Obtaining a Forex broker license in 2023
- Preparation stage
- Basic requirements for obtaining a Forex broker license
- Forex broker license categories, and conditions for acquiring them in reference jurisdictions
- Final thoughts
The license is one of the determining criteria for traders when choosing a Forex broker. If we are talking about the legislative side of the issue, Forex rules and regulation indicate which regulator controls the activities of the brokerage, as well as determine the overall reputation of the company. Many types of licenses are issued by different Forex regulatory agencies around the world under different jurisdictions, but the choice depends on the scale of the broker's business, budget, and other variables, which we will discuss in this publication. Together with legal officers of Soft-FX, we discussed the regulatory and cost requirements for obtaining licenses, restrictions, as well as exemplary jurisdictions for Forex brokers, and the most renowned Forex broker regulators. Please keep in mind that this review is relevant as of January, 2023. We’ll make sure to make updates if any changes occur in the area of Forex regulations and law.
So, how to become a licensed Forex broker? There are several ways of obtaining a Forex business license for operating on the Forex market and find the best Forex regulator for your business. However, to start with, a broker needs to decide on the geography of operations. It doesn't mean that the business office address and location of operations should correspond. However, depending on the registration location, the conditions for registration may vary, including the time required to process the application, as well as legal and financial aspects.
To understand which institution to apply for a license, a broker needs to address several important factors:
- what budget they are willing to allocate for the license;
- banks the company is going to open accounts with;
- the region in which the company will be operating;
- how long they are willing to wait for an effective response to a licensing request and its issuance.
Having answered these questions, it will be much easier for the broker to decide on the institution from which they want to obtain a license.
Basic requirements for obtaining a Forex broker license
First, let's make a clear idea of what is a regulated broker. Regardless of jurisdiction, the basic requirements for obtaining a Forex business license are:
- corporate document regularization;
- registration of the company as a valid business;
- state fees;
- drawing up a business plan;
- setting up the necessary AML/KYC procedures;
- opening a corporate bank account;
- activation of the merchant account;
- applying to the desired institution for a license.
Depending on the financial regulator you need a license from, a Forex licence procedure may look different, as well as Forex license cost. This applies not only to the list above but also to the contents of individual documents. If a brokerage company decides to apply for a license with a contractor, they should prepare for additional expenses. These may include:
- accounting activities;
- office rent;
- additional bank accounts;
- cookies policy.
Forex broker license categories, and conditions for acquiring them in reference jurisdictions
As mentioned above, a Forex licence procedure and all the conditions that go along with it can be radically varied. Each country has its own legal framework and that is why each government's attitude to the foreign exchange market looks different. As one might assume, the most reputable and versatile licenses issued under regulators like the National Futures Association require a corresponding investment. However, depending on the budget available to the brokerage business, there are several notional categories of Forex licenses.
Prime market jurisdictions (A)
This category includes Forex regulations in the United States and Switzerland. In the United States, the Commodity Futures Trading Commission (CFTC) and the National Futures Association regulate the Forex market, while in Switzerland — the Financial Market Authority (hereinafter — FINMA). The regulators of these countries are considered quite stringent.
Forex brokers licensing conditions in the USA
The U.S. Forex broker license is one of the most prestigious and gives access to the richest foreign exchange market in the world. To obtain a license from the United States to operate in the Forex market, a company must comply with the requirements of one of the most stringent Forex broker regulators. First, the applicant’s company office must be physically located in the country. Moreover, the complaints of clients are taken very seriously here, which can easily influence the regulator's decision on the further activity of the brokerage company.
In order to work in the US forex markets, a company needs to obtain a license called Retail Foreign Exchange Dealer (RFED). The process of issuance is accompanied by scrupulous verification of the company's capital sources, personal information of its owners, passing exams by key employees, etc.
