Foreign currency exchanges (forex or FX) run non-stop across the globe through over-the-counter (OTC) markets. The global nature of this boundary-less market allows traders seamless access through a broker despite geographical boundaries. Having a forex broker licence greatly improves your reputation with the trading community and it boost client’s trust. There are many additional benefits, too. Being a licensed broker can gives you the credibility needed to open bank accounts and establish payment processing solutions and gain relationships with trading platform providers.
The financial instrument offered by forex brokers is typically a Contract for Difference (CFD), a contract between two parties, a buyer and a seller, allowing a trader to speculate on the movement of the price of the underlying asset without actually owning the asset. Forex regulations require a forex broker licence authorizing you to arrange and deal in currencies. In many cases, it is a financial services broker licence with permissions for various financial instruments including forex, commodities, futures and shares.
Compliance rules and regulations may vary from country to country in terms of offered leverage, required deposits, reporting requirements, and investor protections, but generally there are three models forex brokers follow. And, depending on the jurisdiction, the regulator may have a specific authorization for the model or combine all in to one.
1) Principal or Market Maker – is a broker model where the broker deals as counterparty to the client choosing what trades to warehouse passing the balance on to the market. The Principal sets bid and offer prices in a certain currency pair; commits to accepting deals at these prices within certain constraints; and, takes the resulting exposure on to their own book, at least initially. A Market Maker earns income from the spread and resulting profit and loss.
2) Agency Model – essentially the broker sources liquidity in the market without taking on principal risk themselves. Also known as Straight-Through-Processing (STP), the method in which the broker delivers prices to its clients and how those clients executed orders is done over an Electronic Communication Network (ECN). It may involve aggregating prices from various liquidity providers or plugging in a source such as a Market Maker to execute trades. A broker using the Agency Model earns income from the spread or mark-up of the price.
3) Introducing Broker – is a model used to solicit clients, but does not have broker operations or accept money or other assets from customers. Therefore, it is for marketing purposes, and the client is introduced to either an affiliated Agency Model or Market Maker broker. The Introducing Broker earns income from commissions.
Speculative trading in the forex market is gaining enormous attention and continues to grow. Although the risks are greater than tradition financial products because of leverage, the lure of making money is tempting to both novice investors and the more experienced. But scams, Ponzi schemes and other bad practices and plagued the retail market. As a result, brokers look to be licenced in jurisdictions where there are regulations set by competent authorities to ensure such practices are avoided.
Regulations are aimed at protecting individual investors and ensuring fair operations to safeguard clients’ interests; but, also ensure an environment protecting the broker’s interests and credibility, too. Robust regulations have a way of attracting brokers with the best practices while keeping nefarious and unscrupulous people out.
In today’s market, the most important criteria for an investor when selecting a forex broker is the regulatory approval status of the broker and which authority governs the broker.
The application procedure for a forex license is quite complicated and time consuming, thus enlisting our support to guide you through it will ensure that you follow all the correct procedures and supply the right documents to the regulator. This will save you time and money.
Receive a comparison of the most popular forex broker licence jurisdictions with requirements and costs!
One of the most highly respected jurisdictions, a UK forex licence brings credibility to a financial services firm. The regulatory body responsible for the issuing of forex licenses and monitoring of activity is the Financial Conduct Authority, known as the FCA. Forex brokers are licensed to have either full market-maker permissions or given a matched-principle licence (agency model, STP).
The Bahamas has a 90-year modern-day financial services history paralleling regulation’s evolution in the US, UK and Europe. Under the country’s legislative framework, the Securities Commission of The Bahamas (SCB) is the country’s regulator with a purpose to “contribute to the growth and development of a financial services sector that is vibrant and competitive.”
The regulatory body responsible for the issuing of licenses and monitoring financial services activities is the Vanuatu Financial Services Commissions, also known as the VFSC. The VFSC was established to provide a regulatory framework for all financial companies from rule making and investigatory practices, to powers of enforcement and ensuring statutory conditions are met.
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