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Three Popular Non-US Regulated Jurisdictions: Britain, Switzerland, Cyprus, and Australia

If you want to open a forex account in a safe jurisdiction that is not as overly regulated as the US, the three most popular jurisdictions at the moment are Britain, Switzerland and a relative newcomer, Australia. All three have powerful regulatory authorities that safeguard the interests of the client without taking away the freedoms customarily enjoyed by forex traders, such as flexibility of leverage and hedging. Some like Britain even go so far as to insure up to $50,000 in client's loss, in case the brokerage were to go bankrupt - very nice.

Most of these brokers do not allow the US clients to open accounts with them, but there are always ways around this, if you are determined enough. Let us get more familiar with these brokerage jurisdictions and regulatory authorities. You may want to give one or each of them a try.  

Britain, the Cost-Benefit Nature of the FSA, and the Double layer of Client Account safety (Segregated accounts and depositor Insurance)

The FSA (Financial Service Authority) regulates the Forex brokers that are based in the U.K. or are dealing with the British traders. The FSA is a quasi-judicial body responsible for the regulation of the financial services industry in the UK, with forex being just one of these services. Based in Canary Wharf, London, with another office in Edinburgh, its board is appointed by the Treasury and owned by the UK government. It was given its statutory powers by the Financial Services and Markets Act 2000, and it has been regulating the financial industry since January 2001. It has regulation making, investigatory and enforcement powers designed to maintain market confidence, promote public understanding of the financial system, secure consumer protection and reduce financial crime.

These objectives are supported by a set of Principles of Good Regulation, some of which the US regulatory authorities could learn from. The principles that I like are Proportionality, Innovation, International character and Competition. All follow the cost-benefit analysis rule.

Proportionality means that the restrictions imposed on the industry must be proportionate to the benefits expected from the restrictions. By this token, some of the recent US regulations are dis-proportionate: to restrict leverage and hedging takes away multiple benefits and returns none in exchange.

Innovation stands for the desirability to facilitate innovation in connection with regulated activities, such as allowing scope for different means of compliance so as not to unduly restrict market participants from launching new financial products and services. By this token, the US regulations killed two innovations of Forex, its higher leverage and hedging capabilities which made it unique compared to other markets. Granted, there was a nod towards innovation in compliance, in that it allowed different brokers different and artful means of compliance to deal with the No-Hedging (FIFO) ruling, which made the No-Hedging (FIFO) ruling practically "invisible" to the client, allowing him to trade as normal in his account while everything got "sorted out," compliance-wise, in the back-office software. 

International character and Competition each stress the need to minimize the adverse effects on competition that may arise from the FSA's activities, within the UK and abroad. By this token, the US regulations against leverage and hedging made the US brokers uncompetitive with their international counterparts. There is no doubt that an incredible amount of capital took flight from US brokerages to offshore Non-US brokerages in order take advantage of jurisdictions such as the UK which did not restrict as much because of their greater value placed upon innovation and competition. The FSA's cost-benefit approach to principals of regulation has thus benefited UK brokerages tremendously against their US and Japanese counterparts who have over-regulated and incurred more costs than benefits. It is interesting to note that the US authorities then tried to deal with the competitive loss of their over-regulation with even more regulations, coming up with the regulation to prevent international forex brokers from accepting US clients, as if the US authorities can somehow stop the international flow of money to freer grounds. 

What happens if a broker goes bankrupt?

In the US, if this happens, you can say goodbye to most of your money. In liquidation, you will be lucky to get 2 cents on the dollar. 

Case in Point: Refco Bankruptcy

Do you remember when one of the largest (75+billion in assets) and oldest (founded in 1969) futures /forex brokerages in the US, "Refco", collapsed into bankruptcy in October 2005? I "painfully" do remember that event because I had a $5000 account with that firm that completely evaporated with the brokerage.

I and 200,000 other customers with over $4 billion had "parked" our funds at Refco brokerage because we deemed it a solid brokerage, one of the oldest and largest. We thought it "too big to fail", and that our funds deposited there were as safe as being at a bank. How wrong we were! When Refco became a public company on August 11 2005, investors had been attracted to Refco's 33% average annual gains over the past four years. But then in October of that same year, everything was undone in scandal and fraud. In October, Refco's CEO Philip R Bennet resigned when it was discovered that he had hidden $430 million in bad debts from the company's auditors and investors in an elaborate scheme that eventually nailed him 16 years in jail. Creditors took legal action against Refco, and the corporation filed for chapter 11 in October, which in the end left most of its creditors and a big pile of its depositors (including myself) out of their money. We had thought it was as solid as a bank when in fact it was quite the opposite. We - the little guys - had no recourse. There was no protection of our money. However this is not the case in the UK. 

The UK has two means of protecting your money in case of broker bankruptcy. 

