Sunday, June 23, 2024
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HomeOpinionWho cares about offshore licensing? Nobody...... Op Ed
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Who cares about offshore licensing? Nobody…… Op Ed

Any aspirations by small retail FX brokerages of renouncing their licenses within regions with populous and developed electronic financial markets participation in the light of increasing regulatory stringency can be written off as at best reactionary, and at worst, damaging.

Today, the International Financial Services Commission of Belize (IFSC) announced that it intends to invoke more substantial capital requirements for retail FX brokerages with ‘licenses’ from the offshore island’s straw man financial services regulator.

In years gone by, during the middle of the last decade when the MetaTrader 4 platform was in its infancy and was the preserve of warehouse brokerages which had paid a nominal fee for a white label license for a platform which at the time was only able to be connected to its own dealing desk server, offering fixed spreads and a you-versus-me profit and loss ethos prevailed.

Those days are long gone, and thankfully the MetaTrader platform is now connected via specialist liquidity management and bridge providers to live price feeds and aggregated electronically distributed liquidity provided by an array of prime of prime brokerages, meaning that in London, Limassol, Sydney and New York, the OTC FX industry has emulated the institutional world for almost a decade, whether via bespoke proprietary platforms or off the shelf efforts.

With the continued growth and advancement in terms of market share of the OTC derivatives industry came the realization by the establishment – namely the traditional stock exchanges – that the OTC retail electronic trading sector was easily capable of producing massive, multi-billion dollar corporate entities with publicly available shares, in many cases proprietary technology, in some cases banking licenses in the world’s most widely respected regions such as Switzerland, and in most cases the ability to provide retail traders with cheap, fast, reliable and fulfilling access to live, liquid markets.

Development and maturity in this case has led to two ‘demographics’ of FX company, the first being the large, highly organized and well recognized entities of London, New York, Sydney and in some cases Limassol, and the others being the discount brokerages with no recognized value proposition and small client bases in non-westernized countries.

For Britain, America and Australia’s finest, what matters is continual development of proprietary systems, maintaining close relationships with liquidity partners, ensuring market connectivity is first class, and providing peace of mind to every customer from middle class private investors to vast Chinese introducing brokers who trust such companies and their trading environment with portfolios of over $300 million in assets under management and trading volumes of over 90,00o lots per month.

Commercial entities such as portfolio managers and introducing brokers in key regions such as China care about where a company is regulated. They want FCA regulation above all. Any inkling by a large investor or commercial partner that a retail brokerage is either registered or purports to be ‘regulated’ in an offshore jurisdiction is usually enough to send them running for the hills.

FinanceFeeds is aware of various former warehouse FX brokerage owners and senior employees who have long since closed their companies down having profited from the losses of clients as part of their business model and attracted the attention of police forces who are now engaged in collaborative efforts to bring them to book, having fled to the Dominican Republic, Panama and the Cayman Islands to run binary options brands from places in blatant attempts to continue their ‘you-versus-me’ ethos, however in a way in which customers have absolutely no recourse whatsoever.

In short, the Belize, or Panama, or Seychelles, or British Virgin Islands ‘licenses’ are worth less than the paper that they are written on, and are increasingly viewed as such by ever more astute customers globally.

The Belize regulator stated today that in order to maintain or apply for a securites license or a license for providing FX trading to retail customers, brokerages must demonstrate that they have capital at a minimum of $500,000.

Of course, many brokerages in such jurisdictions can easily do that, but this does not mean that they will not resort to providing highly leveraged products on a warehouse basis.

In some cases, its about perception, and a combination of past experiences and accountability.

In December, FinanceFeeds spoke with many senior executives in the institutional sector, many of whom have expressed a sincere and most certainly valid concern that the deposit bonus model is continuing to exist to some extent, largely among retail brokers in Cyprus, even though it had been outlawed.

CySec has made tremendous steps recently to not only maintain the retail FX industry to which it plays host, but to ensure its longevity.

