CYprus Forex Company Formation

[soniafx]

Hi,


I have gone through most of the posts regarding the legal side of forming a Forex Company in Cyprus. The one thing that perplexes me that most, is the difference in capital requirments. There is the option of 200K Euros for a brokerage firm and the other option for 1million Euros where the only extra licence you get is Dealing on Own Account. You have mentioned that "most" brokerage firms do take the Dealing on Own Account licence even if that means an extra 800K in capital requirments. My question is why do brokerage Firms go for this Dealing on Own Account option? What does it allow them to do that justifys the lock up of an additional 800K Euros, which otherwise can be invested in more productive activities (from the 1Million Euro Capital requirments I think firms are required to maintain at least 92% in cash at all times!)


Dealing on Own Account is the ability to basicly do prop trading - trade with the companies funds! I do not see how is this connected to accepting clients money and allowing them to trade forex with you? Is it becouse Dealing on Own Account allows the firm to take the other side of the clients trade? Be a Market Maker? why Dealing on Own Account is so important and what does it mean in the context of a Forex company?


I would appreciate your answer as this is the one thing remaining to clarify before we consider Cyprus.


Thank you

 

[redeye]

Isn't it explained in details here: invalid1c/forum/content/39-forex-trading-license-cyprus-can-paid-up-capital-cover-expenses.html

A Forex Trading Company in Cyprus needs to be licensed by the Cyprus Stock Exchange Commission to operate as a Cyprus Investment Firm (CIF) and provide foreign exchange services where these are connected to the provision of investment services. The type of services that will be offered by the Forex Trading Company is solely based on the type of CIF they would like to be. Typically other Forex Trading Companies apply for Reception and Transmission of Orders, Execution of Orders and Dealing on Own Account when they have their own trading platform however there are a few that also apply for Investment Advice and Portfolio Management.
According to the Law the capital requirements are as follows:


A CIF that provides reception and transmission of orders in relation to financial instruments and/or execution of orders on behalf of clients and/or portfolio management and/or provision of investment advice and holds clients' money or/and client’s financial instruments, must have an initial capital of at least two hundred thousand euro (€200.000)


A CIF that provides reception and transmission of orders in relation to financial instruments and/or provision of investment advice and does not hold clients' money or/and clients’ financial instruments, and which for that reason may not at any time place themselves in debt with their clients, may have an initial capital of at least eighty thousand euro (€80.000); or at least forty thousand euro (€40.000) and professional indemnity insurance covering all member states or some other comparable guarantee against liability arising from professional negligence, that it enters into with an insurance undertaking, representing an amount of at least one million euro (€1.000.000), per claim, and in aggregate at least one million five hundred thousand euro (€1.500.000) per year for all claims.


A CIF that provides one or more of the following investment services or/and performs the following investment activities shall have an initial capital of at least one million euro (€1.000.000):


(a) dealing on own account;


(b) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;


© placing of financial instruments without a firm commitment basis;


A CIF that wishes to apply, for example, for dealing on own account and reception and transmission of orders will need to have an initial capital of €1.000.000.


The share capital can be used for business purposes immediately after being paid up. Such business purposes however should be legitimate i.e. purchase of assets, payment of expenses etc.

 

[soniafx]

No, it is not.


The question why is from line 3 - why do borkers need Dealing on Own Account - which is the only difference between the 200K and 1Million euro capital requirments ( I am not talking about (b) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; © placing of financial instruments without a firm commitment basis becouse very few brokers do that. But most (actually all!) do opt for the Dealing on Own Account licence and my question is why?


Regards

 

[redeye]

I think you question should be addressed in the forex trader forum that is the proper forum since the nature of this question would require a Industry professional to answer.


I found the following:

Online Forex Trading acting as a riskless principal (“white label partner”) may benefit from a less restrictive regulatory regime than forex traders dealing on own account.
White label partners are confined to the execution of two matching trades (one with the client and one offsetting trade with another principal) entered at the same time and price, with the white label partner acting as counterparty to both transactions, meaning that their exposure is significantly less than those of forex traders dealing on own account.


Consequently, white label partners shall require a Category 2 licence i.e. section 1 & 2 - “Licence Holders authorised to provide any Investment Service, and to hold or control Clients’ Money or Customers’ Assets, but not to operate a multilateral trading facility or deal for their own account or underwrite or place instruments on a firm commitment basis.”


Category 2 licence holders are subject to a significantly lower share capital of EUR 200,000 compared to EUR 1,000,000 (for a forex trader dealing with own funds) and have to have own fund which are higher than either (1) the initial capital; (2) the sum of all the risk components calculated in terms of the rules but excluding the operational risk component; or (iii) fixed overheads requirements.

 

[soniafx]

Yes, you right! That does answer my question.


Thank you!!!

 

[JohnLocke]

Seems the thread already good answered, thank you redeye