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increased costs of transaction through a regulated exchange and, more importantly the levels of capital associated with the various instruments used.


Indeed the high costs of registration in the US has pushed some brokers to seek registration in more inexpensive but reputable jurisdictions. “Tere’s been a lot of activity in New Zealand and Australia with US firms looking at registration primarily because the capitalisation requirements are significantly less,” reveals Shipkevich.


It is only recently that stricter regulation of FX brokers beyond money-laundering rules has become Europe-wide, but is still under the remit of the local authorities. Tis has allowed


‘passporting’ - meaning brokers licensed in one EU jurisdiction can provide services in another.


“Generally for brokers to get a license they have to demonstrate experience in the sector. Ten there is the capital adequacy of financial resources – initial capital, operating expenses – regulators need to see the business plans and proposal and evaluate different scenarios – worst case to the best case,” explains Platis. Te broker needs adequate systems, an audit trail and levels of compliance.


Jurisdictions


While the rules may be similar, in reality not all jurisdictions are created equal. “One of the reasons that Cyprus has become so successful in attracting business from the Middle East, Asia and elsewhere is its experience on all these rules and while CySEC perhaps does not have advantages over the UK’s Financial Services Authority (FSA) in this respect, it certainly does over other jurisdictions,” says Platis.


Richard Frase


If you qualify for an EU passport there is nothing to stop you opening an operation in another EU country. However, how the joint EU legislation is interpreted and enacted can retain fundamental differences across nations, since the domestic regulatory authority generally takes precedence.


“European and US regulation have similar objectives, but come at them from different angles.”


Frase agrees; “I’ve seen differences in approach between jurisdictions that can be fairly significant.” He points out that while the FSA in UK is fairly open about its views on how firms should conduct themselves, other regulators can be less transparent.


18 | INSTITUTIONAL FX SERVICES - THE BROKERS HANDBOOK 2012/2013


“If a regulator does not fully understand the nature of an instrument or company structure it can become very defensive,” says Frase. Some firms, albeit not FX ones, have withdrawn from individual jurisdictions because of excessive red tape.


“Obtaining authorisation in the UK can be quite a time consuming exercise but it has high standards and once you have been through the FSA regulatory process you are in a good position if you want to set up elsewhere,” comments Frase.


Asia


Te Asian market is also seeing a boom in retail forex trading, but the regulatory infrastructure is in something of a turmoil. “Te regulators in Hong Kong and Japan particularly, are very strict,” warns Angelyn Lim, a partner of Dechert based in Hong Kong. She points to Singapore, Hong Kong and Taiwan which had to go through some regulatory soul- searching following the ‘Lehman mini-bond’ scandal of 2008.


Complex structured products backed by Lehman Brothers were distributed by local banks to retail investors as so-called minibonds. When Lehmans went bankrupt, most retail investors were left with almost nothing in spite of the banks promoting the products as being as secure as bonds and time deposits.


“Tis has led the Hong Kong Securities and Futures Commission to manage very carefully every aspect of selling, capital adequacy and registration in Hong Kong,” relates Lim.


Regulation & Compliance


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