It is absolutely fair to say that Cyprus has a very established retail FX industry, and is the number one hub for the entire global retail business, with platform development firms, liquidity providers, prime brokerages, integration specialists, professional services consultancies and ancillary service providers all based in Cyprus, whose extremely knowledgeable staff make for a long term retail center that dominates globally.

This is a massive achievement, however there is one flaw.

In November this year, CySec took the step – quite rightly – to instruct all CySec regulated firms to desist from providing bonuses on deposits to retail clients.

CySec stated “Cyprus Investment Firms must avoid the practice of offering bonuses that are designed to incentivise retail clients to trade in complex speculative products such as CFDs, binary options and rolling spot forex as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients.”

CySec considers bonus promotions that encourage or incentivize trades in leveraged FX products to be instrumental to the exposure of clients to unde risk. Demetra Kalogerou, Chairman of CySec, considers bonus promotions to be “completely unacceptable.”

She is indeed correct.

At the same time, CySec introduced a limit on leverage to 1:50, for similar reasons, those being to eliminate the “you against the house” mentality of some smaller retail firms, and to stop any exposure to negative balances should firms be processing highly leveraged trades to market.

The difficulty is that despite CySec quite commendably making these rulings, it has been brought to our attention that there are still many firms operating with high leverage and which are offering deposit bonuses, demonstrating one of two possibilities – either CySec is ‘showboating’ by issuing circulars and statements asking firms to desist from this practice, or brokers wishing to continue on that model do not respect the regulations enough.

Russia-focused, Cyprus based brokerage EXNESS is another case in point. The company enjoys significant presence on Limassol’s exquisite new marina complex, in a very prominent building within which the abundance of staff is notable by its absence.

The company has a CySec license, however is also registered in St Vincent and the Grenadines, and according to research by FinanceFeeds, the vast majority of its business is from Asia (mostly mainland China), Russia and the Commonwealth of Independent States.

A discussion with EXNESS customer support revealed that EXNESS will allow clients to register for accounts with the CySec entity in Cyprus, or with the unregulated St Vincent & The Grenadines entity.

When asked whether the company is regulated in St Vincent and the Grenadines, we were asked to wait for a while whilst the representative checked. After a few minutes, the representative confirmed “EXNESS is a Cyprus regulated company, regulated by CySec, whereas EXNESS VC (St Vincent and the Grenadines) is an international business company.”

This representative is indeed absolutely correct, however clearly states that one entity of the firm is regulated by CySec, and the other is not regulated by anyone at all.

EXNESS channels the vast majority of its business through the division of the firm in St Vincent and the Grenadines, offering massive leverage of up to 1:2000, the company having intentionally moved away from New Zealand when the Financial Markets Authority was formed, clamping down on bucketeering and highly leveraged margin FX that had been prevalent in the pre-regulation era.

The firm canceled its New Zealand registration and opted for St Vincent and the Grenadines as a region to continue its business, which was largely from China – as it still is today. Whilst volume figures in general must not be considered accurate, EXNESS notes that its revenues from China form a substantial proportion of the company’s business.

Whilst the firm was honest in explaining that it does not have regulation in St Vincent and the Grenadines, yet does in Cyprus, the majority of its clients are being serviced by the unregulated entity. We asked EXNESS for a division of how many clients are serviced by each entity, the company declining to provide such information.

Despite this, the perception is that Cyprus holds a far greater level of credibility, is part of the MiFID II region under European law, and is a fully fledged, well organized region for FX, whereas the islands of the Caribbean are associated with the cut-and-run brigade.

Quite simply, the reasons for gaining offshore licenses, often orchestrated by less than salubrious specialist law firms, is so that specific, recognized regulation and correct business practice can be circumvented, and in these days in which everyone is looking closely at the conduct of the OTC derivatives world from the Tier 1 banks down to the retail trader, to register in such a region would be to alienate an discerning client base that has the choice of many constantly improving large companies to choose from, whether that be on a retail or commercial basis.