Code of federal regulations for a Forex licence procedure suggest that a company must possess minimum adjusted net capital equal to or in excess of the greatest of:
- $20,000,000 plus five percent of the futures commission merchants or retail foreign exchange dealer's total retail forex obligation in excess of $10,000,000;
- any amount matching CFR’s minimum financial requirements for futures commission merchants and introducing brokers;
- the amount of adjusted net capital required by a registered futures association of which the futures commission merchant or retail foreign exchange dealer is a member.
If this threshold is reduced, it is required each time to notify the NFA. In this case, the entire reporting of the company is obliged to be transparent, i.e. the broker must put almost all data including the information about the accounts, etc., in the open access. The procedure of receiving a Forex business license takes from one to two years.
FX brokers in the USA are obliged to submit in time a great volume of the reports. The regulator at any time has the right to conduct an unannounced inspection of the company without prior notice. Such a level of control allows the National Futures Association and the Commodity Futures Trading Commission to react instantly to any violations of customer rights. Even the smallest violations can incur heavy fines.
Forex brokers licensing conditions in Switzerland
FINMA is fully responsible for the Swiss financial system.
Swiss brokers with an FX license have the status of a bank and the same strict control measures are applied to them as to the banking institutions. This makes brokers with a Swiss license reliable agents in the eyes of clients from all over the world. Swiss brokers are obliged to submit regular reports and be prepared for quarterly and annual audits. The Swiss system itself is recognized as one of the most reliable, not only because of its impeccable reputation and reinforced controls but also because of the high warranty obligations to customers in the industry.
Versatile jurisdictions (B)
The United Kingdom and Australia can roughly be included in the category of Forex broker regulators with relatively adequate cost requirements and access to attractive markets. The regulator in the UK is the Financial Conduct Authority (FCA), while in Australia it is the Australian Securities and Investments Commission (ASIC). These countries have lower capital and reporting requirements.
Forex brokers licensing conditions in the United Kingdom
Despite the less strict requirements, the UK FCA brokerage financial license is one of the most reputable in the world. To pass a Forex licence procedure, a company must be registered in Great Britain. For this purpose, such a legal form as a joint-stock company with limited liability (LTD) may be optimal.
The FCA refers to the Forex market as to the financial services industry which means that the requirements for companies applying for a license here are rather stringent. For example, high requirements are imposed on the company personnel, in particular to the director who must prove their understanding of this financial market segment and prove their professional qualification and experience in this field. At the same time, they must reside in the territory of the United Kingdom.
Capital requirements depend on the services that the company is going to provide within this Forex regulation:
- From GBP 125,000 GBP for companies engaged in brokerage activities, attracting funds from clients (e.g. STP brokers);
- 730,000 GBP for the companies that work on the market-maker or Dealing Desk Broker model and conduct operations on their own account and in their own name (purchase and sale of currency, securities, assets), i.e. have an impact on the market.
Forex brokers licensing conditions in Australia
To go through with a Forex licence procedure in this country, a broker, in addition to registering a company in Australia, must provide ASIC with comprehensive evidence of sufficient financial resources, sufficient qualifications of its employees and must be willing to comply with all legal requirements, including anti-money laundering provisions. ASIC has the right to demand from the company any documents and information it deems necessary.
Legal address in Australia is mandatory. Small businesses must submit accounts to ASIC within a month after the end of the year, and provide regular financial reports at the end of each fiscal year. Small businesses are considered to be those with gross revenue of not more than 25 million USD and the number of employees not more than 100 employees.
All other companies submit their audited financial reports to ASIC within 4 months after the end of the financial year, and provide financial reports within 4 months after the end of the fiscal year. In case of any violations (including filing false information to ASIC) or non-payment of state fees, the Forex license can be revoked.
Popular jurisdictions (C)
Level C includes Forex broker regulators from Cyprus, New Zealand, and Malta. In Cyprus, the official regulator is the Securities and Exchange Commission (CySEC), in New Zealand it is the Financial Markets Authority, and in Malta is the Malta Financial Services Authority (MFSA). Formally, these regulators provide a certain level of protection for clients of brokerage companies. They require brokerage companies to have local offices, but they do not require as detailed reporting as the countries mentioned above, and Forex licence procedure looks a bit less complicated. One of the main features of brokerage companies under these Forex regulations is that they work mainly with clients from Europe.
