Last week, Finance Magnates broke the news that the Securities Commission of The Bahamas will be implementing a range of new regulations, including leverage restrictions and placing a ban on binary options trading for retail traders.
In particular, the regulator will be implementing leverage restrictions of 200:1, and impose marketing restrictions, which will limit cold calling and other aggressive marketing tactics, among other measures.
Regulations will create a predictable environment
The implementation of these regulations comes after a boom for the CFD trading space in The Bahamas, as traders fled jurisdictions with tighter regulation, such as in Europe, in search of better trading conditions. This has been a benefit for the country, which is heavily reliant on tourism, in terms of economic diversification and jobs.
With this in mind, what type of after-effects might these new regulations have? Will The Bahamas still be a go-to destination for traders and brokers in search of higher leverage, or will it change the role the country plays within the global FX market?
Jim Manczak, Director of Bahamas Offshore Services
“The new CFD Rules are a responsible step forward in ensuring the good reputation of the Bahamas as an offshore financial centre,” Jim Manczak, Director of Bahamas Offshore Services said to Finance Magnates. “Good operators will be attracted to a jurisdiction that intends to keep the bad operators out.”
At this point, it might be too early to tell exactly what the fallout - whether good or bad, might be. But one thing these regulations will do is create a predictable environment for both brokers and traders. Traders know what they are going to get - the chance to trade maximum leverage of 200:1 with a range of protections for them.
On the flip side, the regulation provides brokers with a framework in which to operate. Although the island nation does have a broker-dealer regulatory framework, until this point, dealing CFDs was loosely defined.
Speaking to Finance Magnates, the CEO of a broker with operations in The Bahamas said: “The SCB’s new rules follow the IOSCO guidelines, which regulators have adopted globally. It's important to note that the approach to capping leverage at a maximum of 200:1 and including a sophisticated opt-up process is both very sensible and sustainable.
“The SCB is serious about attracting the right type of firms, supporting jobs and economic growth in The Bahamas while placing a priority on a well-regulated industry with a culture committed to compliance.”
The pursuit of leverage
The regulations are more flexible than Tier 1 jurisdictions, such as over in Europe and the product intervention measures implemented by ESMA and later adopted by local European regulators.
For example, based on ESMA’s product intervention measures, CySEC implemented 30:1 leverage for major currency pairs, as did many other European regulators, in Singapore, FX leverage is capped at 20:1 and in Australia, ASIC has also proposed 20:1 leverage. In Europe, Poland’s regulator was the only one to allow a generous 100:1 leverage.
However, one of the main attractions to offshore jurisdictions such as The Bahamas is the lack of restrictions on leverage, which allows retail clients to take on as much risk as they desire based on what is offered by the broker.
Will traders look elsewhere?
With there now being a cap on leverage in The Bahamas, this could see traders look for higher leverage in other offshore jurisdictions. If this occurs, then brokers will also likely move as where clients go, brokers will follow.
On the other side, although leverage has been capped, it is still much higher than in other jurisdictions as mentioned before, and the move by the SC of The Bahamas might give retail traders comfort that they can still trade with higher leverage and enjoy similar protections as in Tier 1 jurisdictions.
Tal Itzhak Ron, Chairman and CEO at legal firm Tal Ron, Drihem & Co.
Tal Itzhak Ron, Chairman and CEO at legal firm Tal Ron, Drihem & Co. and Genia Gurevitz, who heads the Banking and Payments Services at Tal Ron, Drihem & Co told Finance Magnates: “The real question is will the Low-Risk-Low-Profit Bahamas be appealing to the traders themselves. Brokers establish their businesses based on their clients' needs and wants and not vice-versa, as it is commonly mistaken.”
“If it has been the other way around - ESMA's regulations should have brought a surge in FX/CFD activity in the EU and not cause many brokers to migrate their businesses. We believe that the Bahamas will soon be like what we call in our law firm, the "B" or "Plan B" jurisdictions like Barbados, Bermuda and Belize, that serves as a nice place to register the business, but not with a real benefit to the traders or the brokers."
Echoing Ron's assertion that it all depends on traders, Manczak added: “Time will tell if traders get it - a regulator who regulates by balancing the best interests of retail clients and brokers. I know of too many bad outcomes from offshore jurisdictions where rules are lax. But the real test will be if brokers can leverage the Bahamas’ growing credibility with growing a healthy business.”
If not The Bahamas, then where?
If the worst should happen and traders do leave The Bahamas in search for higher leverage, where might they, and as a result, brokers go? According to Tal Ron and Genia Gurevitz, Vanuatu, Seychelles, Estonia and the Cayman Islands have become some of the top choice jurisdictions for crypto and financial activities.
Genia Gurevitz, Head of the Banking and Payments Services at Tal Ron, Drihem & Co
“Obviously, these are not FCA or CySEC quality regulations (though many brokers still keep an FCA/CySec/ASIC regulated arm), but we see more and more banks and payment services agreeing to onboard those brokers if these operations adhere to strict compliance protocols,” they explained.
“It is the brokers responsibility to make sure they target clients only in jurisdictions where it is allowed to do so, and part of our task is to obtain legal opinions signed by local lawyers from our global network, and get them onboard with decent banking solutions.
“Having said that, there is a misconception that choosing the right jurisdictions is THE problem, whereas its merely A problem for brokers. Working according to the law; proofing your website legally; surrounding yourself with professionals; teaming up with proficient service providers; being attentive and responsive with your clients'; building up sound banking infrastructure, these are the things that are far more important than where to locate your business.”
The knock-on effect
The Bahamas is one of the most popular and legitimate offshore destinations for foreign exchange and CFD brokers. With the implementation of the new regulations, is it likely that other offshore jurisdictions might follow suit and implement friendly leverage restrictions whilst, at the same time, provide protection for retail clients?
“... there is a trend of imposing stricter regulations globally,” added Tal Ron and Genia Gurevitz. “We don't think this trend is over yet, especially amid the COVID19 outbreak that left the world economy in great uncertainty, thus the relentless efforts of lowering risks are both important and inevitable. Vanuatu, Seychelles and the Cayman Islands shall still remain the jurisdictions of choice, as far as we believe, for those who prefer a non-EU route.”
The new regulations from the SC of The Bahamas could have a number of different impacts, and at this stage, it is too early to know for sure. Nonetheless, the move from the regulator does show a dedication to regulate the growing industry, whilst at the same time, still provide more flexibility for traders and brokers alike than in Tier 1 jurisdictions.
