Online Forex Trading: Updated Criteria for Prospective Applicants

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The Forex market is the leading and most liquid market in the world with an average daily turnover of $3.2 trillion and includes all of the currencies in the world. The Forex market is also referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’.This market is open 24 hours a day, 5 days a week with the most important world trading centres being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. Generally speaking, forex trading is the speculation on the price of one currency against another.

As a result of the various factors noted by the Malta Financial Services Authority (hereinafter referred to as “MFSA”), while handling applications in this sector as well as various risk warnings issued at EU level alerting retail investors to the main risks involved in forex trading, MFSA is setting out its updated criteria regarding the licensing of entities that would like to offer online forex trading to clients in terms of the Investment Services Act and the Malta Financial Services Act.

Compliance by Prospective Applicants

Companies must ensure that any application for license submitted to the MFSA is in line with the provisions of the policy (outlined hereunder) and that it would be in a position to comply with relevant conditions upon commencement of its activities and throughout the course of its licence. These licensing criteria are applicable with immediate effect to all new applications submitted to the Authority after 14th July, 2015.

Moreover, applicants whose application is still being processed by the MFSA are also required to come in line with the below-mentioned additional criteria with immediate effect. However, a period of one year from the date of publication of the notice is being granted for entities to regularise their position with regard to Shareholding Structure and Capital Requirements.

The objective of these criteria is to provide clear guidance to the industry of the aspects that applicants wanting to offer such service to retail clients are expected to satisfy. Other factors which have led to further scrutiny of the licensing criteria include the following: the high risks associated with forex trading by retail investors due to the reliance on automated systems, the complex nature of forex products and the accessibility to such products by retail investors.

Updated and Additional Criteria

Shareholding Structure

Additional criteria have been introduced which shall apply to potential applicants for a Category 2 or a Category 3 Investment Services Licence that would like to engage in online forex trading. In particular, where the client is not authorised as an investment services provider either in Malta or in its own country of origin, hence not being subject to supervision, in considering whether to grant authorisation, the MFSA may require an active participation by way of shareholding interest by a reputable investment services institution or by any other entity involved in the provision of financial services regulated activities. This is to be to the satisfaction of the MFSA and the activities must be relevant in the context of the application in question. The MFSA will take certain factors into consideration such as the shareholding structure, the target market and due diligence investigations in considering the waiving or otherwise of the shareholding participation.

Capital Requirements

Companies applying for a Category 2 licence will now be subject to a higher minimum initial capital requirement of €730,000. Such capital requirement has to be satisfied on an ongoing basis and not just at licensing stage.

Competence Requirements

The members of the Board of Directors are expected to collectively possess the requisite competence and experience specifically in the field of online forex trading. The Authority needs to be satisfied that the proposed members of an online forex company collectively have the necessary competence to be able to effectively contribute to the decision-making process of the Board. Such requirements are also applicable to individuals occupying senior positions, who report directly to the Board, such as the Senior Manager, the Risk Manager or Head of Trading (hence they have to likewise have an adequate track record within the forex industry).

Local Presence/Corporate Governance set-up

Licence holders are expected to dedicate sufficient human resources as well as put in place adequate internal controls for the day-to-day management of their business, the monitoring of trades, handling of clients’ enquiries and complaints and risk management.

In the case of Category 2 and Category 3 licence holders, the authority expects that the establishment of a locally based risk management role responsible for designing, implementing and monitoring the risk management policies and procedures of the licence holder (without derogation).

In the case of Category 2 IS License Holders, the Authority may consider the outsourcing of such function to locally based entities and in the case of Category 3 IS License Holders are expected to have a full-time dedicated risk management function in place. The Authority expects that the core licensable activities, including the setting of trading policies and parameters and monitoring of the execution of electronically-generated trades via the applicant’s online trading platform/s of licence holders that provide online forex trading, are carried out in and from Malta.

With respect to Category 3 license holders, the Authority also expects that the following activities/functions are carried out in Malta:

  1. The selection of counterparties and conclusion of agreements therewith;
  2. The establishment of trading limits and other parameters;
  3. The setting of pricing policies;
  4. The monitoring and control of transactions undertaken with clients.

 

The Board of an online forex trading company is expected to have collective expertise in the area of online forex trading. Furthermore, it should include one or more independent directors having the necessary competence and experience in forex trading. The Authority shall also require that a locally based Board member, who ideally has the necessary competence and experience in forex trading, is always appointed in satisfaction of the local presence requirements. The dual-control principle has to be adhered to on an ongoing basis. Notwithstanding the fact that outsourcing is allowed, it should not be such as to reduce the company to a shell entity.

Applicants are expected to have a lucid policy used by its clients of expert advisors as part of their trading strategy which policy should, from the outset, be clearly communicated to the license holders’ clients. Whatever the medium used to carry out transaction with clients, counterparties and other third parties, the Authority expects the licence holder to have real time access in Malta to and control all transactional data. The Authority would require full access to this data as and when required, including during Compliance Visits. In addition, data has to be fully preserved in its records on an ongoing basis at its head office in Malta and shall have in place an appropriate offsite backup system for risk management and business continuity purposes. It is important that such information held at its offices in Malta is consistent with the provisions of the Investment Services Act and the MFSA Act, and any regulations or rules issued thereunder.

Systems

Where the applicant intends to use a proprietary online trading platform, be it developed in-house or not, the Authority would need to be provided with evidence that such system has been certified by an independent IT auditor duly qualified and that it has a satisfactory track record as a result of having been used by other regulated online forex companies in the EU/EEA or other recognised jurisdiction. Such certification will be required on an annual basis. Needless to say, the license holder should take all the necessary measures to ensure that all of its employees are provided with the necessary training on the trading platform(s) to be offered to clients.

Liquidity providers/Counterparties

Applicants should only appoint regulated financial services firms as their counterparties/liquidity providers, provided further that these are already authorised by the relevant competent authorities in an EU, EEA or other jurisdiction that has the equivalent regulatory framework as in Malta.

Consumer Protection Measures

The Board of Directors would need to ensure that the entity takes adequate measures to enhance consumer protection and awareness of the risks involved in cases where online forex trading is offered to retail investors. In effect, the following warnings will be required to be displayed on the homepage of its website or on any other promotional/advertising material:

  1. A warning on the riskiness of engaging in forex trading; and
  2. A warning that trading in forex instruments runs the risk of losing the entire sum invested;
  3. Any other warning or disclosure required under the relevant rules or regulations.

 

Moreover, the licensed entity must also ensure that its web-portals contain the appropriate educational material aimed at guiding consumers who are new to forex trading on the nature and specificities of this type of investment; provide a clear explanation of how an online trade can be made over the system and explain what type of skills are required to carry out online trading activity and to limit trading risk.

Applicants and licence holders are also required to abide by ESMA guidelines on the sale of complex products where online forex is specifically mentioned as a complex product.