Your Money Protected #1: The Default system of Segregated Accounts

A feature of the regulation of UK based forex brokers is that all forex accounts opened by a UK forex broker are required to be segregated.  This means, in practice, that in the case of bankruptcy of the forex broker, the forex trader's funds would be secured.

Your Money Protected #2: The $50,000 Insurance Program

Brokers under jurisdiction in the UK and regulated by the FSA automatically subscribe to up to £50K government guarantee for your funds under a protection program called the FSCS. The FSCS is the UK's statutory fund of last resort for customers of financial services firms. This means that FSCS can pay compensation to consumers if a financial services firm is unable, or likely to be unable, to pay claims against it. The FSCS is an independent body, set up under the Financial Services & Markets Act 2000 (FSMA). The £50K guarantee is a pure 'default' one that covers scenarios like Refco's and the like.

FSCS: The maximum levels of compensation are: Investments: £50,000 per person per firm (for claims against firms declared in default from 1 January 2010). 100% of the first £50,000.

Having been burned at Refco, I know that a US brokerage firm, no matter how old or large it is, is not a safe place for your money. You can get greater degrees of safety if you work with the largest and oldest firms, and perhaps now, after the large capital requirements for forex brokers, most US forex firms are less likely to go belly-up with nothing in the kitty for its depositors and its creditors. You may ask for segregated accounts, which can add another protection for your money, in that if the firm were to go belly up your account should still be there. But be forewarned: segregated accounts can offer some degree of protection but far from a guaranteed protection. There are still possible scenarios where you are left unprotected even with a segregated account: there might still be issues with creditors' claims against the account, issues with account accuracy reporting, or issues with the principals having access to the account so they can commit fraud.  

In the end, it is hard to match the safety of the FSCS insurance program required of British forex firms regulated by the FSA. If things go horribly wrong on the part of the firm, for whatever reason, you can always rest assured that you will be covered up to the 50K of your funds by the FSA/FSCS insurance program. 

Switzerland, SFBC, and strong banking Reputation.

Swiss banks (400+), ranging from the "Two Big Banks" (Credit Suisse and UBS) down to the small ones, have earned a reputation around the world for providing sophisticated and discreet banking services. They have a long history of secrecy and safety. Remember when they protected German Jews from Nazi confiscation, at the same time they protected Nazi treasure (and account holder identities) from the Allied attempts to reclaim it. It is a criminal offense, with the possibility of an individual going to jail, for the bank or its employee to divulge confidential information, and herein is cultivated a culture of absolute discretion. At the same time criminals cannot hide their loot as the Nazis were once able to, as now Swiss authorities routinely cooperate with foreign counterparts in criminal investigations. Today having financial legislation similar to that of most other OECD countries, and thus financial crimes in one jurisdiction are likely to be considered criminal in Switzerland.

Do the same standards and reputation of the Swiss banking extend over to Swiss forex brokers? 

Up until as recently as 2009, there was no requirement for Swiss regulation of forex brokers, and thus protection of retail forex traders in Switzerland was largely non-existent. Switzerland is one of the largest banking centers in the world and yet, ironically, it had led many retail forex traders to believe that, by opening an account with a Swiss forex broker, then that broker would be subject to a higher level of regulation than had they opened with a US broker. A Swiss broker had merely to sign up with any number of self-regulatory organizations in Switzerland (such as Organisme d'Autoregulation fondé par le GSCGI, PolyReg and Association Romande des Intermédiaires Financiers), yet these private bodies provide very little in the way of forex regulation for the retail forex trader, and instead their main duty is to ensure that the appropriate anti-money laundering regulations are enforced.

Given that the forex broker enjoyed the reputation of its bank counterparts without the need for any real regulation or compliance, there had been cases of fraudulent Swiss brokers opening up shop on Swiss soil to lure foreign investment. 

Case in Point: Crown Forex

Crown Forex (circa 2005-2009) had a fancy Swiss address, a fancy office, and it was a member of the ARIF or Association Romande des Intermédiaires Financiers — a Swiss-based regulatory agency specializing in the prevention of money laundering. Moreover, it was a top choice among brokers, having its own trading platform, a large client base and a considerable amount of money in the bank. It looked to all appearances as "good as gold," that is until it went bankrupt in 2009, taking many of its client's accounts with it in the collapse. It seemed that it was a legitimate brokerage until September 2008, when there began the start of a period in which the broker's clients (many of whom had deposits in excess of $50,000) began to have serious problems with the fund withdrawal process. They couldn't get their money back and they could not get an answer from the firm. In late 2008 the SFBC began investigating Crown Forex, with the commission stating that the company had no authorization from the SFBC for any activity in the financial sector in Switzerland, and by May 2009 Crown Forex was being liquidated by Swiss regulators, and by December 2009, a lawsuit was filed against Crown Forex by the U.S. Securities and Exchange Commission or SEC. As it turned out, Crown Forex is named a relief defendant, along with twelve other "shell companies", all controlled by two primary defendants, two Ponzi artists residing in Minnesota, Trevor G. Cook and Patrick J. Kiley (host of "Follow the Money" Christian radio show), who together raised in excess of over $190 million from 1,000 individual investors and promised them an annual return of between 10% and 12%. Most of this money was spent away in extravagant lifestyles, or lost in gambling casinos, Ponzi payouts, the purchase of operations (including Crown Forex), and bad investments, including $45 million in forex losses. Advising their clients to invest their funds in segregated accounts at Crown Forex looked safe for the clients, because it was based in Switzerland, but in reality Crown was operated by them, and they did what they pleased with the client funds supposedly meant for "segregated accounts" and forex trading. It is shame that so many people, and so much money, were defrauded by these two con-artists and this ill-fated broker. 

