Cypriot Brokers are Selling Their Licenses or are at Least Trying To Do So…

Some companies see it as an opportunity to expand their businesses and will brag about it in a cocky fashion, others see it as a reason to get out, and others look to consolidate with other companies and poach talent.  However it is in the European Union, the market environment is going to change drastically.  Understanding what is happening behind-the-scenes helps traders and investors understand the dynamics of the policies and the stability of the industry with a fiduciary duty to their clients.  The significance of a reported two dozen Cypriot firms selling their licenses is tremendous and it is damaging to the economy of Cyprus.  Is it necessarily because of the leverage?  It should not be, it should be due to the fact that the regulatory environment is uncertain.

Those Looking to Acquire Immediately Should Be Careful

For all of the bragging and assurances that Retail FX Brokers were going to be fine in the wake of the ESMA Temporary Intervention, the exodus from Cyprus tells a different story.  Some of these brokers will be smeared as companies that thrived on high leverage or did not wish to be “exposed” for attracting terribly performing traders, but these are presumptions not based out of fact.  Respected media sources are treating the restrictions as permanent changes, but they are clearly not and ESMA also temporarily prohibited Binary Options in the European Union.

The Temporary Interventions are of a quarterly nature and this could mean a loosening or tightening of the restrictions, which creates an operational and legal nightmare for brokers and traders.  It is unpredictable, it is like doing business in a failed state or a country in the middle of a Civil War.  Companies like Marriott and McDonald’s can do business in a country like Venezuela and not be terribly concerned by sovereign, monetary or regulatory risk because they have franchised operations and ownership, which leaves them with limited risk.  Forex Brokers do not have such an ability and unlike hoteliers and restaurant chains, they carry a fiduciary duty to clientele.  A closure or change in the company’s structure will change the client’s experience with the company or end it.  It’s relatively easy to unwind a hotel property or restaurant in an exit, but for a Non-Banking Financial Institution, it is much more challenging.

The adage “When others are fearful, get greedy” does not apply to a situation where the laws can possibly change in a drastic fashion from one quarter to another.

Media are making assumptions and valuations are based on assumptions.  This would make brokers looking to be bought or exiting the industry altogether extremely cheap, but this may still be a loss for the acquirers.

How to Adjust?

More specifications will come out for European brokers.  There may be opportunities for loopholed carveouts for the higher end retail clients, which may be the reason for any sort of optimism, but it is a lot of competition for a limited pool.

If you are a European looking to trade FX, you may be looking into incorporating in an offshore company to determine some sort of a workaround, but right now the brokers know just as much as the investors about what is going to happen in presumably July 2018 and then the changes that take place in October 2018.   The workaround would likely work best for offshore corporations looking to use brokers outside of the European Union.  Brokers in New Zealand and Australia could see a boom in clients from offshore destinations.

It could all set up a very Dark Christmas Season in the European Retail FX industry as ESMA could swiftly eliminate it upon discovering that their restrictions did not fix the problems.  After all, if regulators cannot effectively reform it, they just ban it.  

It’s possible that a Commissions Futures Trading Commission under a Trump Administration could see an opportunity to make regulatory reforms.  After all, Dodd-Frank changes could be voted on this month in the U.S. House of Representatives according to House Majority Leader Kevin McCarthy (R-CA).  Would Cypriot firms relocate from Limassol to Tampa, Orlando, Chicago or even San Juan?

Look to Consider the Following Options, if you’re in Europe:

  1. Sticking with the European Brokers through these changes.
  2. Forming an Offshore Company to attain some sort of a different status than a Retail FX client (extremely speculative possibility that brokers would entertain this).
  3. Forming an Offshore Company to get better leverage with a regulated broker outside of the European Union.  (Do your Homework on this matter first)
  4. Saving up the money to get Professional Trader status to receive better leverage terms and/or survive the possible temporary ban on Retail Forex Trading.

However, everything is still speculative and participants are still trying to figure out what is next.