Foreign exchange trading is the trading of one currency for another at determined exchange price on the over-the-counter (OTC) market. Forex traders speculate in currency variations, which may be due to economic factors and also other factors, such as natural disasters.
The Regulation of Forex in Malta
Dealing in forex derivatives, contracts for difference, and spot forex is licensable in terms of the Malta Investment Services Act. The MFSA is the authority responsible for the regulation, licensing and supervision of all investment services falling under the Investment Services Act.
Malta is nowadays being widely used by forex companies due to a number of reasons, mainly the solid regulatory framework, the attractive tax system resulting in 5% effective tax rate on profits generated from forex business, and the possibility of passporting the licence to all other EU Member States for the purpose of servicing consumers based in those other Member States.
Different categories of licences
Generally, in the case of online forex trading, one of two investment services license categories would be applicable: either by dealing on own account or by acting as a riskless principal. Different licences apply for the two categories.
Category 2 license – If a forex company is acting as a riskless principal (‘white label partner’), a category 2 license applies. Under this category, the company is authorised to provide any investment service, and to hold or control clients’ money or customers’ assets, but not to operate a Multilateral Trading Facility or deal for their own account or underwrite or place instruments on a firm commitment basis.
In such case, the entity is involved in a back-to-back transaction entered nearly simultaneously and at the same price, with the entity acting as counterparty to both transactions (margin making). The entity is involved solely in executing two matching trades and is not itself creating prices (or reselling the forex). Exposure is significantly less than those of forex traders dealing on own account (which would require a Category 3 licence). The requirement to obtain a category 2 license is that a minimum capital of €125,000 is required. Furthermore, the forex must have its own funds which are higher than either (i) the 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 required. An MFSA Category 2 license application requires payment of an application fee of €5,000.
Category 3 license – if the trader is dealing on his own account and is therefore a market maker (setting the price of the forex) the trader would require a Category 3 investment services licence. A category 3 licensee needs an initial capital of €730,000. A forex company applying for this license should have its own funds which are higher than either (i) the initial capital; or (ii) the sum of all the risk components calculated in terms of the rules including the operational risk component. An MFSA Category 3 license application requires payment of an application fee of €7,000.