The lesson learned here is that just because a broker sets up shop on the soil of a good jurisdiction, and has a fancy Swiss address, does not mean it is registered there legally. A con-operation like Crown Forex, controlled by shady Americans, would never been allowed to be licensed and audited by the SFBC. 

Since 2009, and perhaps because of the Crown affair, the Swiss banking authorities have made it obligatory for forex brokers to become regulated by the SFBC (Swiss Federal Banking Commission) and to obtain a real Swiss banking license and thus become a regulated banking institution. For traders, this can be a good thing to have an account with such a licensed broker, as Swiss banking regulation is one of the best in the world. To have these brokers jump through all the hoops and fulfill all the difficult requirements to becoming a bank which can should be considered reliable, is surely a good thing.

On the other hand, obtaining such a banking license, in a country that prides itself on its banking standards, is a long and expensive process, and some former Swiss Forex brokers have moved out to less demanding jurisdictions. The downside for the trader is there is often a give and take between bank/broker reliability and client requirements; it seems the more reliable the broker is, which is made thus because of the more scrutiny it is being put under, the more scrutiny is passed on to the client in the form of more paperwork, more fact checking, and ultimately, a longer account opening process. Usually it is very difficult to open a bank account in Switzerland, given that there is a high minimum opening amount for non-residents, there is much greater care with due diligence, with the bank required to know its client sufficiently well (often with face to face interview) to ensure that the funds being placed on deposit are unlikely to come from illegal activities. To open a forex brokerage account can be considerably easier than a bank account. However, given their strong money-laundering laws, it can be much more difficult to open an account with a Swiss broker than a broker anywhere else. I remember when I opened up a personal account at Man Financial, before it became a bank, and back then, I still had to fill out and mail (email not allowed) all the signed application documents, as well as notarized identity documents, and explain in detail the source of my funds. The turnaround time from the application process to acceptance was two weeks (compare that with the 2 minutes it takes to open an account at FXOpen or Alpari NZ). 

Cyprus and Cysec Security

Prior to its acceptance in the EU in 2004, the Island of Cyprus was well known offshore tax haven that attracted a number of unregulated forex brokers to establish their operations there. Since these companies did not comply with any anti-money laundering laws, they were characterized as cowboy companies. Companies that had set up shop in Cyprus prior to its regulation makeover were: Prime4X, Forex4You, FXOpen, TadawulFX, IkoFX, eTorro, BroCo and so on.

Since joining the European Union in 2004, Cyrpus has had to comply with European Union law and European Parliament Directives, and so began a regulatory makeover. In 2003, Cyprus established the Cyprus Securities and Exchange Commission (CySEC) (www.cysec.gov.cy), a regulatory body which regulates many markets, including FOREX. It did not need to reinvent the wheel when it drafted its laws. Instead it borrowed from Europe. CySec had become member of the CESR (The Committee of European Securities Regulators) http://www.cesr.eu. Eventually this makeover meant that it had to request, sometime in 2009, that all forex firms domiciled in the Island submit an application to the commission in order to be granted CIF(Cyprus Investment Firm) authorization. This directive forced all brokers who still wanted to operate on the Island to become regulated. They had to comply with the European Markets in Financial Instruments Directive (MiFID) http://ec.europa.eu/internal_market/...d/index_en.htm and operate under the Cypriot Investment Services and Activities and Regulated Markets Law of 2007 (Law 144(I)/2007).One of the first ones was FXPro and Tadawal, followed by more.

Australia and the AIS

Forex Regulation in Australia Foreign Exchange (forex) trading in Australia is regulated by the Australian Securities and Investment Commission (ASIC).

ASIC requires that all companies providing foreign exchange services to retail customers must be able to show that they hold an Australian Financial Services License, or are licensed by the Reserve Bank of Australia, or are an agent of a licensee of the Reserve Bank of Australia.

Recent changes to the regulatory environment as a result of the increase in popularity in Australia of retail foreign exchange trading has seen the regulation of foreign exchange brokers brought under the Financial Services Reform Act (FSR), administered by ASIC. For more information, visit ASIC's website, click here.

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