an actual aggregated bank feed, hence whilst the execution at the brokerage itself may well be on a ‘straight through processing’ basis, it ends up at the dealing desk of a similar, and often small, retail firm which then executes it on a B-book basis.
The entire FX industry is all too aware of aberrations such as the method of operation that has sullied the name of the industry such as IronFX which continues to operate and ride roughshod over any rules or regulations, as well as the countless binary options scams that have been associated with many other regions, but have been allowed to operate, fully regulated, out of Cyprus and despite the criminal background of their operators, have been able to gain a license and continue to run their businesses unabated.
FinanceFeeds has had several conversations with CySec about this matter, and has also approached CySec with regard to why IronFX and various binary options firms are allowed to continue operations, are let off very serious matters with at the very most a very small fine or settlement, and are allowed to use bogus words such as “Exchange” when there is no such thing present in any of the OTC binary options firms or market makers, or “Swiss” when there is no link to Switzerland.
This matter and the impotence of the regulatory framework has attracted the attention of the European Securities and Markets Authority (ESMA), which will begin to address this with an iron fist if the firms on the island, which have the ability and the prowess, and all of the support by institutional and technology providers on Cyprus with whom a good relationship is easily fostered and maintained, do not move themselves on and begin to approach the increasing presence of funds in Cyprus, and develop multi-product offerings.
Warnings and regulatory notices are usually worth less than the paper that they are written on, and mean absolutely nothing, and are often followed up by no action whatsoever.
ESMA’s recent directive reads quite differently, however.
The European Securities and Markets Authority (ESMA) recently issued a warning about the sale of contracts for differences (CFDs), binary options and other speculative products to retail investors who are unaware of the risks associated with these products, and also highlights the regulatory action taken in relation to several Cyprus-based investment firms.
This was a blanket dig at Cyprus investment firms (CIFs) in general, from the main regulator which is responsible for overseeing CySec regulated firms at large.
ESMA’s senior regulatory figures have noted that there has been an increase in the marketing of these products, often through aggressive practices, and at the same time, a rise in the number of complaints from retail investors who have suffered significant losses.
Steven Maijoor, Chairman of ESMA made it clear that ““ESMA and national regulators still have serious concerns that firms are selling these products, which are inherently risky and speculative, to people who do not understand them. These products are often advertised to the retail mass market via online platforms and sold without investment advice. When these products are marketed and sold in an aggressive manner or when firms otherwise fail to comply with their regulatory obligations, this creates the conditions for retail investors to suffer significant detriment, including unexpected losses. ESMA and national regulators are committed to working together to ensure investors receive proper protection across the EU.”
This means that unless firms are prepared to move themselves on, and adapt different practices, emulate the more sophisticated trading environments of London and New York, there will be limited upward mobility.
FinanceFeeds has experienced small companies in Cyprus continuing to operate on the gaming/affiliate marketing model and aggressively argue with established firms in London over passe aspects such as forcing bonuses onto clients and operating a churn and burn model. Mr. Maijoor’s notice alludes to some notorious firms in Cyprus, stating that CySec has reached settlemnts with Depaho, Reliantco, IronFX Global, WGM Services, Pegase Capital, Rodeler, Banc de Binary and Ouroboros Derivatives Trading – totalling EUR 2,072,000.
Big deal. That is less than IBFX got for warehousing trades (without detriment to customers) and for undercapitalization from the NFA before the NFA finally removed them from the US altogether, and whilst IBFX was undercapitalized on several occassions, its behavior cannot be compared to any of the entities on this list.
The danger is that if funds, multi-product environments and higher level business is not adopted – and in Cyprus it would be VERY easy to adopt – then ESMA will likely begin to wind down a large proportion of the smaller brokerages on the island.
This would be a travesty, as the island is an absolutely first class place to do business, is home to fantastically knowledgeable professionals and has the absolutely right formula of institutional and technology firms in place to drive such an advancement forward.
If I can afford myself an opinion on this from my own professional perspective, I would like to see an investment in a move in that direction by Cyprus firms to the effect that within five years, Cyprus is regarded as the prestigious destination for electronic trading, rather than the populous.
#cyprus, #CySec regulation, #esma, #fca, #FX Industry, #MT4 firms