Where Should I Open My Forex Brokerage?“Location, location, location”- a well-known known expression when it comes to real estate. The same applies to a brokerage, although it does not have the same importance. However, it does affect how you will conduct your business. For the most part, the location of a brokerage company defines how it is regulated. Compliance with the laws and regulators is a common head spinner for all great business ideas. Yet for a brokerage, compliance with regulators also has a positive effect since it gives clients confidence about the safety and security of their trading capital as well as the peace of mind of the legitimacy of the brokerage. The decision of which jurisdiction to open your forex brokerage in is a balance between brokerage freedom, marketing, available resources, and more. In this article, we will discuss the ingredients about regulation, brokerage location, and all the things in between. Globalization is very much a factor for any online business. With the right technical support, you do not even have to have a real, physical office. The list that we need to address when choosing a location is getting longer, but we should never lose sight of our ultimate goal. Let’s start with the regulators and the areas they cover, starting with the most demanding ones.

Many businesses would like to target this market, especially due to its size and value. However, it comes with a high cost both financially and regulatorily. US brokers are rare for this reason and it is unlikely brokerage start-ups begin here unless entrepreneurs hold key advantages that will help them enter this market. The NFA – the regulator you will have to answer to, requires over $20 million in capital requirements, an annual license fee of $100k, and extensive compliance and oversight. There are also heavy requirements in terms of the IRS, licensed employees, a physical company address, and many tangible and intangible factors. The NFA is a gatekeeper that definitely contributes to client fund security, yet some will question this control effectiveness and they may even wonder if the NFA is actually protecting sensitive national financial interests and competition. Only knowledgeable, patient, resourceful, and large investors can consider applying for an NFA license. Similar conditions exist for Japan and Switzerland. However, these markets are smaller and for most, non-local start-ups, they are just not worth the trouble.

European regulators are guided by the European Securities and Markets Authority aka ESMA and in turn, all brokerages that deal with EU citizens. One key issue the ESMA directive addresses is the leverage traders can use. Leverage is an interesting feature that CFD (contracts for differences) brokers usually promote to their clients. The interest for higher leverage lies in the possibility of higher gains with smaller deposit amounts. Retail clients like this idea, however, if you plan to open brokerage services to EU citizens, the maximum leverage you can offer is 1:30. This is somewhat lower than most offshore brokers offer. Aside from leverage, the FCA (Financial Conduct Authority) regulator that covers the UK market is stricter than CySEC (Cyprus Securities and Exchange Commission) and much more than the MFSA (Malta Financial Services Authority) in Malta. While Malta is an easier solution to get into the EU market, educated traders know the differences. Interestingly, CySEC is a popular choice for many brokerages. The Cyprus-based regulator provides very good tax, paperwork, and payment processor conditions. CySEC requires €125k capital requirement to open a brokerage and offers traders a compensation fund for their deposits. This is a good blend to consider, however, some CySEC brokers do not have a stellar reputation in the trader community, regardless of the regulation. CySEC is known to be slow to respond to brokers behaving badly. In some cases, brokers also avoid the risks associated with card processing by indulging in internally owned card processing to avoid chargebacks. However, new traders that seek a regulated broker would maybe not mind or know this.The Malta MFSA is considered another EU brokerage heaven. With a great tax and regulatory framework, it is a common choice for brokerage start-ups. The MFSA has a few license types that open more options for low capital investors, such as the Category 2 and Category 3 license. When the EU is your target market, make sure you also understand the MiFID II directive. The Markets in Financial Instruments (MiFID II) is a legislative framework that has been instituted by the EU to regulate financial markets and to enhance the protection of investors. The main goal of MiFID II is to standardize brokerage practices across the EU and to restore confidence in this industry.

ASIC (Australian Securities and Investments Commission) is a known regulator which holds some of the largest and most reputable brokers in the world. Capital requirements are 1 million AUD and several months of waiting time. Australia is a common choice for brokerages that also want to jump into Asian and Indonesian markets. Once the EU set lower leverage limits (to 1:30 for retail clients) and other requirements, there has been a surge in migration to ASIC regulation. This has caused ASIC to revise its openness to such practice since the majority of clients come from Asia rather than Australia. Unfortunately for brokers, the requirements are much higher today than they used to be a few years ago.

Africa is an amazing market considering there are a lot of young, growing populations eager to make a living from forex trading. Nigeria, Namibia, and South Africa especially show promising, easy client-building results. The FSCA, Financial Sector Conduct Authority, is the official South African regulator that sets the requirements for brokerages looking to enter these emerging markets that want a recognized brokerage license. Unfortunately, the FSCA does not enjoy the same prestige as the FCA, ASIC, and CySEC regulators. However, they do impose strict requirements to acquire a license, especially as a good portion of internet scams are based in African countries.

In these countries, these regulators do not set a lot of requirements, legally or financially. Such mild authorities do not mean much to educated, high deposit traders. However, compliance with the KYC (Know Your Customer) and AML (Anti-Money Laundering) policies are required, and most start-ups choose low-risk endeavours with these regulators. As expected, scam brokers also like such conditions so your brokerage could be stamped as one even without reasons. On the other hand, you have more freedom to express ideas about how trading should be done. Brokers can offer bonuses, high leverage, accept various citizens, and other features which are strictly forbidden with other regulators. Beginner traders will enjoy this freedom, especially if you set low minimum deposit limits. Scam brokers rarely want to offer such accounts.

Choosing the right location for your brokerage is a key decision that should not be taken lightly. A key factor that will drive your decision is your target market and the demographic of the clients you wish to onboard. If you plan on building a prestigious brand with high-value client’s then you will want to make the investment of being licensed with a top, reputable regulator. On the other hand, if your brokerage will serve small retail clients that are not overly concerned about regulation, then a cheaper and more relaxed regulator might be a better fit. Whichever route you take, ensure your brokerage operates honestly and offers the best service because bad client experiences can spread like wildfire on the internet which can have a devastating effect even on the most regulated and licensed brokerages.