Regulation Made Simple- a Global Guide Part 2

This article was written by Adv. Nir Porat and David Woliner. Nir Porat is the Co-Managing Partner at Ben Basat, Porat & Co., and is also responsible for leading the Corporate and International Law departments in the firm.

David Woliner is the Head of Financial Regulation at Ben Basat, Porat & Co Law Firm.

Read the first part of this article here.

Full Regulatory Regimes

The European Union

The most prominent regulation for forex and binary options ventures nowadays is the EU. The EU has established a comprehensive regulatory regime for the organized execution of investor transactions by regulated markets, other trading systems and investment firms. In so doing, it has, among other things, created a single authorization for investment firms which enables them, following the receipt of a license from the regulator of an EU member, to do business anywhere in the EU through the use of any investment firm’s freedom to provide investment services and activities throughout the EU (commonly referred to as “passport” right) under the MIFID directive. Currently, Directive 2004/39/EC (MIFID 1) is still in force and is set to be replaced by Directive 2014/65/EU (MIFID 2), to be transposed by EU members by July 3^rd 2016. The MIFID directive clarifies that in order to enable investment firms' passport right, EU member states shall not impose any additional requirements on such an investment firm in respect of the matters covered by the Directive.

Apart from the above mentioned passport right, another key development in the EU becoming the most wanted regulation for binary options is the recognition by the EU commission of binary option being a financial instrument under the MIFID Directive in late 2010. Following this decision, regulators from EU member countries started granting licenses to investment firms offering solely binary options. Cyprus’ CYSEC was the pioneer, to be followed rapidly by Malta’s MFSA. According to the latest reports, the UK is in the midst of transferring the supervision of binary options providers from the Gambling Commission to the Financial Conduct Authority (FCA). It is no surprise that the above mentioned EU regulations (Cyprus, Malta and the UK) are considered the leading regulations for forex services providers as well.

Capital requirements are set at EU level, ranging from 80,000 EUR for a broker not holding clients’ funds, to 125,000 EUR for a broker holding clients’ funds and finally a 730,000 EUR requirement for a market maker. Annual license fees are set at national level, and as such they vary between regulations. For example, CYSEC’s annual fee is based on turnover and ranges between 3,500-75,000 EUR. Under Malta’s MFSA you will be required to pay an annual fee based on revenue, ranging between 1,300-10,000 EUR.

Cyprus

Forex and binary option providers in Cyprus are submitted to the oversight of the local regulator, CYSEC.

There are three types of licenses relevant to the industry, which are broadly a broker not holding clients’ funds, a broker holding client’s funds and a market maker. The most popular license is for a broker holding client’s funds, especially for binary option provider. Some forex services providers need to consider the market maker license as it is the only one allowing its holder to deal on its own account.

The average time frame is 5-6 months starting from the date of submission, although recently CYSEC inaugurated a new fast track regime where your application will be checked within two months. Capital requirements depend on the type of license and range between 80,000 euros for a broker not holding clients’ funds, to 200,000 euros for a broker holding clients funds and up to 1,000,000 euros for a market maker. Annual license fees are based on turnover and ranges between 3,500-75,000 euros per year.

duties include internal audit reports, compliance reports, Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term reports, anti-money laundering reports, audited financial statements and auditor’s reports

Main office requirements to bear in mind - a physical office in Cyprus is required. At least two senior managers are required to manage the company along with two non executive directors. The majority of the board must be Cyprus residents. Also, the investment services are required to be offered from Cyprus.

Some key regulatory requirements - capital requirement must remain blocked during the final stage of the application. The required capital will need to be duly issued and paid following the authorization of the license. CYSEC has to approve changes to the original shareholdings, directorate or management. Clients’ funds must be segregated in a separate account. Investment firms are bound to periodic reporting duties in relation to capital adequacy and large exposures of company’s position. Additional reporting duties include internal audit reports, compliance reports, risk management reports, anti-money laundering reports, audited financial statements and auditor’s reports. Licensees need to become members of the investor compensation fund.

