ESMA Blues, ASIC Boom and Brexit No Big Deal: This Year in Regulations

From PSP problems in China to leverage caps in Europe, it's been a challenging year for brokers across the globe.

It’s been a wacky, fun-loving year in the exciting world of regulation.

All of our readers will be familiar with the European Securities and Markets Authority’s (ESMA) product intervention measures which, as you can see from the huge amount of ink that we’ve spent covering them, have defined the retail trading industry’s year in many ways.

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European Union (EU) regulated brokers are now forbidden from offering more than 50:1 leverage to their traders. Binary options have been banned, risk warnings made mandatory and, since the rules went live in August, brokers have had to say what percentage of their traders lose cash.

Above: Senior Executives Discuss the Post-ESMA World at the recent Finance Magnates London Summit

One result of this, which was entirely predictable, has been a shift of EU clients to offshore brokers. As Finance Magnates reported last week, some offshore brokers have been receiving between $2 and $3 million in deposits from EU clients per month since August.

We also saw the resignation of IG Group CEO Peter Hetherington back in September and a substantial downgrade in CMC Markets’ revenue forecast. On the other side of Europe, in the kebab-loving nation of Cyprus, a large number of brokers have either canceled or returned their licenses.

No Brexit blues for retail traders

ESMA’s rules have certainly been the main concern for brokers but Brexit has been playing on the minds of many firms too. But unlike much of the rest of the financial services industry, the UK’s departure from the EU isn’t too much of a concern for the retail trading companies.

“It’s no big deal as far as we’re concerned,” CMC Markets CEO Peter Cruddas told Finance Magnates back in August. “We don’t have to open an EU office because we’ve already got half a dozen anyway. We’d just have to upgrade one of those offices, probably our Frankfurt office, and apply for full European status. There would be some logistical changes but they’ll be minimal – maybe an additional couple of traders on-site.”

Other companies have actually seen Brexit have a positive impact on their business. Ongoing uncertainty surrounding an eventual deal, if there will be one at all, has driven volatility in the market. As our readers well know, that’s not a bad thing for brokers.

“Brexit is good for volatility,” ValuTrades CEO Graeme Watkins told Finance Magnates in late November. “That drives trading and is benefiting us and probably benefiting all brokers.”

Uncertainty in China – Finance Magnates Reports

Uncertainty may have been good for business in Europe but it has had the opposite effect in China. Just as it claims to be communist when it is actually mercantilist, China has no retail trading laws on its books but its government still makes life tough for brokers.

At the start of this year, Finance Magnates reported that three brokers had been asked by the government to shut up shop and leave the country. Next came BMFN. The broker had been in China for ten years but was abruptly asked to leave the country by authorities back in March.

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In September it was JFD Brokers’ turn. Repeated problems with payments service providers (PSPs) meant the company was unable to process its clients’ funds and had to shut its office in the land of Jackie Chan and Chairman Mao.

The Cyprus-headquartered broker is by no means the only company to have experienced PSP problems in China. Consultants, brokers and introducing brokers that Finance Magnates has spoken to over the course of the year have always mentioned PSPs as their number one problem. Like JFD Brokers, all of them complain that accepting their clients’ funds is becoming extremely difficult.

But PSPs aren’t the only hurdle that brokers have to overcome in China. Back in February, the government ordered Baidu, the country’s biggest search engine, to ban brokers from advertising on their platform.

Brokers with the requisite knowledge, and who don’t rock the boat, can do business in China but it remains challenging. Were it a small jurisdiction, it wouldn’t be worth the hassle but, when you are dealing with a country that contains 20 percent of the world’s population, putting in the effort can pay off. Don’t expect any change here in 2019 – brokers are likely to continue the balancing act of attracting clients and dealing with a temperamental and unpredictable regulator.

ASIC License – $4 million a pop

Meanwhile, down under, beneath the sunny skies of the Southern Hemisphere, Australia has become an increasingly popular jurisdiction for brokers. Unlike the EU, it hasn’t clamped down on leverage and unlike many other non-EU jurisdictions, it isn’t a hive of scum and villainy.

Even prior to ESMA’s regulations going live, brokers with EU and ASIC licenses were quietly funneling their European clients to their Australian business. Brokers with an ASIC license but not an EU one have also seen an uptick in EU client onboarding since August.

Speaking to a Finance Magnates reporter at this year’s London summit, Rakuten Securities’ Global Head of FX said his company has seen a three-fold increase in the number of EU clients opening accounts with their Australian brokerage since ESMA’s rules went live.

Unfortunately for brokers, getting an Australian license isn’t an easy process. As Finance Magnates reported at the end of November, it costs brokers around $4 million to get one and it can take two years for the application process to be completed


Lastly, we have some of the more ‘out there’ jurisdictions. Most of these are used by some *ahem* less than scrupulous individuals, but others, Alpari’s Belize license comes to mind, are the real deal.

There isn’t much to say here beyond payments problems. Fortunately, brokers with licenses from certain jurisdictions, notably the Marshall Islands and Vanuatu, are struggling to get PSPs on board with them.

That means many brokers, including those who aren’t regulated at all, are looking to get a regulatory license. Leverate CEO Yasha Polyakov told Finance Magnates this December that, for these firms, the Seychelles and Mauritius are the most attractive options for these brokers.

Well, that’s about it on the regulatory front for this year. ESMA’s pushing people offshore, offshore people are being pushed to real regulators, Chinese companies don’t know what’s going on and the Australians are doing just fine.

See you in 2019 for some more exhilarating, breath-stopping regulatory shenanigans!

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