Malta Forex Company: setting up Forex Companies

Dr. Maria Chetcuti Cauchi | 27 May 2013

Malta Forex Company setting up Forex Companies

The MFSA: Malta's regulator for FOREX business

The Malta Financial Services Authority (MFSA) is responsible for the licensing, regulation and supervision of investment services such as providers operating in and from Malta. The Investment Services Act provides that no person shall provide, or hold himself out as providing, an investment service in or from within Malta unless he is in possession of a valid investment services licence; foreign exchange acquired or held for investment purposes is one of the instruments listed in the Investment Services Act and as such a company offering services related to financial exchange must obtain a licence from the MFSA before doing so. The MFSA also licenses, regulates and supervises banking, companies, insurance, collective investment schemes and recognised investment exchanges.

What is FOREX?

The foreign exchange market is the largest, most liquid market in the world with an average traded value that exceeds 1.9 trillion dollars per day and includes all of the currencies in the world. Foreign Exchange is also known as ‘FOREX’, ‘FX’ or ‘the currency market’ and is the market in which all world currencies are traded. The foreign exchange market is “decentralised” meaning that it is an international network with no fixed, physical location. It is an over-the-counter (OTC) market where brokers and dealers (‘intermediaries’) negotiate directly with one another.

Malta Forex Licensing: The Investment Services Act, 1994

Foreign exchange is regulated by the MFSA as an investment service and as such providing foreign exchange products and services in and from Malta is an investment service which is a licensable activity. 

The law provides that in granting a license, the MFSA, as the competent authority, may subject the license holder to such conditions, as it may deem appropriate.

The conditions which MFSA generally imposes upon an investment services license holder are generally based on proper protection of investors, the proper carrying out of the operation and anti-money laundering procedures.

The Investment Services Act lists the following services as licensable:

1.    Reception and Transmission of Orders in relation to one or more instruments;

2.    Execution of orders on behalf of other persons;

3.    Dealing on own account; 

4.    Management of Investments;

5.    trustee, custodian or nominee services;

6.    investment advice;

7.    Underwriting of instruments and, or placing of instruments on a firm commitment basis;

8.    Placing of Instruments without a firm commitment basis; and

9.    Operation of a Multilateral Trading Facility

 

Malta Forex License Categories

There are four categories of an investment services license;

Category 1

The category 1 license is of two types:

a)    Category 1a - Licence Holders authorised to receive and transmit orders in relation to one or more instruments and, or provide investment advice and, or place instruments without a firm commitment basis but not to hold or control Clients’ Money or Customers’ Assets.

b)    Category 1b - License holders authorised to deal as agent, arrange deals or provide advice in terms of the Act solely for non-private customers but not to hold or control clients’ money or customers’ assets, deal for their own account or underwrite.

Category 2

Category 2 license holders are authorised to provide investment services, and to hold or control clients’ money or customers’ assets, but not to deal for their own account or underwrite.

Category 3

Category 3 license holders are authorised to provide investment services, to hold and control clients’ money or customers’ assets, and to deal for their own account or underwrite.

Category 4

Category 4 license holders are authorised to act as trustees or custodians of collective investment schemes.

Licensing of Forex Providers in Malta: Some Considerations

In the case of foreign exchange products, when a company is providing investment advice or receiving and transmitting orders in relation to FOREX and FOREX derivatives, it will require a Category 1 Investment Services Licence; FOREX traders acting as riskless principals (execution of two matching trades where the security being traded involves two orders, with the execution of one of these orders dependent upon the receipt or execution of the other) require a Category 2 licence whereas a Category 3 Investment Services Licence is required if the FOREX business is dealt with on own account as a market maker.

Online FOREX

The business of online foreign exchange trading is generally provided in one of two forms, either by dealing on own account (market makers) or by acting as a riskless principal (often as a ‘white label partner’). With respect to 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 price, with the entity acting as counterparty to both transactions. This is considered as execution of orders on behalf of clients. In order for an entity to execute orders on behalf of clients, a category 2 investment services licence is required. On the other hand, an entity which would like to deal on its own account (only applicable to entities which are market makers) is required to have a Category 3 investment services licence.