In terms of accounting and audit requirements – every investment firm has the obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS). Audit obligation is applied on all investment firms.

Malta

The regulator responsible for overseeing forex and binary options providers is the Malta Financial Services Authority (MFSA). The most relevant license is entitled Category 2 license, allowing for all investment services and for the holding of clients’ funds, but not allowing the licensee to deal on its own account (trading on its own account can be performed only with a category 3 license). There are also two category 1 licenses (entitled “a” and “b’) which allow for brokerage activities but do not permit the holding of clients’ funds. The application fees are 17,000 euros and the average time frame to review an application is 6-8 months. The capital requirement for a category 2 licensee is 125,000 euros, while a category 3 licensee will be required to hold 730,000 euros. Annual license fees are based on revenue and ranges between 3,000 euros to 10,000 euros.

Regarding office requirements - physical office is required. At least two senior managers are required to manage the company. Investment services are to be offered from Malta only.

Audit obligation is applied on all investment firms.

As to regulatory requirements - the MFSA has to approve changes in the original shareholdings, directorate or management. Segregation of clients’ funds in a separate bank account is obligatory. Periodic reporting duties in relation to capital adequacy and large exposures of company’s position. Reporting duties also include internal audit reports, compliance reports, risk management reports, anti-money laundering reports, audited financial statements and auditor’s reports. Licensees need to become members of the investor compensation fund.

In terms of accounting and audit requirements – all licensees are under the obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS). Audit obligation is applied on all investment firms.

Australia

The oversight of the financial sector is given to ASIC. The relevant license is entitled a Financial Services Provider (FSP) license. It allows for brokerage and dealing on own account. It requires a capital requirement of 1.1 million AUD and an annual fee based on turnover ranging between 3,500 AUD to 50,000 AUD.

As to office requirement - physical office is required. At least one Australian manager is required to manage the company. Investment services are to be offered from Australia to Australians only.

Each licensee must become a member of the Financial Ombudsman Service (FOS)

Some key regulatory requirements - capital requirement must remain blocked during the final stage of the application. The required capital is to be duly issued and paid following the authorization of the license. 50% of the capital requirement must consist of liquid assets. Obligation to segregate clients’ fund in a separate account. There are periodic reporting duties in relation to capital adequacy and large exposures as well as reporting duties concerning internal audit, compliance reports, risk management reports, anti-money laundering compliance reports audited financial statements and auditor’s reports, compliance program, register of training, product review policy. Each licensee must become a member of the Financial Ombudsman Service (FOS). Professional indemnity insurance is required from each licensee as well as liability insurance for directors and officers.

There is an obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS). Audit obligation applied on all investment firms.

In addition to the bookkeeping of the business there are monthly taxes, monthly reconciliations, quarterly tax reporting and if you have staff there is monthly payroll. All companies are required to disclose statements, terms and conditions and financial service guide.

Hong Kong

Hong Kong’s financial regulator is the Securities and Futures Commission (SFC). There are three types of licenses available: type 1 - dealing in securities, type 2- dealing in futures contract and type 3 – leverage foreign exchange trading. The type 3 license is likely to be the most wanted one, as it is directed at forex providers. The application is typically reviewed within 4-6 months starting the date of submission. The capital requirement varies, depending on the type of license, and ranges between 700,000 HKD – 1,300,000 HKD. Same for annual fees, where depending on your type of license the ranging of the fee will be between 6,000 HKD – 19,000 HKD.

The type 3 license is likely to be the most wanted one, as it is directed at forex providers

Regarding office requirements – physical office is required and the employees must be resident.

Application must be made by an HK company or registered HK company.

The company must appoint at least two responsible officers and appoint one of them as executive director. The applicant company and its officers, employees and shareholders must satisfy the fit and proper criteria set out by the SFC. The SFC will consider, among others, the applicant’s financial solvency and status, his educational and other qualifications, his experience in relation to the nature of the functions to be performed, the ability to carry on the regulated activity competently, honestly and fairly and his reputation, character reliability and financial integrity.

