The future of foreign FX brokers in China is completely safe – if you get it right. FinanceFeeds research

Recent concerns about the Chinese government removing non-Chinese FX brokerages from mainland China do not apply to those with their businesses structured in accordance with Chinese government rules on overseas business activity. We explain in detail what to do to ensure longevity and to remain on the right side whilst operating in this important region

Ever since the opportunity presented itself for retail FX brokerages to access what has become a very well organized and large scale network of introducing brokers (IBs) in mainland China, the attention and dedication toward entering and sustaining business in the mainland has been, not to put too fine a point on it, substantial indeed.

During the past ten years, a completely business to business (B2B) commercial ecosystem has arisen for retail FX in mainland China, spurred by retail investors with massive property and physical investment portfolios seeking to boost monthly returns by handing a proportion of monthly revenues to IBs in order that they trade them, often automatically via expert advisers connected to a MAM account, for vast profit on the global market.

FinanceFeeds has been instrumental in conducting substantial research on this industry sector, largely from within mainland China over a period of several years, speaking with senior executives and leading industry figures, and recently has established FinanceFeeds China, which is the only international FX and electronic trading industry news and research resource in the world which has a license from the Chinese government to research and report on the FX industry from within China.

300 senior executives addressed in Mainland China on how to structure a local brokerage

The internet media license that FinanceFeeds holds from the Chinese government aligns FinanceFeeds closely with key government departments and thus ensures that FinanceFeeds is in a position to report absolutely comprehensively within China.

Therefore, addressing the recent concerns that have come about from many Western FX industry participants with regard to what is being perceived as a ‘clearout’ of Western FX firms by the Chinese government is very important.

FinanceFeeds can categorically state that it is absolutely not the case that the Chinese government is looking to remove all brokerages of non-Chinese origin from the mainland, however it is important to consider exactly how a brokerage should be structured in order to approach Chinese IBs (and subsequently service their clients) in order that the Chinese government can supervise the activities of the brokerage in detail.

It is not about being of overseas origin, its about commercial structure

Very importantly, structuring a division of a Western brokerage inside mainland China with a view to developing partnerships with IBs and executing trades on behalf of the customers of IBs, as well as operating a technology or liquidity provider with a view to providing technology and liquidity to Chinese brokers requires adhering to a specific format.

Brokerages with well respected regulatory jurisdiction, for example licenses from Britain’s FCA and Australia’s ASIC non-bank financial markets regulatory authorities are considered to represent the very highest level of FX brokerages, largely because those are the homes of the vast, publicly listed and originally British firms such as CMC Markets, IG Group and the UK division of FXCM which has a massive IB network all across China.

Brokerages with substantial domestic market influence and a loyal domestic market client base which then establish their own Chinese-owned offices within mainland China are absolutely safe from revocation, as the government’s concerns with ‘social stability’ for retail clients are mitigated when a retail brokerage has a public listing on a stock exchange in London, or a vast domestic audience and provides liquidity to global brokerages as well as has its own trading infrastructure – Saxo Bank being a case in point, the company having a vast IB network in China and Chinese-operated local offices as well as Geely Corporation as a 30% shareholder.

Quite simply, by owning a Chinese company, a foreign broker is operating its business on Chinese infrastructure, hence the government can see every activity that is being performed via internet surveillance across China’s government-monitored internet system.

The authorities can also see the order flow, how trades are being executed, where funds are being kept and how traders are responding to customer service due to Chinese language Baidu-indexed exchanges of email and messenger media between broker and customer.

The vast majority of well operated brokerages that have offices inside China are doing so in accordance with government stipulation in that it is either in the form of a WOFE (Wholly Owned Foreign Enterprise), a joint venture with a partner that is completely 100% Chinese owned, or direct ownership by the overseas brokerage with Chinese responsible officers, license holders for the internet, merchant services providers, and a Chinese shareholder for the Chinese division of the company.

A good example of this is eToro, which sold 10% of its corporate entity to PingAn Ventures, the Venture Capital division of PingAn, a Chinese bank, which has empowered the company via Chinese government-overseen evolution to be part of every PingAn retail customer’s retail banking application. FinanceFeeds has spoken about this at length, in China, in person, with not only PingAn themselves, but also eToro’s Chinese CEO. This is a system that is here to stay.

