Despite not being a major economical powerhouse of Europe, Cyprus is a foreign exchange (forex) hub within the region. However, over the past decade, the country has lost some of its major FX players. But are we now seeing a return to the jurisdiction regulated by the Cyprus Securities and Exchange Commission (CySEC)?
In recent weeks, Finance Magnates confirmed two brokers are seeking licences from CySEC. This prompted the question – is this part of a larger trend of brokers seeking CySEC licences?
During our search, in which we reached out to a number of regulation experts within the industry, it appears that the recent announcements from Pepperstone and GAIN Capital are indeed part of a larger trend.
“I see much more brokers targeting a multi-jurisdiction, multi-license approach,” Tal Itzhak Ron, Chairman and CEO at legal firm Tal Ron, Drihem & Co. explained to Finance Magnates.
“In previous years, some important brokers have left Cyprus. In the last 12 months, Cyprus is back on track as an important FX hub. I see more clients starting new applications for CIFs (Cypriot Investment Firms) and even acquiring existing CIFs in order to make the process faster (and buy them either with their previous activity or non-activated).”
ESMA drives brokers out of Europe
In 2018, the FX industry within Europe and the United Kingdom received a big shakeup, with the implementation of leverage restrictions, driving brokers and clients offshore.
In August of 2018, the European Securities and Markets Authority (ESMA) implemented its temporary product intervention measures. This saw the introduction of leverage restrictions on currency pairs, contracts for differences (CFDs), commodities and more.
Binary options were banned, marketing practices were restricted and other conditions were put in place. These measures, which have since been made permanent across Europe to some degree, saw a migration out of Europe from both traders and brokers, searching for more favourable trading conditions. So why are brokers heading to Cyprus instead?
Is Brexit driving the new trend?
With Brexit looming, many brokers are trying to secure licences both within the United Kingdom under the Financial Conduct Authority (FCA) and in European countries under ESMA, to ensure their operations are not disrupted after the UK leaves the bloc.
In particular, Pepperstone, an Australian based broker confirmed to Finance Magnates that it was in the process of securing a licence as part of its Brexit plan. Currently, the broker is regulated by the FCA and the group currently offers its services in Europe via this licence, which, thanks to the Brexit transition period, is still applicable in Europe.
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GAIN Capital, also revealed to Finance Magnates that it was seeking the CySEC licence as part of its European expansion plans, as well as ongoing Brexit planning. The company is also already regulated under the FCA.
Speaking to Finance Magnates, Quinn Perrott, co-CEO of TRAction Fintech said that whilst Brexit definitely is part of this trend, it is by no means the major reason for the growing interest in CySEC licences.
In fact, Perrott explained that this trend of more brokers trying to secure European licences has been a trend over the past few years, although it has been “more of a steady trickle than a sudden rush.”
“This is also due to limitations imposed by other regulations (eg Australia),” Ron added. “The Brexit may be a driving force for this – seeing Cyprus as part of the EU, even though the FCA regulation is still regarded as a more coveted symbol of financial regulation.”
As to why Cyprus is the chosen destination, Perrott believes there are a number of reasons for this. “Cyprus has a relatively cheap and well educated base of workers, due to Forex being a major industry here, it is a lot easier and cheaper to setup and staff an office here than it is in London or Sydney.”
Furthermore, he pointed out that some brokers might be doing it to provide support outside of normal Asian hours, as it’s most likely easier for an Australian broker to have staff over in Cyprus than have the local team work the midnight shift in Sydney.
“Lifestyle could also play a part,” he continued. “I’ve known a few owners of CFD firms that have relocated here. I suspect the good weather and laid back lifestyle may have been the perfect antidote for stressful jobs.”
“I also think part of it is actually due CySEC. Nobody loves their regulator but lately I’ve seen a growing appreciation for CySEC’s down to earth approach, fast response and in-depth knowledge of the Forex and CFD industry.”
According to Ron: “The typical scenario nowadays for a mid-size broker would be an EU or UK regulated arm (typically Cyprus or UK), an offshore regulated arm (Vanuatu or Seychelles), and a self-regulated arm (Saint Vincent and the Grenadines – until regulation will be introduced there, or Marshall Islands). Banks and payments providers would typically be based in Singapore, Germany, UK and the Baltics.”
Clients are coming back to Tier 1 jurisdictions
In a webinar hosted earlier this week, when asked which jurisdictions will become popular among traders, Jim Manczak, Director of Bahamas Offshore Services outlined: “I think the trend will be coming back to those Tier 1 jurisdictions simply because the infrastructure is there and the clients are going to realise that’s where their money is safe.”
With the Brexit deadline just around the corner, and ASIC in Australia set to implement its own set of product intervention measures, it will be interesting to see what other players will head to Cyprus, and how the increasing popularity of the jurisdiction will change the landscape of the CySEC-regulated country.