Have You Future Proofed Your Brokerage?
Global brokerages are facing an increasingly competitive environment, with the exponential rise in retail trading interest during the pandemic. On the other hand, thousands of retail investors entering the market is attracting the scrutiny of regulatory bodies. Regulators are especially concerned regarding misinformation, and risky trading practices. In the United States, a change in political leanings has made data transparency, listing rules, and tax issues gain prominence for financial market participants.
Markets Direct, a brand of Triton Capital Markets Ltd., licensed and regulated by the Malta Financial Services Authority (MFSA), has announced that it will offer brokers access to US exchange-traded products, in compliance with the requirements of the nation’s information reporting regime, commonly referred to as Qualified Intermediary (QI)/Qualified Intermediary Dealers (QID) Regime.
To make the most of this offer, brokers first need to know the developments expected in the US financial markets landscape in the coming years.
Market Data Pricing and Distribution
Data is an extremely valuable commodity in the world of finance. In particular, the issue of market data distribution and pricing has become extremely important for regulators and financial market participants globally.
Highlighting this fact is an example of the top US exchanges. Although they are incredibly diversified businesses, US exchanges have over the years become more dependent on the sale of market data for revenues. In fact, they are so possessive of this business model that they filed a lawsuit against the US SEC in February 2021, against the regulator’s decision to add supply and demand for stocks to public feeds. This information is sold at a premium to Wall Street banks, hedge funds, and other financial services firms.
Markets Direct has contracted with the CBOE to be an authorized re-distributor of price data. Markets Direct is required to maintain proper oversight of this data to its end users. Markets Direct has also contracted with a service provider of corporate actions. This ensures that all corporate actions are affected in the underlying trading accounts accordingly. For foreign brokers, this is a great way to foray into the US financial markets
The US Exchanges Look to Clamp Down on Unauthorized Market Data Distribution
The US SEC is one of the entities to have recently received a backlash from the exchanges in this regard. For years, exchanges have been concerned about unlicensed brokerage firms re-distributing their data feeds without proper license arrangements. In a 2015 investigation by Finance Magnates, several reputed industry insiders had revealed that several big exchanges, with the help of regulators, were clamping down on downstream CFD brokers, who didn’t have direct access to exchange data feeds. But they were still providing data to their clients, without a license or paying adequate fees.
Clamping down on these practices is expected to be top-down. Exchanges will approach brokers who have the license to access their data feed directly, to understand the structure of re-distribution. For downstream CFD brokers, it will mean a blackout for US-based assets, if their upstream liquidity providers decide to terminate the feed or demand fees for the data.
CFD Brokers Need to Withhold Tax
US tax laws stipulate the withholding of tax for non-US investors (non-resident aliens) on payment of US source stock dividends, distribution of short-term capital gains, and substitute payments in lieu. Most types of income from US sources received by foreign investors are subject to a tax of 30%. This rate can be reduced, or an exemption can be provided if there exists a tax treaty between the US and the country of residence of the foreign investor.
Most CFD brokers offering margin trading activities in US-listed assets don’t withhold tax.
This can be a significant lapse in compliance, considering that the current US government is increasingly stressing on combating tax fraud and avoidance. President Biden plans to propose a funding boost of $80 billion for the Internal Revenue Service (IRS) over the next 10 years, which will help the agency double its enforcement staffing and provide new technology tools for regulatory crackdowns.
The new sources of funding will not only help the IRS train new enforcement officials but also enable it to speed up audits, without the intervention of lawmakers.
The regulatory landscape for the American financial markets is becoming increasingly complex. The QI solution through Markets Direct will offer brokers an opportunity to navigate the markets more efficiently.
MarketsDirect is a Brand of a Qualified Intermediary
Foreign brokers who wish to offer retail or institutional investment opportunities to their clients in US CFDs, indices, stocks, and other assets are required to be compliant with the Qualified Intermediary Regime (QI/QID). This is a stringent process. Not all jurisdictions qualify, and even if they do, the process for approval may take anywhere from 8 months to a year. Registration costs are high, and brokerage firms need to implement software that complies with the regime. Through the Markets Direct Gateway, brokers can allow clients access to US-listed equities without the high cost of data and registrations, as well as huge resource requirements for becoming a QI/QID themselves.
In conclusion, Brokers gain access to qualified data, while withholding tax on dividends. This will allow them to remain compliant with the law of the land, avoiding costly litigations and fines. One final point, they will not need to disclose client data to Markets Direct. The gateway will allow them complete control over individual customers, through the Markets Direct environment, from a single account.
If you need more information on this, make sure to connect with the Markets Direct team at the iFX EXPO International taking place on 4-6 October in Cyprus. Send an email to Anthony Edwards, Head of Sales-UK, to set up a meeting or you can contact [email protected]