The main difference in the requirements which are applicable to a category 2 and a category 3 investment services licence holder relates to the capital requirements which must be satisfied. A Category 2 investment services licence holder is required to have an initial capital of Euro 125,000 and has to have own funds which are higher than either: [i] initial capital; or [ii] the sum of all the risk components calculated in terms of the rules but excluding the operational risk component; or [iii] the fixed overheads requirement. A category 3 investment services licence holder is required to have an initial capital of Euro 730,000 and should have own funds which are higher than either: [i] initial capital; or [ii] the sum of all the risk components calculated in terms of the rules including the operational risk component.

Malta Forex Licensing Process

The Preparatory Stage

This stage usually includes a meeting with the Authority, submission of a draft Application Form and supporting documentation, review by the MFSA, delineation of the Standard License Conditions to be applied to that particular Applicant by the Authority.

The Pre-Licensing Stage

This stage involves the issuance of an 'in principle' approval for the license by the Authority, incorporation of the corporate vehicle, submission of final and signed application form and supporting documentation, other documents arising during the application process, including audited financial projections.

The Post-Licensing/Pre-Commencement of Business Stage

This stage requires the satisfaction of ad hoc requirements arising post licensing but pre-commencement of business.

The applicant must be „fit and proper‟ and be prepared to act in accordance with the law and the Standard License Conditions attached to any license which is issued.

The speed of the Preparatory Stage (stage one) is dependent on the efficiency of the applicant. However, stages two and three can be completed within six to twelve weeks.

The Growing Importance of Regulation for FOREX Businesses

On the 5th of December 2012 the European Securities and Markets Authority (“ESMA”) issued a notice on investing in foreign exchange warning retail investors to always invest with companies that have valid investment licences.  This notice was brought about by the realisation of an increase in unauthorised firms offering transactions, or platforms to trade, in currency derivatives in the FOREX market (such as ‘contracts for difference’ [CFDs], ‘FX forwards’, and ‘rolling spot contracts’).

Unlike companies licensed in the EU to offer investment services, unlicensed companies offering FOREX products and services are not authorized to do so; without a licence a company cannot even offer trading platforms. An unlicensed company is not regulated by any authority and as such it is not bound to abide by investor protection rules such as safeguarding of client assets, giving clear information, disclosure of risks involved in trading in foreign exchange, suitability and complaint handling. Also, due to the company not being authorised, clients of such unauthorised service providers would not have access to complaints procedures (financial ombudsmen) or compensation schemes in the event of something going wrong.

Therefore in light of ESMA’s campaign to have the business of FOREX service providers regulated throughout the EU, it is of utmost importance that potential FOREX product and service providers apply for a license before commencing their operations. Once an investment services licence is obtained in one European state such as Malta, the service provider will, in certain instances be able to offer its products and services throughout the European Union through the use of passporting.

Passporting of FOREX licenses

Passporting refers to the right of a person to establish a branch, or provide services, in a Member State or EEA State other than that in which it has its head office and this right is governed in Malta by the European Passport Rights for Investment Firms Regulations (the “Regulations”) which implements the Markets in Financial Instruments Directive 2004/39/EC.

Passporting reduces cost and bureaucracy and opens up markets while helping to maintain investor confidence in high regulatory standards. For these reasons it is of great benefit for potential FOREX investment service providers to obtain a licence in Malta in order to be able to offer their services throughout the EU and EEA.

The services which are allowed to be passported are divided by the Regulations into “Core Services” and “Ancillary Services” and article 11 of the Regulations provides that “A European right shall entitle a Maltese investment firm to provide one or more core investment services: Provided that a European right may additionally entitle a Maltese investment firm to provide one or more ancillary service, but it shall in no case be exercised solely in relation to ancillary services”.

