Are you considering starting your own forex brokerage? If you’re wondering whether it’s still a good idea to establish a brokerage in 2023, the short answer is yes – after all, new brokerages are emerging frequently. In this article, we’ll explore the process of creating a forex brokerage from the ground up. Some sections of this article are based on a real-life example, but due to legal constraints, we won’t be able to disclose the firm’s name.
Are You Starting Your Forex Broker? Where to Begin?
Typically, the first steps involve conducting thorough research, estimating ongoing costs, and creating cash flow projections. In this guide, we’ll primarily focus on the research phase. Get ready – there’s a lot to learn.
Offshore or Onshore?
The first crucial decision is to determine where to establish your forex brokerage – offshore or onshore. We’ve had experience setting up brokerages in both contexts. This article, however, will lay out a roadmap for setting up an offshore broker.
Offshore jurisdictions often provide more flexibility in setting up and managing your forex firm, but they can also present certain challenges. For example, you may struggle to find a bank willing to take you on as a client (more on that later). Be prepared for this, and be aware that the banks that do accept you as a client may charge significantly high fees for their services.
While there were once many appealing offshore jurisdictions, only a few remain today. But before you decide on any of them, it’s essential to research which best suits your needs.
Onshore
Establishing your forex brokerage in an onshore jurisdiction can also be incredibly expensive. However, onshore jurisdictions offer benefits that offshore counterparts don’t.
The onshore option is generally more suitable for high-net-worth investors with ample resources. In 2023 it may be challenging to opt for this choice without sufficient funding. It’s also a viable option for investors already operating a successful offshore business, as integrating an EU entity into your structure can be a logical next step.
Offshore
Most offshore (as well as onshore) jurisdictions require forex companies to obtain a special license to offer their services to clients. There are a few jurisdictions where your company doesn’t need to be licensed, but that’s a topic for another time.
Research Phase
What Happens Once You Find an Offshore Country for Starting Your Forex Broker?
You can select the name for your company and register your legal entity. You can do this yourself or hire a professional service for a fee, which can range from relatively small to considerable, depending on where you set up your operations and which company you choose to work with. Thus, if you’re keen on saving some money, you can tackle the entire process on your own. It might be a challenging endeavor, but it is certainly achievable.
Alternatively, you can purchase a ready-made, shelf company (an existing, mature legal entity with or without prior operational history) in the jurisdiction of your choice. You may also buy an operating company depending on your budget and timeline. However, should you decide to purchase an existing business, proceeding with extreme caution and conducting thorough due diligence is crucial.
Securing Your License
Having registered your company, the next step is to secure your license. By this stage, you should have completed your research on the licensing procedure, the license’s timeframe, and the associated requirements. Typically, this process takes three to six months, but depending on your specific circumstances, it could be quicker or slower.
Regulatory authorities often describe the information they require in your application package. While there might be some country-specific differences, the core of your application usually includes the following:
- A standardized application form for you to complete.
- A comprehensive business plan.
- KYC for all directors and shareholders includes their CVs, police certificates from their residing countries, proof of address documents (such as utility bills or bank account statements), and copies of identity documents. Professional references may also be requested.
License Types
Different businesses often require different licenses. If you wish to internalize risk (an elegant way of saying that you want to take the opposing side of your clients’ trades), you’ll need an “extended” license, often referred to as a market maker license.
This type of license provides a lot of flexibility regarding how you interact with your clients (e.g., pure B-book, a combination of A- and B-book). While costly, it’s usually worth the investment in the long run.
For instance, previously in Belize, the capital requirement for a license was $100k. However, it has since increased to $500k, almost equivalent to the cost of a market maker’s license in places like Cyprus or Bulgaria.
The regulatory authority will require you to deposit these funds with a local bank and maintain them there for as long as you hold the license. These funds will not be available for use. Additionally, you’ll need to pay an annual “renewal fee.” Considering these points when planning your project funding and ongoing operational costs is essential.
Upon submission of your application package, the regulatory authority will review it. This usually takes about three months. If your application is satisfactory, you will receive your license. If not, they will provide feedback on the necessary corrections to your paperwork.