 

 

Andrew Saks-McLeod, Head of Research and Analysis, ETX Capital
Andrew Saks-McLeod, Head of Research and Analysis, ETX Capital
With 25 years of experience in the financial technology sector, Andrew is a prominent international figure within the FX industry. His detailed research in editorial and televised form is often the central point of information for executives within all sectors of the global FX business.
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13 COMMENTS

  1. Great op ed Andrew. Quick few comments I’d like to share:

    “the first being the large, highly organized and well recognized entities of London, New York, Sydney and in some cases Limassol”

    This is a bit Western-slanted, no? Why not include Singapore and Tokyo on that list?

    “Belize, or Panama, or Seychelles, or British Virgin Islands ‘licenses’ are worth less than the paper that they are written on”

    To their credit, Belize and the BVI are moving in the right direction – raising requirements, oversight, requiring resident directors, larger-scope audits, etc.

    On the other hand, the jurisdiction you oddly left off this list (Vanuatu) has virtually no requirements to speak of. They have a completely laughable minimum net capital requirement of $2,000 USD. The licenses are rubber-stamped and handed out like candy to anyone with a pulse. No surprise they’ve become a new hotspot, with 280 licenses granted already..

    Re – Exness. Alpari is in the same boat (regulated entities, but their St Vincent entity is by far the largest). Prior to their Russian licence being granted last Nov, the company was for years was mis-referred to as “Alpari Russia”, when in fact their primary (Russian) division was always St Vincent.

    “To license offshore means to loose all credibility.”

    In a perfect world, we could all be legally based in a tax haven offshore (Cayman Islands), operated onshore (North Carolina), and yet somehow regulated on the other side of the planet in Australia. But sadly, we can’t all be Advanced Markets. 😉

    • The AM comment made me chuckle 🙂

      Look, we are in Vanuatu. I get the dismissiveness, no need for me to try and tout the virtues of the regulator… but the options are not any better.

      Clients pushing the ‘benefits’ of regulations is cyclical and if you have not noticed, this past 18 months or so the cycle has returned.

      I cannot tell you the last time regulation actually helped me helped my clients make money. Last look? No problem. Spread widening? No problem. Indicative pricing? No problem. Non-firm pricing top of book with little to no liquidity and firm pricing 15 pips away…. No problem. Regulation is almost worthless. Until regulators focus on leveling the playing field between institutional and retail flow, I will not be a fan.

      The problem is no regulation means no banking. No banking means no business.

      I would take a competent offshore outfit over a completely incompetent sales and marketing focused client churning regulated broker any day of the week. Not all regulated brokers fall into this category… but not all offshore brokers are crooks either.

  2. I agree with Michael. I will also add: CySec is not actively enforcing the rules that they already have. How long does it take to suspend the license of a firm that cannot follow simple requests?

  3. well you have chosen a really dodgy company to illustrate this example. exness. i requested for a B2B money transfer and they said it cannot be done as my money are parked in their non-regulated entity… where is CYSEC?

  4. What about CIMA in Cayman Islands? one of the decent FX brokers is regulated by CIMA and operated onshore, and I’m not pointing at AM. Would like to know your feedback in regards to that broker or regulatory.

  5. good read. But isn’t Cyprus doing the same to London as the caribbean do to Cyprus. That is to say you have a broker that is registered in London, advertises the fact, but is also registered in Cyprus. When you come to sign up, you are pushed towards Cyprus with more lax rules. Everyone gaming the system. On other other hand with regards to Alpari and Exness, is this to do with regulation or just keeping the monies far away from Russian authorities? Also what pressure are british protectorates coming under to clean up their financial dealings from London? Is this affecting FX regulation in those countries as it is certainly affecting many other financial dealings? (also Belize is not an island)

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