The relevance of the above article comes about due to the fact that Foreign exchange services connected to the provision of investment services (spot FOREX) are classified by the regulations as ancillary services  and therefore this ancillary service may be passported when it is offered in connection or ancillary to a core service such as:

  • Reception and transmission of orders in relation to one or more financial instruments;
  • Execution of orders on behalf of clients;
  • Dealing on own account;
  • Portfolio management;
  • Investment advice;
  • Underwriting of financial instruments and, or placing of financial instruments on a firm commitment  basis;
  • Placing of financial instruments without a firm commitment basis.

Licensed companies offering FOREX products and services can only passport to other EU and EEA jurisdictions when the provision of FOREX includes the use of derivatives, CFDs, futures, options, swaps in relation to securities, currencies, interest rates or yields and as discussed further above, in cases where the provision of foreign exchange is offered as an ancillary service to any of the above listed core investment services.

Therefore in summary Although FOREX is not, strictly speaking, an instrument under MiFID (and thus pass-porting rights do not arise automatically in this context), there are still certain instances where passporting is possible:

1)      Derivative instruments which are commonly used in relation to FOREX, such as CFDs and Futures, qualify as ‘instruments’ under MiFID, and thus, they enjoy automatic passporting rights.

2)      Services provided in relation to spot FOREX where they are ancillary to other, pass-portable core activities as listed above.

3)      Certain types of spot FOREX transactions can be deemed to be equivalent to transactions made using derivatives and may thus also be pass-portable

Why Malta?

Malta has achieved notable success in the financial services industry over the past years. This success is attributable to a number of factors such as favourable taxation systems, lower costs and a well trained and educated human resource. Malta’s accessible regulator, competitive costs and business friendly environment have in fact, led it to become an interesting option for FOREX service providers seeking to work within a well reputed regulatory regime. Malta has attracted[r10]  to its shores various market players in the field of foreign exchange, ranging from specialist software providers interested in using Malta as a base of operations, to FOREX specialized asset managers and FOREX trading platforms seeking their way of entry in the EU Market. FOREX, albeit relatively new, stands to attain the same level of success as that of other sectors of the industry and this is mainly due to the below factors.

Legal Clarity

 Malta recognises and regulates foreign exchange as an investment service regulated by the Malta Financial Services Authority under the Investment Services Act; this is in contrast to various other countries where FOREX suffer from a lack of legal and regulatory clarity. Malta’s legal clarity gives rise to various advantages, including high and clear regulatory standards, certain opportunities for passporting, as well the comfort of having certainty as to the applicable legal and regulatory regime.

Flexible Forex Regulation

Malta also has flexible rules with respect to leverage ratios. This allows Malta FOREX businesses to cater for a broader array of investor risk appetites. The Malta FOREX solution is therefore becoming an increasingly popular choice among businesses looking for a viable FOREX domicile. 

How we can help you

Set up & Pre-Licensing

At the pre-licensing stage, our firm provides assistance to co-ordinate meetings with the MFSA in order to discuss the proposed forex activity in Malta and assists in the drafting and completion of the documentation required for licensing purposes such as forex business plans and the completion of the other various official documents required.

Chetcuti Cauchi's lawyers can also provide specialized assistance in order to choose the most appropriate and tax-efficient legal structure in accordance to the envisaged nature, scope and extent of the proposed activity. We also assist client in choosing collaborators, external service provides, banks and payment solutions.

Post-Licensing & Compliance

Upon the obtainment of the licence, investment services providers are required to comply, on an on-going basis, with the various post-licensing requirements established by the relevant EU directives which are transposed into Maltese law. Our team provides a comprehensive compliance advisory service which ensures that all compliance matters are attended to including amongst others the preparation of all regulatory returns, the drafting of policies and reports and the handling of statutory notification requirements; advice is also provided in relation to the various licence conditions which may be imposed by regulator.


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Key Contacts

Dr Jean-Philippe Chetcuti

Global Managing Partner & Founder

+356 22056411

Dr Priscilla Mifsud Parker

Senior Partner - Corporate, Trusts & Fintech

+356 22056422

Mr Colin B German

Chief Executive Officer

+356 22056442

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