As to regulatory requirements – every licensed company has to maintain, at all times, paid-up share capital and liquid capital not less than the capital requirement. Licensee holding client’s funds must open bank account with a local bank. Segregation of client’s funds is mandatory. Every licensee must keep records of: financial solvency and status, financial education overview, internal compliance and internal control system.

Every licensee has the obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS) and to submit monthly, quarterly and yearly financial reports. All companies are to disclose financial statements to the public.

South Africa

Regulation in South Africa is also gaining attention. The relevant license entitled Financial Services Provider (FSP) is granted by the local regulator, the Financial Services Board (FSB). The license application involves fit and proper requirements as to the applicant company, its directors and shareholders. Annual fees are set to a maximum of 97,000 USD. Another fee to be paid annually is the Levy for funding the Office of Ombudsman for Financial Services Providers (which is basically a fixed amount times the number of key individuals and representative).

There is no minimum capital requirement. As part of the license, every applicant need to fill and submit a form regarding financial soundness along with its financial statements. Competency requirements consist of experience, qualification and regulatory examination requirements that are applicable to all FSPs, key individuals and representatives.

Russia

Russia has one central regulator – the Central Bank of Russia (CBR). The CBR has issued its first license recently (to Finam Forex), and is in the process of reviewing five more applications. The CBR’s aim is to review an application and issue its decision within 60 days of submitting the application. The license is entitled 'forex dealer' and permits its holder to operate as a forex dealer only, as it cannot combine its activities with other activities on the securities market. Each licensee is required to deposit an amount of 255,000 USD (2 million Russian rubles) to be transferred to an investor compensation fund.

Unlike many full regulatory regimes, no physical presence of directors or shareholders in Russia is required.

The minimal capital requirement is set at 1.2 million USD (100 million Russian rubles). Officer, directors and shareholders are required to submit, as part of their fit and proper assessment, proofs of academic education and professional qualifications, proof of relevant experience in this field and a certificate showing no criminal record. The company is also required to submit a business plan. Unlike many full regulatory regimes, no physical presence of directors or shareholders in Russia is required.

Israel

In Israel, regulation of securities is in the responsibility of the Israeli Securities Authority (ISA). Companies providing forex and binary options services can apply for a license as a Trading Platform Trading Platform In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real Read this Term to its own account. Israel’s minimal capital requirements ranges between 200,000 USD - 1,000,000 USD, depending on the type of activity, while the annual fees, which are revenue based, range between 13,000 USD – 90,000 USD. It is important to note that to this day no licenses have been issued by the ISA. Currently, there are 21 applications which are being reviewed by the ISA.

Trading platforms are set to follow rigorous licensing requirements by the ISA, including the submission of several reports such as periodic reports, activity reports, profitable and non-profitable clients reports, credit risk reports and market risk reports. Also part of the licensing process is an extensive fit and proper assessment of the company and its officers, directors and shareholders. Licensees are required to hold insurance such that the types and scope of coverage are appropriate to its operations.

to this day no licenses have been issued by the ISA

Trading platforms licensees are to follow rules defining permitted leverage for types of financial instruments, duties regarding management of conflicts of interest, a prohibition on provision of investment advice and portfolio management services to clients, duties regarding the handling of clients funds (including segregation), a duty to determine the suitability of clients to trading activities and associated risks, rules regarding advertising, extensive reporting duties to clients and the ISA, minimal equity requirements and duties regarding risk management as to the platform’s activities.

Summary

Now that we have seen what is available on the global stage, a few thoughts as to how forex and binary options providers can put all of this to their advantage. If you are an unregulated brand looking to take your first steps into the regulatory world, applying for a license with an offshore regulation has many benefits – first, you are regulated. Second, you enjoy the many benefits of being offshore, mainly cost and tax effective benefits. On top of that, you are better viewed and accepted by banks and payment processors.

If you are already regulated in an offshore jurisdictions or are looking to get access to premiere financial markets, you may apply for a license with a full regulatory regime. This will grant you access to the top tier banks, payment services providers and other key players in the financial world, not to mention that it will improve your reputation with both traders and regulators.