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Regulation of Forex broker activities in the EU

Европейский парламент

Obtaining permission to conduct Forex activity on the territory of EU Member States is governed by Directive 2014/65 / EC, which is also called MiFID2, since it is the new version of the Directive “On the Financial Instruments Market” 2004/39 / EC (MiFID), and is a legal basis of a single regulated market of financial instruments in the EU. This means that the rules laid down in this Directive are mandatory for the twenty-eight member countries of the EU and the three countries of the European Economic Area.

First MiFID2 establishes the basic requirements for the operation of investment companies (investment companies under the Directive refers to and including financial brokers, so we will hereafter call them so) and the conditions for obtaining a permit for their activities in the EU.

It is assumed that each Member State should adopt national legislation in accordance MiFID2 requirements, the provisions of which may not be more stringent than the provisions of the basic directive. However, MiFID2 also regulates the procedure of interaction of controlling the market in every European country, both among themselves and with the European specialized authorities (ESMA – the European office of the Securities and Markets and the EBA – European service banking supervision).

To start working on the territory of the EU investment company must submit to the competent Member State authority, where it (or its affiliate) is registered, an application for a permit (license) and a set of required documents. Within two days after the filing of the application the competent authority shall send a notice of receipt of the application, and for 6 months – to approve or reject the application. If the application is approved the competent authority shall issue a permit and making it into a public register of investment companies, as well as provides information about it in ESMA, which in turn makes the information in its overall roster.

It should be noted that in accordance with Article 6 of the Directive such a permit is valid in the entire European Union, and gives the investment company the right to provide services and the implementation of its activities provided by the permission, in the entire European Union through the implementation of the right of occupancy. However, other Member States have no right to impose any additional requirements on such investment companies. However, in order to exercise this right, the investment company for the first time who wished to provide services or carry out activities on the territory of another Member State shall provide the following information to the competent authorities of its home Member State:

  1. A Member State (or States), where it intends to operate;
  2. A program of operations stating in particular the investment services and / or investment activities as well as ancillary services which it intends to provide in the territory of the Member States in which it intends to provide services. In the case of the intention to use sales agents established in the territory of their State of origin, it is necessary to inform the names (titles) of these agents.

Further, the competent Member State shall within one month after receipt of the information to transmit it to the competent authority of the host State, and after that an investment firm may start providing investment services and conducting investment activities in the host State.

Unfortunately, the procedure for obtaining authorization is not as simple as it might seem at first glance. Company-bidder must comply with numerous requirements set MiFID2, namely:

To control the system: effective organizational and administrative programs, separation of duties, the prevention of conflicts of interest, prevent negative impacts on the interests of customers, regular measurement of financial instruments;

For staff: skills, knowledge and experience of the staff; experience, reputation, qualification, management body members, and paid to the adequacy of their time to perform their duties;

By internal documents: the existence of policies and procedures for the provision of services, the remuneration policy of the persons involved in the provision of services, security policies, etc;

By internal procedures: administrative, accounting procedures, internal control mechanisms, investment risk assessment procedures and the risks to security of data processing systems;

For security: functioning of the security system and identify means of transmission of information, unauthorized access to data, ensuring their privacy; security of customer assets;

For transparency: the competent authority should have access to information and documents for the control and supervision of management decisions in the investment company, as well as to have information on shareholders, members and their shares in the company; All information about the company, its services, financial instruments, the estimated investment strategies, platforms, order execution, costs and expenses (including advertising information), transmitted by existing and potential customers must be fair, clear, accurate and transmitted on time.

In addition, the investment company must necessarily be a member (members) of the compensation program loss of investors, provided by Directive 97/9 / EC.

For companies that provide direct electronic access to a trading platform (as is the case with Forex) establish additional requirements for the development of effective customer control system using the service, to eliminate the excess of the corresponding preset trading and credit thresholds, as well as prevent trading that could lead to risks for the company and help create market failures. Another requirement – it is a written agreement between the broker and the client in respect of the fundamental rights and obligations in connection with the provision of services, as well as a provision under which the broker remains responsible under the MiFID2.

A Member State has the right to require third-party company that intends to carry on business in its territory, to establish a branch. In this case, such a branch must have prior approval of the competent authorities of the Member State in accordance with the following conditions:

  • the provision of services, for which third-party company requires a permit, require authorization and supervision in a third country where this company was founded, and it has all the proper permits;
  • have cooperation agreements, including provisions on exchange of information in order to preserve market integrity and investor protection, and for the avoidance of double taxation with respect to income and capital, concluded between the competent authorities of the Member State in which the planned establishment of the branch, and the competent supervisory authority the third country in which the company is established;
  • at the disposal of the branch has sufficient initial capital;
  • appointed at least one person responsible for the management of the branch, and each such person fulfills the requirements set for the investment company’s management bodies;
  • the company participates in the program of compensation for investors, approved or recognized by the relevant EC Directive.

As for minimum capital requirements that, depending on the type of activity, it must be:

  • 125,000 euros for investment companies, which are holders of assets of its clients, and stamped the following services:
    • Reception and transmission of investors’ orders for financial instruments;
    • Execution of orders of investors in respect of financial instruments;
    • Management of individual portfolios of investments and financial instruments.
  • Member States may establish minimum requirements for the reduction of the authorized capital of up to EUR 50 000 for investment companies, which are not holders of assets of its customers and does not carry out transactions for its own account or under the guarantee of a firm commitment;
  • 730,000 Euro for other investment companies.

When selecting the jurisdiction of the European Investment or her branch of the most important criteria are the size of the income tax, the amount of annual license fees and Complexity of procedures and statements which are set at the national level.

If you are interested in this material, you can seek the advice of our lawyers at any time convenient for you.

Author: Olena Kutova
senior lawyer of the Finance Business Service company