Forex brokers licensing conditions in Cyprus
An FX license obtained in Cyprus is the key to the entire European Union. Cyprus is the jurisdiction that forex brokers choose most often when they want to expand their activities in the EU. This is because the license issued by CySEC gives brokers the ability to sell and accept deposits from clients and to establish their presence legally in all member states of the European Union.
The requirements for the minimum amount of capital depend on the services that the company intends to provide. For STP brokers this amount is around 125,000 EUR, and for market makers, it is 730,000 EUR.
An office in Cyprus and at least three local directors, who must have experience in finance, are also required. The average time to obtain a license in Cyprus is six months.
The procedure for obtaining a Forex license in Cyprus is much easier compared to the aforementioned countries. Moreover, this jurisdiction is considered to be respectable, so the CySEC license will lend credibility to the brokerage company. Another advantage is that investors can contact the CySEC directly in case of any complaints.
Forex brokers licensing conditions in New Zealand
All companies willing to operate a Forex broker in New Zealand must obtain a financial license at FMA. Under the Financial Markets Conduct Act 2013 (FMC Act), a company must be licensed to make a regulated offer of derivatives. Every company (unless an exemption applies) which has a financial license is obliged to register with the Financial Dispute Resolution Service (FDR).
Forex brokers licensing conditions in Malta
Malta, like Cyprus, is a member of the European Union and, as a consequence, provides access to European markets. This jurisdiction is remarkable for its open economy, attractive tax environment, good reputation, and stable political and economic environment.
According to FX regulation license conditions and rules, a brokerage company must have an office in Malta and qualified staff (including directors) and must file regular financial reports. The entire process of obtaining a license takes an average of five to seven months. The minimum required capital for an STP broker is EUR 125,000; for market makers, this amount is EUR 730,000.
Offshore jurisdictions (D)
Well, what is a regulated broker's status in the case of offshore jurisdictions? This is where we step on fragile terrain. To understand who regulates Forex brokers offshore, we must first understand the very nature of this jurisdiction. An offshore in the context of the Forex market is a jurisdiction that is outside the traditional financial center of the world's activity. It means that the financial legislation is not developed or is poorly developed there, taxes are low, or there are significant tax benefits. Offshore jurisdictions still allow remote filing and receipt of documents. When registering it is easy to get by with a minimum package of documents. There is no need to have a large share capital and pay taxes.
Another distinctive feature of offshore jurisdictions is that obtaining a license does not require a preliminary audit. The decision to issue a license is made based on the submitted package of documents. Nobody checks the company's activity and its legal purity.
Keep in mind that opening bank accounts, connecting fiat payment systems, and establishing relationships with liquidity providers may prove challenging due to such a jurisdictional environment. Moreover, the pressure of big regulators forces offshore zones to adopt the established international financial legislation and tighten the conditions, imposing additional rules and restrictions.
Most offshore locations are on islands in the Pacific, the Indian Ocean, and the Caribbean. Classic examples of offshore countries are Belize, Guyana, Suriname, and others. The fee for obtaining a license in such Forex regulations can be as low as several thousand euros.
The above-mentioned countries are not all jurisdictions where it is possible to obtain a Forex license. You can also open a company and obtain a license through Forex broker regulators in Hong Kong, Singapore, Panama, Latvia, Czech Republic, Estonia, Ireland, Bulgaria, Gibraltar, Mauritius, India, and other countries.
In general, getting a license without professional help is not easy in any Forex regulation. Therefore, enlist the help of experienced law professionals who will help you to properly apply for a license, draw up documents in accordance with the legal requirements of a particular country and will monitor and adjust the entire process.
As part of the installation of the Forex Broker Turnkey solution, we can provide comprehensive assistance, including advice on Forex rules and regulation and how to become a licensed Forex broker.