A foreign exchange service is licensable under the Investment Services Act (hereinafter referred to as “ISA”), Chapter 370 of the Laws of Malta and is passportable under the EU Markets in Financial Instruments Directive (hereinafter referred to as “MiFID”), if the service relates to contracts for difference, derivatives in relation to foreign exchange and rolling spot forex.  Providing a service with respect to foreign exchange, which is acquired or held for investment purposes, is also licensable under the ISA, however this is not considered a MiFID service and therefore cannot be passported under this EU Directive.

The service of online forex trading is generally offered in one of two forms, namely either by dealing on own account or by acting as a riskless principal, often as a ‘white label partner’. Regarding the latter, the entity would be involved in executing two matching trades, one with the client and one offsetting trade with another principal, entered at the same time and place, with the entity acting as counterparty to both transactions. This is regarded as the carrying out of orders on behalf of clients.  For an entity to be able to execute orders on behalf of clients, a Category 2 Investment Services Licence is required. On the other hand, an entity which desires to deal on its own account is required to obtain a Category 3 Investment Services Licence.

The main difference in the requirements which are applicable to a Category 2 and Category 3 Investment Services Licence Holder, prior to the issuance of a recent notice by the Malta Financial Services Authority (hereinafter referred to as “MFSA” and “the Authority”, used to relate to the capital requirements which must be adhered to. Initially, a Category 2 Investment Services Licence Holder used to require an initial capital of Euro 125,000, as opposed to Euro 730,000 initial capital requirement for a Category 3 Investment Services Licence Holder. Through such notice by the Authority, companies applying for a Category 2 licence will be subject to a higher minimum initial capital requirement of Euro 730,000, similar to the initial capital requirement for a Category 3 licence holders, in light of the risks associated with this kind of business and potential loss of retail clients’ money. Such capital has to be satisfied on an ongoing basis and not just at licensing stage.

Apart from the new initial capital requirement for a Category 2 licence, the following criteria regarding the licensing of entities that would like to offer online forex trading to retail clients were brought about by the abovementioned notice.

Shareholding Structure

The MFSA will only accept an application for a licence if at least one entity holding a direct qualifying shareholding in the applicant is already regulated in the provision of financial services to a level which is satisfactory to the MFSA and whose activities are relevant in the context of the application. In addition, the Authority may also require active participation in the management of the proposed entity by the qualifying shareholder/s.

The following factors will be taken into consideration when processing an application for a licence:


  1. The shareholding  structure of the applicant;
  2. The quality and track record of the proposed management team of the applicant. To this effect, promoters should demonstrate several years of competence with reputable institutions to the satisfaction of the MFSA;
  3. The target markets and clients of the applicant;
  4. Due diligence investigations; and
  5. The level and nature of operational and business risk involved.


Competence Requirements

Board of Directors

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. To this effect, the Authority requires comfort that the proposed Board 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.

Other Staff

The competence requirements are applicable to individuals occupying senior positions with the licence holder and who report directly to the Board of Directors, such as Senior Manager, Risk Manager or Head of Trading:


  1. These individuals have to prove to the satisfaction of the Authority that they have an adequate track record with one or more regulated firms that operate within the forex industry.
  2. The trading of one’s own funds is not deemed to be sufficient for the purpose of the Authority’s competence assessment.
  3. The level of skills and expertise required of such employees will be considered in detail, taking into account the particular circumstances of the applicant in question, including the nature of the instruments to be traded, the type of clients to be targeted and the nature of the investment services to be provided.


Local Presence/Corporate Governance Set-up

Notwithstanding the fact that the bulk of such licence holders’ business is carried out through automated means,  licence holders are expected to have sufficient human resources and adequate internal controls in place for the day-to-day management of their business, the monitoring of trades, handling of clients’ enquiries and complaints, and risk management.

The Risk Management Function

The risk management function is considered to be an important function in such a business; hence it is a requirement for both Category 2 and Category 3 licence holders. To this effect, the Authority expects that the licence holder establishes a locally based risk management role responsible for designing, implementing and monitoring the risk management policies and procedures of the licence holder.

No derogation from the requirement to appoint a Risk Manager is given to applicants engaging in online forex trading, irrespective of the volume of business. With respect to Category 2 IS Licence Holders, the Authority may consider the outsourcing of such function to locally based entities. However, Category 3 IS Licence Holders need to have a full-time dedicated risk management function in place.

Moreover, 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 to be carried out in and from Malta.

Functions to be carried out in Malta

Regarding Category 3 licence holders, the following functions are to be carried out in Malta:


  • The selection of counterparties and conclusion of agreements therewith;
  • The establishment of trading limits and other parameters;
  • The setting of pricing policies; and
  • The monitoring of transactions undertaken with clients.


The Board of an online forex trading company is to have collective acumen in the area of online forex trading. The Board of Directors should include one or more independent directors having the requisite competence and experience in forex trading. To satisfy the local presence requirement, the Authority requires that a locally based board member is appointed.

Moreover, commencement of business is subject to having the requisite number of personnel in place that will guarantee compliance with the dual control principle on an ongoing basis. The Authority will not accept a structure wherein the licensable activities and other key functions of the licence holder are concentrated in one person.


Notwithstanding the fact that investment services providers are permitted to outsource some of their functions, such outsourcing arrangement should not be such as to reduce the company to a shell entity. For this reason, the applicant is required to show to the satisfaction of the Authority that the licensable activities applied for will be undertaken in and from Malta.

With regards to a limited number of support services, the MFSA may consider requests for time-limited outsourcing arrangements with appropriate external parties, in the initial stages. From an applicant initially relying on a number of support services from its parent company or other third parties, the Authority has to receive a detailed plan of any planned eventual phasing out of such outsourcing or support services arrangements.

Expert Advisors

Applicants are expected to have a clear policy on the use of expert advisors by its clients, as part of their trading strategy. Such policy has to be clearly communicated to the licence holders’ clients from the outset.

Record Keeping

Irrespective of the medium used to carry out transactions with clients, counterparties and other third parties, the licence holder is to have in Malta real time access to and control over all transactional data. The Authority would require full access to this data as and when required – including during Compliance Visits. The licence holder has to have this data fully preserved in its records on an ongoing basis at its head office in Malta, and an appropriate offsite backup system for risk management and business continuity purposes.


If the applicant intends to use a proprietary online trading platform, whether developed in-house or not, the Authority requires evidence that such system has been certified by an independent IT Auditor, duly qualified, and that it has a satisfactory track record when used by other regulated forex companies in the EU or other recognised jurisdiction. Such certification by the Auditor will be required on an annual basis.

Liquidity Providers/Counterparties

Applicants that would like to offer online forex trading to their clients should only appoint regulated financial services firms as their liquidity providers/counterparties, provided 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 for the provision of such services. The Authority requires details and the regulatory status of the liquidity providers/counterparties as part of the application review process.

Changes made to liquidity providers/counterparties, post-licensing, should be notified to the Authority.

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