What do you think traders most often pay attention to first when choosing a broker? Most likely, 9 out of 10 will give the same answer – the presence or absence of a license.

But in reality, a trading license serves more as an assistant to the company itself than to its clients. The successful opening of a brokerage company on the Forex market largely depends on the choice of jurisdiction in which it will be registered and licensed. The decision whether to use an onshore or offshore jurisdiction, or whether to obtain a license from a non-profit organization, can have significant consequences for the company’s tax obligations, regulatory requirements, and business opportunities.

What is a licensor (regulator)?

A trading license is a legal document that allows individuals or legal entities to engage in trading activities in a specific market.

  • It grants the licensee certain rights and resources to manufacture and/or market a specific product.
  • A license agreement may include intellectual property rights such as patents, trademarks, trade names, or technologies.
  • The licensee is usually required to comply with certain requirements and rules set by the licensing authority.

The application process for a trading license involves filing the required documents and paying the required fees. The validity period of a trading license varies by jurisdiction and can be renewed upon expiration.

Obtaining a trading license is crucial to legalizing business activities and ensuring compliance with laws and regulations in the trading industry.

A forex broker license is a permit issued to a company to engage in activities that facilitate foreign exchange trading for its clients. It serves as a consumer protection tool by ensuring that brokers, both onshore and offshore, comply with a set of established rules.

The process and requirements for obtaining a trade license

The process of obtaining a trade license involves several steps, which may vary depending on the jurisdiction. Typically, it requires:

  • filling out an application form;
  • providing the necessary documents, such as proof of identity, proof of address, and business registration;
  • paying the required fees.

The licensing authority will then review the application and conduct an assessment to ensure compliance with regulatory requirements.

Licenses in onshore jurisdictions

Onshore jurisdictions are developed countries that adhere to international agreements and meet the standards set by authoritative organizations (FATF, OECD). They can be conditionally divided into two subgroups: top-level onshores (USA, Switzerland) and second-category onshores (Cyprus, Singapore).

What distinguishes onshore jurisdictions:

  • A robust legal framework. Onshore jurisdictions have a well-established legal system that protects the rights of investors and market participants.
  • A developed financial infrastructure. Stable financial systems operate here, guaranteeing the transparency and security of financial transactions.
  • Strict control. The activities of forex brokers in onshore jurisdictions are subject to strict supervision by regulatory authorities.
  • A significant domestic market. Onshore jurisdictions typically have a large domestic retail market, which provides access to a wide client base.

However, strict rules also mean high requirements for brokers choosing these jurisdictions:

  • High capital and financial obligations. Onshore regulators impose strict requirements for the capital and financial stability of brokers.
  • Long licensing process. Obtaining a license in an onshore jurisdiction can take a long time and require collecting a package of documents.
  • Significant expenses. Licensing and operating in an onshore jurisdiction are associated with high annual fees and other expenses.
  • Presence requirements. Onshore regulators may require brokers to be physically present in the jurisdiction, have an office and staff.
  • Restrictions for foreign companies. In some cases, onshore jurisdictions may have restrictions for the operation of foreign companies, providing advantages to local market players.

Examples of onshore jurisdictions: Great Britain, Singapore, Cyprus, Hong Kong, Germany, Switzerland, Lithuania.

Licenses in offshore jurisdictions

What are the characteristics of offshore licenses?

  • Taxes. Offshore zones always have low rates or even complete exemption from taxes, which helps save money and increase profits.
  • Affordability. Lower costs for obtaining a license compared to onshore, which is suitable for new and small businesses.
  • Confidentiality. Registration in an offshore zone increases the confidentiality of the business and means protection of information about owners, directors and shareholders.
  • Access to markets. Compared to state regulators, registration in an offshore zone reduces dependence on the local market and, thus, expands the opportunities for working with clients from other countries.
  • Asset protection. The features of offshore jurisdictions strengthen the protection of companies from litigation.
  • Regulation. Offshore jurisdictions have fewer requirements than state ones. This allows companies to reduce costs and is better suited for small companies.

