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Malta has achieved notable success in the financial services industry over the past years. This success is attributed to a number of reasons such as advantageous taxation systems, lower costs and skilled human resource. These key factors allow acquiring a Malta Forex license good reputation and establish trust and security for users and service providers alike.
Malta’s accessible regulator, competitive costs and business friendly environment have in fact, led it to become an interesting option for FOREX service providers seeking to work within a well reputed regulatory regime. Malta has attracted to its shores various market players in the field of foreign exchange, ranging from specialist software providers interested in using Malta as a base of operations, to FOREX specialized asset managers and FOREX trading platforms seeking their way of entry in the EU Market. FOREX, albeit relatively new, stands to attain the same level of success as that of other sectors of the industry and this is mainly due to the below factors.
Malta Forex Licensing: The Investment Services Act, 1994
Foreign exchange is controlled by the MFSA as an investment service and as such providing foreign exchange products and services in and from Malta is an investment service which is a licensable activity.
The law arranges for that in granting a license, the MFSA, as the competent authority, may subject the license holder to such conditions, as it may deem appropriate.
The conditions which MFSA generally imposes upon an investment services license holder are generally based on proper protection of investors, the proper carrying out of the operation and anti-money laundering procedures.
The Investment Services Act lists the following services as licensable:
There are four categories of an investment services license;
The category 1 license is of two types:
Category 2 license holders are authorized to provide investment services, and to hold or control clients’ money or customers’ assets, but not to deal for their own account or underwrite.
Category 3 license holders are authorized to provide investment services, to hold and control clients’ money or customers’ assets, and to deal for their own account or underwrite.
Category 4 license holders are authorized to act as trustees or custodians of collective investment schemes.
The business of online foreign exchange trading is generally provided in one of two forms, either by dealing on own account (market makers) or by acting as a riskless principal (often as a ‘white label partner’). With respect to the latter, the entity would be involved in executing two matching trades (one with the client and one offsetting trade with another principal) entered at the same time and price, with the entity acting as counterparty to both transactions. This is considered as execution of orders on behalf of clients. In order for an entity to execute orders on behalf of clients, a category 2 investment services license is required. On the other hand, an entity which would like to deal on its own account (only applicable to entities which are market makers) is required to have a Category 3 investment services license.
The main difference in the requirements which are applicable to a category 2 and a category 3 investment services license holder relates to the capital requirements which must be satisfied. A Category 2 investment services license holder is required to have an initial capital of Euro 125,000 and has to have own funds which are higher than either: [i] initial capital; or [ii] the sum of all the risk components calculated in terms of the rules but excluding the operational risk component; or [iii] the fixed overheads requirement. A category 3 investment services license holder is required to have an initial capital of Euro 730,000 and should have own funds which are higher than either: [i] initial capital; or [ii] the sum of all the risk components calculated in terms of the rules including the operational risk component.
This stage usually includes a meeting with the Authority, submission of a draft Application Form and supporting documentation, review by the MFSA, delineation of the Standard License Conditions to be applied to that particular Applicant by the Authority.
This stage involves the issuance of an ‘in principle’ approval for the license by the Authority, incorporation of the corporate vehicle, submission of final and signed application form and supporting documentation, other documents arising during the application process, including audited financial projections.
This stage requires the satisfaction of ad hoc requirements arising post licensing but pre-commencement of business. The applicant must be “fit and proper‟ and be prepared to act in accordance with the law and the Standard License Conditions attached to any license which is issued. The speed of the Preparatory Stage (stage one) is dependent on the efficiency of the applicant. However, stages two and three can be completed within six to twelve weeks.
On the 5th of December 2012 the European Securities and Markets Authority (“ESMA”) issued a notice on investing in foreign exchange warning retail investors to always invest with companies that have valid investment licenses. This notice was brought about by the realization of an increase in unauthorized firms offering transactions, or platforms to trade, in currency derivatives in the FOREX market (such as ‘contracts for difference’ [CFDs], ‘FX forwards’, and ‘rolling spot contracts’).
Disparate companies licensed in the EU to offer investment services, unlicensed companies offering FOREX products and services are not authorized to do so; without a license a company cannot even offer trading platforms. An unlicensed company is not regulated by any authority and as such it is not bound to abide by investor protection rules such as safeguarding of client assets, giving clear information, disclosure of risks involved in trading in foreign exchange, suitability and complaint handling. Also, due to the company not being authorized, clients of such unauthorized service providers would not have access to complaints procedures (financial ombudsmen) or compensation schemes in the event of something going wrong.
Malta recognizes and regulates foreign exchange as an investment service regulated by the Malta Financial Services Authority under the Investment Services Act; this is in contrast to various other countries where FOREX suffer from a lack of legal and regulatory clarity. Malta’s legal clarity gives rise to various advantages, including high and clear regulatory standards, certain opportunities for passporting, as well the comfort of having certainty as to the applicable legal and regulatory regime.
Malta also has flexible rules with respect to leverage ratios. This allows Malta FOREX businesses to cater for a broader array of investor risk appetites. The Malta FOREX solution is therefore becoming an increasingly popular choice among businesses looking for a viable FOREX domicile.