The MFSA has tightened up its licensing requirements for entities desirous of offering online forex trading to retail clients. The complex nature of forex products, excessive reliance on automated systems, and the accessibility to such products by retail investors were amongst the factors which raised the hackles of the regulator.
The novel licensing criteria shall, as of the 20 October 2014, be applicable to both prospective applicants and applicants whose application is currently being processed. With respect to the latter class of applicants, however, an intermittent grandfathering period of one year shall apply with respect to the new rules governing capital requirements and shareholding structure.
Elucidated hereunder is an overview of the most salient rules (the “Rules”) imposed by the MFSA upon applicants wishing to engage in online forex trading. The Rules shall apply in addition to the conditions set out in Part A of the Investment Services Rules for Investment Services Providers.
Under the new Rules, the MFSA will only accept a license application if at least one entity holding a direct qualifying shareholding in the applicant is already regulated to carry on the provision of financial services at a level which is satisfactory to the MFSA.
Furthermore, in terms of the new licensing criteria, the MFSA may: (a) request applicants to submit audited accounts in respect of any corporate shareholders in the proposed shareholding structure; and (b) request a promoter to provide it with a statement of wealth in other to ensure a satisfactory level of own funds.
In accordance with the new Rules, companies desirous of obtaining a Category 2 licence will be subject to a higher minimum initial capital requirement of €730,000, which must be satisfied on an ongoing basis and not just at licensing stage.
In order to be granted a license under the new Rules, the applicant must inter alia prove that, staff occupying senior positions within the applicant (such as senior manager, risk manager or head of trading) have an adequate track record with one or more regulated firms that operate within the forex industry.
Local Presence/Corporate Governance set-up
The new rules imposed in this regard are labyrinthine. However, in a nutshell, they require:
(i) licence holders to have a locally based risk manager responsible for designing, implementing and monitoring the risk management policies and procedures of the applicant;
(ii) applicants to reduce reliance on automated organizational infrastructure by dedicating sufficient human resources to (inter alia) the day-to-day management of their business and the monitoring of trades; and
(iii) core licensable activities (including the setting of trading policies) to be carried out in or from Malta; and
(iv) the board of directors of an online forex trading firm to have one or more independent directors who have competency and experience in forex trading.
The Rules require applicants/licence holders to have in Malta real time access to, and control over all transactional data. This applicant must have this data fully preserved in its records on an ongoing basis at its head office in Malta and shall have in place an appropriate offsite backup system for risk management and business continuity purposes.
In accordance with the Rules, if the applicant intends to use a proprietary online trading platform, the MFSA would need to be provided with evidence that such system has been certified by an independent IT Auditor and that it has a satisfactory track record as a result of having been used by other regulated online forex companies in the EU or other recognised jurisdiction.
In terms of the Rules, applicants that would like to offer online forex trading to their clients should only appoint regulated financial services firms as their counterparties/liquidity providers, provided that these are already authorised by the relevant competent authorities in an EU, EEA or other jurisdiction that has an equivalent regulatory framework as Malta for the provision of the services in question.
In addition to the above requirements, applicants and license holders are also required to comply with the ESMA guidelines (the “Guidelines”) on the sale of complex products, where online forex is specifically mentioned as a complex product. Forex products could (inter alia) fall within the remit of the Guidelines when the applicant offers clients the possibility of entering into derivative transactions, such as fx swaps and fx forwards for instance.
For more information please contact Laragh Cassar at email@example.com