Exclusive: Cheap and easy offshore FX brokerage? Not anymore….

In most respects, the strengthening of regulatory and infrastructural requirements within well recognized areas that are populous with retail FX brokerages such as Australia, Britain, North America and the European Union (mostly Cyprus), has been welcomed by the entire industry as well as its customers. One of the major downsides of the implementation of strict […]

In most respects, the strengthening of regulatory and infrastructural requirements within well recognized areas that are populous with retail FX brokerages such as Australia, Britain, North America and the European Union (mostly Cyprus), has been welcomed by the entire industry as well as its customers.

One of the major downsides of the implementation of strict capital adequacy requirements, trade processing and execution transparency regulations and infrastructural changes that form a large part of EMIR, MiFID II and the Dodd-Frank Act is that due to the ether-based nature of the retail electronic trading business, companies not wishing to conform can simply cancel their license and then carry on business as normal with absolutely no changes to their operational make-up by simply signing a piece of paper that gives them registration in an offshore jurisdiction.

Note the word registration rather than regulation.

This is the entire point. Offshore jurisdictions including Panama, Belize, Vanuatu and the Seychelles are completely devoid of an electronic trading industry and are equally devoid of any expertise in any specific area of the business, yet the companies registers on the respective islands are populous with small retail brokerages which use these regions as tax havens and methods of avoiding any real, well organized financial markets regulatory structure.

There are two camps these days, the first being those which are small brokerages with very little capital and a MetaTrader 4 white label license purchased for $5000 and a staff consisting of less than a handful of employees, that operate a B-book trade warehousing model and have no live connection to the outside market, wishing to make a quick buck from their basement in Russia, the Middle East or South East Asia.

The second being those which are much larger entities that have regulatory licenses in Cyprus or Malta for the kudos of being listed under a MiFID-compliant regime, and then onboard their clients via the back door to an offshore region with no regulatory stipulations on trading conditions or execution in order to offer very high leverage or to survive on the P&L of client losses.

The risk of both modus operandi is huge, and the potential damage is equally vast, however this week the first step toward vindicating this has been taken by the Vanuatu authorities.

Vanuatu is a small island in the South Pacific Ocean nation made up of roughly 80 islands that stretch 1,300 kilometers. The entire region is very lightly populated and has absolutely no infrastructure whatsoever as far as electronic financial markets participation is concerned, yet has become one of the latest havens for unregulated FX brokerages to operate from.

One of its attractions for small brokerages has been the almost comical $2,000 capital adequacy requirements set out by the Vanuatu Financial Services Commission, however this has thus far been a very serious moot point for industry professionals and global regulators.

Vanuatu’s tiny financial services regulator has actually taken note, and is now in the process of raising the capital adequacy requirements to $50,000, showing that even the offshore regions such as this which are considered to give carte blanche for firms to do whatever they like are beginning to show concern for the risks that they are facilitating.

Indeed, a $50,000 capital requirement is not going to deter an established firm which seeks to dupe its customers by displaying a CySec license on its home page and then handling its entire client base via Vanuatu, this is a small price to pay to be able to ensure clients blow their accounts with 1:2000 leverage and massive bonuses that would be completely anathema to European, Australian or American authorities, however it will likely go some way to putting a stop to the establishment of shoe-string chancers that have a small white label license and are looking to bag as many client deposits as possible with zero accountability to anyone.

An FX industry insider this morning explained to FinanceFeeds “They are trying to get themselves off the FAFT black list. As usual there is some backlash locally on the jump to $50,000, so perhaps the final number will be lower, but the point is they are moving in the right direction.”

Whilst offshore jurisdictions continue to be the preserve of brokerages which resemble the behavior of some of John Wayne’s most famous characters, this is a step in the right direction and will likely go some way toward mitigating the five minute wonders with less than honorable intentions toward their clients.

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