What are the possible disadvantages of obtaining an offshore forex broker license:

  • Legal. Differences in legislation: complexity of compliance, legal issues.
  • Reputational. Many associate offshore business with tax evasion and a negative image of the company.
  • Operational. Limited access to resources: difficulties in finding employees, suppliers, infrastructure.
  • Limited legal protection. Weak legal system. Offshore jurisdictions may have a less developed legal system, which limits the options for clients in the event of disputes or problems with the broker. Complexity of litigation. Litigation with offshore brokers can be more complex, expensive and time-consuming due to geographical remoteness and differences in legal systems.

There are several main types of offshoring:

  • Business offshoring: all or part of a company’s operations are moved to an offshore jurisdiction.
  • Investment offshoring: wealthy investors open offshore accounts to invest their funds.
  • Production offshoring: production of goods is moved to an offshore jurisdiction with lower labor costs.

Examples of offshore jurisdictions: Seychelles, Belize, Panama, Bahamas, Cayman Islands, Virgin Islands.

Examples of state (onshore and offshore) regulators

Securities and Exchange Commission (SEC). Created in 1934 in response to the stock market crash, the SEC is an independent federal agency tasked with protecting investors and maintaining fairness in the securities markets. The SEC’s primary mandate is to protect investors, meaning it combats fraud and market manipulation by ensuring that investors receive accurate and transparent information. The SEC also oversees the operations of exchanges, brokers, and dealers, setting rules for trading securities. It also has enforcement powers, namely investigating and prosecuting violators of securities laws.

Cayman Islands Monetary Authority (CIMA). The Cayman Islands Monetary Authority was formed in 1997 by the merger of the Cayman Islands Department of Financial Services Regulation and the Cayman Islands Monetary Authority. CIMA’s purpose is to regulate and supervise financial activity in the Cayman Islands and to ensure the stability of its currency.

Scope of regulation: CIMA oversees a wide range of financial services, including:

  • Banking of all types;
  • Fiduciary services (financial services related to asset management);
  • Insurance;
  • Investments and securities.

What CIMA’s powers include:

  • Licensing and registration;
  • Appointment/replacement of officers;
  • Referral to court;
  • Recommendation of prosecution.

Non-governmental regulators

However, regulators are not necessarily tied to a specific jurisdiction. Non-profit organizations can also act as broker licensees. In the brokerage industry, these are self-regulatory organizations (SROs), which are non-governmental entities empowered to develop and enforce industry and professional rules and standards.

In the financial sector, as with onshore and offshore regulators, SROs have the primary goal of protecting investors. To do this, they establish trading rules, codes of conduct, and procedural standards aimed at ensuring ethical, fair, and professional conduct of business. Because SROs influence the rules and regulations in their field, they often act as “watchdogs” protecting against fraud and unfair practices.

The ability of SROs to impose sanctions on violators is not based on direct authority granted to them by the state. Control over compliance with SRO rules is usually carried out using internal mechanisms regulating business operations. These mechanisms can be based on internal SRO rules or on agreements between members of the organization.

The principles and rules of the SRO are developed and approved by its members. Membership in the SRO implies mandatory compliance with these rules, otherwise sanctions such as fines or exclusion from the organization may be applied to the violator.

FINRA (Financial Industry Regulatory Authority)

An example of the most well-known self-regulatory organization (SRO) is the Financial Industry Regulatory Authority (FINRA). It has the authority to license securities brokers and to audit these brokers and related firms.

FINRA’s goal is to promote ethical practices in the securities industry and increase transparency among its participants. In addition, FINRA oversees arbitrations between investors, brokers, and other interested parties. It is important to note that FINRA is not a government agency. It is a private organization created by its members – financial institutions such as broker-dealers and financial professionals. Thus, the rules and standards developed and monitored by FINRA are self-regulatory.

IFMRRC (International Financial Markets Regulation Centre)

Another example of a non-governmental regulator IFMRRC is the International Financial Markets Relations Regulation Centre (IFMRRC). This is a non-profit organization designed to improve the quality of services provided by brokers, dealing centers, as well as the reliability of services offered by participants in the cryptocurrency market.

The mission of the IFMRRC is to ensure maximum security of traders’ and investors’ transactions in the stock, currency and cryptocurrency markets. To achieve this goal, the Center certifies companies providing services in the Forex and BO markets, as well as in the cryptocurrency markets.

