Every entrepreneur looking to start up a forex brokerage should first decide the jurisdiction in which the headquarters of the business will be based before proceeding with other issues. This involves a lot of prepatory work and is one of the crucial decisions that a forex startup needs to take, since it also has a big impact on the cost structure of the firm.
The regulatory authority could be an EU member state, or one of the offshore jurisdictions such as BVI or Cayman Islands. Cyprus has taken the lead among EU member states for being the market leader in attracting applications for setting up forex brokerages because it was the first country to regulate the forex industry. Strange that it may seem, many jurisdictions have not regulated the forex brokerages. The fact that Cyprus moved first to regulate the industry has been very beneficial, since during the last couple of years, Cyprus has managed to attract well above 50 foreign firms to apply and secure regulatory license and base their operations from the east Mediterranean nation.
The majority of the forex applications to Cyprus are made by Israel and Russian citizens.
There are many firms who help in the licensing process with the fee scale ranging from EUR 12.000 to EUR 25.000 depending on who is the consultant. The regulator is the Cyprus Securities & Exchange Commission (CySEC) which usually gives its answer within 4 months.
Once the license is granted, the investment firm will need to hire licensed persons to head each and every department for which a license application has been made. For investment firms that wish to hold client funds, the minimum capital is EUR 200.000.
Based on first hand experience, the annual costs of a Cyprus Investment Firm licensed to trade in forex amounts to a minimum of EUR 350.000 and can increase to EUR 1 mln depending on the number of staff and the services the firm intends to offer.
On the other hand, those who apply for a regulated license from an offshore jurisdiction like BVI or Cayman Islands will also need to pay between $20.000 to $50.000 to secure the license, but the annual operating expenses are substantially lower.
The big difference between an EU and offshore jurisdiction is that while the EU obliges the investment firm to employ licensed persons for every department for which it has secured licensing and is being offered, an offshore jurisdiction has no such requirement, meaning that one person can effectively run the business.
And since all investment firms can white label the electronic trading platforms from other established firms, which essentially means the trading is all automated, then one may argue why the need to become regulated in the EU and not outside.
Here arises the next question of where you intend to be active? If as a forex brokerage you plan to operate within the boundaries of the EU, then it’s obvious that you need to have a license from one of the EU27, otherwise you will be breaking securities laws.
But if you wish to operate in countries where there are no strict regulations and you think you can get away with this, then by all means, an offshore jurisdiction has lower operating and maintenance costs.
The decision obviously will have a significant impact on areas of operation and the cost structure of the forex brokerage.
Source: http://www.eurivex.com
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