- Acquiring a European Forex broker, first hand experience.
- Challenges we faced while we were looking for a suitable acquisition target.
- MIFD II and our plans.
- Conclusions. Was it worth it?
In one of our previous articles, we mentioned that there is a possibility to register and operate either an offshore or onshore broker. For this and our other articles, when we say onshore, we always mean one of the EU jurisdictions. More precisely, Cyprus or Bulgaria. Below we are going to review case of acquiring a European Forex broker, based on our personal experience.
1. EU Forex License
Both options have their advantages and disadvantages. For instance, an off-shore broker used to be and, to some degree, still is relatively cheap to set up and to operate. The downside is that it is becoming increasingly complicated to open accounts with different payment providers (e.g. banks, e-wallets, credit/debit card processors), liquidity providers and other service providers. The reason is that retail forex is considered a high-risk activity by these institutions. This is especially true, if your company is registered in an off-shore jurisdiction.
An EU forex licence doesn’t solve all these problems, but it certainly makes them more predictable to deal with. For instance, it certainly is much easier to solve your banking issues. With your EU licence you get access to payment providers that are very reluctant to onboard off-shore brokers (e.g. PayPal).
2. Let us review a real-life example of establishing your local presence in Europe
So, once we got our offshore broker up and running, we understood we needed EU presence. Nowadays it is a very common practice to have an EU forex licence along with several others in different off-shore jurisdictions.
To set the scene, we made the decision about “going on-shore” a couple of years prior to MIFiD II introduction. And we were full of hopes that it would be easy for us to establish our presence in Europe. Now looking back, we would probably think twice before taking such a decision again.
So, the decision was made, and we started doing our research into retail forex regulation in different EU jurisdictions. Cyprus was at the top of our list, for obvious reasons, and that is where we started our research.
We should mention that we didn’t want to establish our EU broker from scratch. The reasoning behind this was that acquiring an operational one would save us time. So, we ended up buying one. In retrospect, it wasn’t a wise decision at all. We would have been better off if we had just registered one from scratch and applied for the licence ourselves. But what’s done is done. Perhaps, someone who reads this makes certain conclusions and won’t repeat our mistakes.
At the end of the day, we could find a couple of decent options for acquisition that met all our requirements. So, we proceeded to conduct our pre-acquisition audit. This allowed us to narrow down our choices to a single firm. The firm owned an MT4 licence, which was excellent. It also had a very short operational history and had just applied for the market maker’s licence with CySeC. The owners wanted to sell it off due to funding issues . A perfect scenario for us, however, it never panned out. At the very last moment, the sellers reneged on the deal and we were back to square one.
We continued searching for possible acquisition candidates in Cyprus. At the same time we turned our attention to Bulgaria. The rationale behind this was fairly simple, Bulgaria was and still is a relatively less expensive alternative to Cyprus and to other more advanced EU economies. After a month of active search we could zero in on a possible acquisition candidate. We started the negotiations and our due diligence. Eventually bought the firm.
The broker we acquired had a “small licence”, which meant that we could only receive and transmit clients’ orders (pure A-book model). Our thinking was that we go live with it and then apply for the “market maker’s” licence.
Anyhow, the acquisition process took us longer than we had expected and once it was completed, we proceeded to establish our local presence in Bulgaria. At this stage, we only had a nominal director employed to keep the company operational on paper. The idea was to get as many things done as possible for the “real” directors to take things over.
The very first thing we did was we cloned the website of our off-shore broker. We made some cosmetic changes to it, nothing dramatic. Then we cloned all our back-office systems (CRM).
While our web development team was working on the website, we were actively looking for local directors. As per law, we needed two. It took us a while, but we could find two extremely talented guys.
When they took things over from us, the website and the back-office systems were already operational. All they had to do was to open accounts with LPs, banks and payment systems. It only sounds easy, in reality it takes time, because these organisations have to do their due diligence and they usually take time. Took us a couple more months to get that done. And took a little over a month for our web devs to integrate them all.
In parallel to all that our directors created the missing policies and procedures, to make us compliant with the local regulatory authority. And yes, there is a whole plethora of them (e.g. just to name a few of them: Complaint Handling Policy, Conflict Of Interest Management Policy, Order Execution Policy, Client Categorisation Policy, Clients assets protection and investor compensation, Characteristics and Risks of Financial Products, Tariff of Services).
By the time we were ready to go live, the MiFID II was introduced, and we had to take many things, including many of our policies back to the drawing board. Also, we had to create some of the new ones from scratch. In addition to all that, we had to implement the new ESMA reporting requirements. But the new leverage limitations dealt us the biggest blow.
So, “screwed” doesn’t even begin to describe the situation we found ourselves in. Nevertheless, we decided to press on and went live in a little more than a month after the MIFID II directive came out.
At the same time we still wanted to try and apply for an extended type of licence (the so-called “market-maker’s licence”) and started our preparations. As a part of this preparation process, we had to increase the capital of the company, update all our internal manuals and procedures accordingly to stay compliant with all regulatory requirements. This was the “easy part” (not at all).
In parallel to all this, we had to prepare a lot of paperwork for our shareholders. This ate up most of our time. The regulator requested to see everything but their colonoscopy results. But of course, if you want to get the licence, you have no choice, but to hustle and comply.
Once everything was ready, we submitted our application package, and it was time for the regulatory authority to evaluate it. Per law, they have three months to do this. If they have questions about your application or want you to fix something in it, they will reach out to you and let you know. However, don’t expect them to contact you before these three months run out.
Being the inefficient governmental bodies that they are, they have no incentive to work fast, so what they do is they wait until the very last moment and only then contact you, thus extending the term for another three months. They can pull this off as many times as they like. In our case they extended the term twice. So, factor this into your plans if you decide to apply for the extended licence.
Also, they would most likely come to your office to check out how you set things up, how and where you store clients’ data, and so forth. As a part of this on-site visit they may also interview some of your people, which is why you have to train them well beforehand.
At the end of the day, we got our licence after six more months of waiting. And it was not a cause for celebration, because introducing MIFID II suddenly made all firms in the industry significantly worse off. It put a very heavy regulatory burden on everyone, without properly considering everyone’s interests. More on that in our next article on MIFID II.
While we were waiting for the licence, we weren’t just sitting on our hands. We were thinking things over, trying to come up with ways to live and make things work in the harsh environment that MIFID II plunged us into. But we would be lying if we said that this was an easy task.
MIFID II/MIFIR outlawed things like deposit bonuses, referral programs, risk-free trending (this is not an all-inclusive and exhaustive list). And the only thing you can compete on, dig this “spread”.
With very few tools left at our disposal and a limited marketing budget, we did what we could, but the results were suboptimal. Which brings us to the conclusion. Was our attempt at acquiring a European Forex broker worth it? Yes, and no. Surely we received valuable experience, but experience doesn’t put food on your table. If we had to make this decision today, we would probably scrap it on the stage of idea. But if you firmly know how you are going to use your EU-licence (e.g. look now we have an EU-based legal entity in a reputable jurisdiction) and funding is not an issue, then perhaps a few obstacles shouldn’t stop you.
Although we’ve done our best sharing our experience acquiring a European Forex Broker in the above article, we’d love to ensure our valued followers and clients save time and money €€€ simply contact finansified to learn more.