The most important feature of the IFMRRC is its independence. This means that the founders of the organization do not include companies providing services subject to IFMRRC certification. Thus, influence on certification decisions, as well as on any other decisions made by the Center, is excluded.

IFMRRC certificates of conformity are mandatory for companies that have received them. Organizations planning to undergo the certification procedure must strictly comply with all the requirements of the Center.

Why are licenses needed anyway?

Legal Protection and Reputational Support. In the competitive marketing industry, a trade license is a sign of legitimacy. Customers and investors are more likely to do business with a business that has a trade license, which inspires trust and credibility. This element is especially important for marketing efforts, creating the basis for strong relationships with both customers and investors.

Access to Exclusive Niche Audience Segments. An often overlooked benefit of a trade license is the potential access it provides to exclusive professional groups. Having a valid trade license can open doors to joining certain industry associations and networks, facilitating valuable connections and opportunities for business growth.

Access to New Markets. A trade license allows businesses to explore new markets and reach a wider customer base to expand their operations and increase their revenue potential.

Protect Intellectual Property. Obtaining a trade license helps protect a business’s intellectual property rights, such as patents, trademarks, and copyrights. This ensures that no one can infringe on their unique creations or ideas.

Onshore and offshore broker: how to choose?

Here are some things to consider when choosing a broker whose license you will be more comfortable working with:

Regulatory framework:

  • Onshore licenses: meet the high standards set by regulatory bodies in developed countries, ensuring investor protection and strengthening the broker’s reputation. Example: FCA license (UK) guarantees a high level of trust and security for clients.
  • Offshore licenses: offer more lenient regulatory conditions, which can be attractive to brokers looking to reduce costs. Example: Belize licenses are usually cheaper and quicker to obtain.

Cost and Time:

  • Onshore licenses: require higher costs and longer processing times due to strict compliance checks and regulatory requirements. Example: FCA licenses can be expensive due to capital requirements and ongoing fees.
  • Offshore licenses: are generally cheaper and quicker to obtain, making them attractive to new brokers looking to minimize costs. Example: Belize licenses are an affordable option with a short turnaround time.

Business objectives:

  • Onshore licenses: suitable for brokers focused on operating in a strictly regulated market and attracting clients who value security and compliance. Example: FCA license is suitable for clients focused on reliability in preserving their deposits.
  • Offshore licenses: suitable for brokers who want to offer flexible trading conditions with lower operating costs. Example: Belize license may be attractive to brokers looking to optimize costs.

Strategic Choice:

  • Onshore Licenses: May be a more strategic choice if new markets are planned for the future. Example: An FCA license may facilitate expansion into other regulated jurisdictions.
  • Offshore Licenses: Suitable for brokers targeting niche markets or wanting to test new business models. Example: A Belize license may be appropriate for pilot projects or operating in less regulated regions.

We got registered in Comoros – why is this important?

We are pleased to inform our clients that Paradice trade LTD, the owner of the ParadTrade brand, has been officially registered in Comoros at Bonovo Road – Fomboni, Comoros Union.

The company is regulated by the Mwali International Services Authority (MISA) which plays a central role in ensuring a stable and prosperous financial sector on the autonomous island of Mwali (Moheli) in the Union of Comoros. As an authoritative regulatory body, MISA tirelessly promotes and regulates financial institutions, ensuring that they comply with international standards.

MISA’s activities are multifaceted:

  • Ensuring transparency and efficiency of the licensing process. MISA creates a favorable environment for financial institutions to operate by providing them with clear and understandable licensing conditions.
  • Developing a multifaceted financial system. The regulatory framework developed by MISA covers a wide range of financial services, including banking, insurance and asset management.
  • Compliance with international standards. MISA adheres to strict international regulations, such as the Financial Action Task Force (FATF) standards. This ensures a safe and sound financial environment on the island, protecting the interests of investors and enhancing Mwali’s reputation as a responsible financial center.
  • Ongoing customer support. MISA provides ongoing regulatory support to financial institutions, helping them adapt to evolving international standards. Regular audits, compliance reviews and advisory services provided by MISA help maintain a high level of operational integrity in the island’s financial system.

Overall, MISA acts as a reliable regulator and agent of progressive change, working tirelessly to make Mwali’s financial sector competitive, transparent and attractive for investment.