Cyprus-based broker Alfa-Forex is suspending its service to Russia’s residents, probably due to CySEC’s new licensing restrictions.
The brokerage statement Tuesday cited the regulatory obligations as the reason for discontinuing its offering to Russian clients, which takes effect on March 23, 2018.
The announcement reads: “All the obligations to the current Alfa Forex clients will be duly performed in accordance with the present agreements, Terms of Business and applicable law under the control of the CySec.”
Last week, the Cyprus Securities and Exchange Commission (CySEC) published a new circular that is requiring all Cyprus Investment Firms (CIFs) to fully disclose all countries in which they are operating.
Firms will need to notify CySEC when they are providing their services in third countries. Before they can deliver their product in a given country they will need to first get appropriate authorisation from the country’s regulatory authorities.
If that were the case, indeed, we may anticipate more brokers to announce a similar suspension in coming weeks, not only in Russia but across many other non-European jurisdictions.
This will obviously be a mess for Cypriot brokers since their financial statements show that the bulk of revenue isn’t coming from Europe. In other words, brokers cannot survive on European business alone.
The above approach, if confirmed, is expected to cause a tremendous stir among Cyprus-based operators and clients alike. Confirmation means that the Cypriot financial regulator would announce a more detailed ruling, or enforcement actions related to the one issued a weak ago, by which brokers operating under the CIF license are obliged to cease soliciting business outside the European Union.
The first thing that comes to mind is that CySEC is just proceeding with what it has been doing since it first issued its circular banning trading bonuses and tightening trading conditions, including the allowed leverage. The second explanation is that CySEC is following in the footsteps of several other European regulators.
However, in either case, CySEC can’t simply follow in the footsteps of such regulators, whether they be established watchdogs such as those of the UK, Spain, France and Germany, or even minor ones such Malta’s MFSA. FX business for these jurisdictions is tiny as a proportion of the rest of their financial industries. Sometimes, they just don’t want the FX business to tarnish their brand as it ultimately damages the reputation of the country itself.
This isn’t the case for Cyprus and simply means that it could lose its position as a financial hub bridging Asia and the Middle East to mainland Europe.
It would also effectively kill the growth of the Cypriot brokerage sector, including banks which benefit from the brokers clients’ deposits, whilst playing into the hands of jurisdictions that can offer less strict regulations, or at least the advantage of setting up in a more prestigious hub.
How these brokers will manage to maintain market share outside Europe depends entirely on their business models. Obviously, they will turn their focus to more ‘universal’ regulations. But this is also more complicated since it implies additional sub-strategies to handle dealing with non-EU clients from countries with regulators, and non-EU clients from countries without a regulator.