Malta’s MFSA Tightens FX and CFDs Leverage and Raises Capital Requirement

Following in the footsteps of several European regulators, the Malta Financial Services Authority (MFSA) has published a circular on changes to its Investment Services Rules, excerpted below from the official press release.

The MFSA’s statement concerns current investment services providers, as well as applicants for Category 2 or Category 3 licences which allow firms to offer contracts for differences (CFDs) and spot Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term contracts under the MiFID regime in and from the Mediterranean island.

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Before delving into the details, the Category 2 license in Malta allows the licensee to provide all investment services, including the holding of clients’ funds, but not to deal on its own account, which can be performed only with a category 3 license.

In a statement, the MFSA said: “These requirements are applicable with immediate effect to all firms, subject to the transitory provisions referred to below, both at application stage as well as when effecting material changes to the firms’ business set up approved by the Authority at application stage.”

Spot the Difference

One of the changes for new Category 2 Investment Services Licence applicants is that the MFSA will introduce a higher capital requirement of €730,000, compared to €125,000 under the the previous rules and similar to the initial capital requirement for current Category 3 licence holders. The new, tougher rules come as the Category 2 firms would still be assuming a significant element of risk as Category 3 Investment Firms, albeit for a very short period of time until such instruments are transferred to the respective counterparty.

The MFSA’s new capital requirement should be satisfied on an ongoing basis and not just at licensing stage.

To deter illegitimate sources of funding, the MFSA said that it “reserves the right to request a promoter (who is also the ultimate beneficial owner of the applicant) to provide it with a statement of wealth that should be signed by a person holding a warrant of a certified public accountant under the Accountancy Profession Act (Cap.281) or holds professional qualifications of similar standing of an institute of repute recognised by the Authority.”

The MFSA lists the applicant’s shareholding structure as well as the quality and track record of the proposed management team as factors for consideration. Promoters should demonstrate several years of competence with reputable institutions, target market and the applicant’s clients.

Local Presence

The regulator also touched on the topic of localizing Category 3 licence’s activities. It said:

With respect to Category 3 licence holders, the Authority also expects that the following activities/ functions are carried out in Malta:

• The selection of counterparties and conclusion of agreements therewith;
• The establishment of trading limits and other parameters;
• The setting of pricing policies; and
• The monitoring and control of transactions undertaken with clients.

Meanwhile, the incoming rules state that “the Authority expects that firms establish a locally based Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term role responsible for designing, implementing and monitoring their risk management policies and procedures”.

Trading platforms

The changes detailed in the circular also included revisions for the rules of offering trading platforms and software, namely: the MFSA requires the firm that intends to use a proprietary platform to provide annual certification from a qualified IT Auditor. Moreover, it recommends the IT auditor to have been used by other regulated brokers operating within the Europe or other recognised jurisdiction.

Interestingly, the regulator said it would prefer the firms to use renowned trading platforms which are used by regulated entities in this sector, saying “it will be considered more favourably by the Authority.”

Leverage

Following a string of risk warnings and concerned regulators across the EU alerting retail investors to the risks in FX and CFDs trading, the MFSA has also updated its criteria for the entities wanting to offer margin trading services.

As one of the hottest topics in the industry regulation’s debates, the MFSA has set a host of new rules regarding the leverage limits. Forex and CFDs brokers are now required to follow new limitations when offering leverages to their clients:

• For retail clients – 1:50;
• For retail clients electing to be treated as professional clients in terms of MIFID – 1:100;
• For all other clients – no leverage limits.

Finally, Malta’s regulator has ordered its regulated firms to implement procedures that clearly define slippage parameters in order to ensure that orders are filled in a symmetrical manner.

Ron Finberg, Business Development Manager at Cappitech, said: “The changes from the MFSA are in line with the pan-EU reevaluation of leveraged CFD and forex products taking place. This is resulting in greater harmonization of leverage across EU jurisdictions as well a reassessment of corporate risks involved with operating a STP Matched Principal brokerage model.”