Having a genuine physical office, rather like that of CMC Markets in Shanghai, which is a proper office of CMC Markets, is owned and operated by CMC Markets and is in keeping with Chinese business ethic and rulings is the only way to remain sustainable.

At the opening of CMC Markets in Shanghai last year, FinanceFeeds China, along with certified Chinese media, were presented to by senior executives who explained how the firm was structured, and of course the government is indexing it on Baidu and is well aware of its operational remit, and is actually monitoring it closely.

The government will be well aware that this is a publicly listed British firm, with a vast market capitalization, branches all over the world and a loyal domestic client base, hence social stability is not a concern, and the firm is operating as a proper Chinese company with its own office.

Companies which use IB offices and pass them off as their own Chinese office, companies with no business outside China that are approaching Chinese IBs from the outside and then sending their money abroad, companies which throw elaborate, gambling-style ‘razzmatazz’ events that loudly focus on ensuring retail clients deposit funds, then subsequently sending them to a little-known entity abroad with no regulated offices and no means of recourse for customers are likely to face the door and are on the government’s list for removal.

If the government cannot monitor activity from deposit through execution to withdrawal and all customer correspondence, hosting, internet routing and commercial methodology, the axe looms.

Recent blocking of certain websites belonging to retail FX firms with large IB and direct retail business in China but with no physical operations has demonstrated the direction here. The block, although temporary, is not a coincidence and FinanceFeeds research denotes that by taking funds from IBs or direct clients abroad and then servicing from overseas, the government cannot see what is being done hence blocking and removing the payment channel is their response.

Companies that solicit business by rounding up IBs and plying them with drink and elaborate entertainment are also on the radar. The Chinese government considers this disingenuous and often is associated with companies with very little infrastructure inside China apart from sales teams, hence the government has no method of monitoring whether the clients will be properly serviced or not.

Additionally, international media sites which propagate the verbatim viewpoints of firms on China’s list without conducting research run the risk of having an IP block in China.

In October last year, FinanceFeeds received several communications from brokerages in mainland China which have service from suppliers outside of China, stating that the HTTP protocol over TLS and SSL, known commonly as ‘443’, which is a port used for secure web browser communication and is a major connection methodology for MetaTrader 4, had been blocked by the government.

This is a port which is used to connect MetaTrader 4 to trading servers, hence several brokers are now unable to connect from within mainland China.

One of the facets of port 443 is that data transferred across such connections is highly resistant to eavesdropping and interception, hence it is more difficult (although not impossible given China’s sophisticated firewall system) for the government to monitor the flow of data and trading dynamic between Chinese companies and their overseas suppliers given this topography.

Moreover, via the use of port 443, the identity of the remotely connected server can be verified with significant confidence. Web servers offering to accept and establish secure connections listen on this port for connections from web browsers desiring strong communication security.

Once established, web browsers inform their users of these secured connections by displaying an icon — a padlock, an unbroken key, etc. — in the status region of their window. FinanceFeeds was established by experts in the field of institutional connectivity, thus this is a protocol on which our level of understanding is very high.

This is ideal when operating in a free market, however by blocking it, China rids itself of the lack of transparency and ability to monitor the traffic, but also creates a complete inability for some firms to operate their trading platforms.

FinanceFeeds can verify that this restriction did not affect all users of MetaTrader 4 in China, as currently, brokerages which are using MetaTrader 4 and are being supplied with liquidity and connectivity by Western firms with a Chinese base with all of their trading infrastructure hosted on Chinese servers are still operational, and given the government’s ability to scan data at server and hosting level within China, it is likely that these will never be affected.

Conversely, brokerages using connectivity partners or white label providers with no Chinese presence at all risk being completely disconnected from their trading server.

Thus, institutional partners from the West which have a fully operational Chinese base are completely transparent to the Chinese government right from data center hosting to trade server activity.

No longer are there any more dialogues about Western firms buying institutional providers in China as had been the case last year. Instead, Western brokerages are focusing on increasingly basing their operations in Mainland China, and often with full assistance and support from the Chinese government as long as their entity is completely Chinese in its operations, and has ownership by a Chinese entity.

Quite simply, it is business as usual for those with Chinese operations.

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