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Legal Status of FOREX Brokerage in the TRNC and the Republic of Cyprus

Legal Status of FOREX Brokerage in the TRNC and the Republic of Cyprus

Despite the leading heading, it is easy to say that there is no legal status of Forex, brokerage or any related concept in the TRNC. On the other than there is a light form of regulation in the Republic of Cyprus attractive for brokers.

Before heading into what needs to be regulated, first the components of Forex should be discussed. One of the primary purposes for a Forex broker is to provide leverage. For Forex purposes, leverage means borrowing a certain amount of money from a broker to invest in Forex. For a set initial margin (i.e. the money put down by the prospective investor), brokers offer a high leverage making the investor able to invest more than he/she was originally capable of, thus making the returns higher.

To put it simply, imagine that you put down one standard lot of X/Y amounting 10X units of a certain currency, expecting the currency to rise in value so that you can make profit. A broker will offer you a leverage ratio of 1:100 (depending on the margin you are required to deposit). This means that for each 10 units you give, the broker will add 100 units itself to raise your initial margin so that you can invest more. If your trading strategy goes according to plan you will make 100 times more profit than you originally planned, while you will gain more and so will your broker.

The concept of leverage varies from country to country. For instance, in Turkey, there is a very restrictive regime as to what ratio of leverage a broker can provide which is 10X. Since Forex brokerage license to practice here can only be sought from Turkey, this rule is expected to apply to the TRNC as well. However, in absence of any regulation, it is entirely possible for Forex brokers to set their own margin-based leverage without having to conform with such restriction. Leverage limitation in the Republic of Cyprus can be up to 100X and there are many countries which have not set a maximum leverage that can be offered by brokers. The margin that needs to be put down in TRNC is also determined by the rules in Turkey. Turkey determined the initial margin to be 50.000-TL and it is also expected to be applied in TRNC but usually isn’t. On the other hand, the Republic of Cyprus has no such limit and neither do most countries. While there exist such vague limitations and it is expected for traders and brokers to conform, there is no regulatory mechanism or supervision committee in TRNC to oversee whether the rules are obeyed. This provides room for illegal activity and unregulated trade. The most prominent one is the issue of ‘online betting’ that is deemed illegal in TRNC without having a legal definition. As a result, any kind of risk-based investment such as Forex can be deemed illegal activity. Furthermore, many authorities still believe Forex to be a form of gamble, which I believe is a perception entirely against the nature of investment. Thus, best way to eradicate this kind of thinking would be to find a way of regulation. It is quite easy for financial authorities in TRNC to review Forex mechanism, define its scope and fit it within legal instruments so that it can be regulated. However, no such step is taken yet.

The Republic of Cyprus, one the other hand, is perceived as a haven for Forex brokers. This is because of the Cyprus Securities and Exchange Commission’s (CySec) early action of giving brokerage licenses in 1988 and thus starting to regulate the market early on, providing safety for both brokers and investors. Furthermore, there exist many tax benefits in settling Forex companies in Cyprus as the country has one of the lowest corporate tax rates in the world. Cyprus is also within the EEA and subject to the EU MiFID directive and thus part of a regulatory framework however minimum. While there is a high adequacy requirement of 730.000-Euros to become a broker, the advantages of Cyprus laws still make Cyprus attractive to settle. This directive also allows a firm to offer it services in another participating member state (called a passporting agreement). Conclusively, while a Forex company can settle in Cyprus with the advantage of low tax, the firm can also offer its services in other member states such as Ireland or Germany. CySEC allows ‘fast track’ applications for Forex dealers as the moment they apply to be registered, the law expects them to have an operational office and staff; so the faster they can start dealing the better. Finally, the encouraging nature of Cypriot company law applies zero tax when shareholders of a company – Forex or otherwise- want to pay dividends.

So how can you incorporate a Forex company in Cyprus? You must comply with the requirements of both Cypriot company law and investment laws and regulations. The starting point is same as all companies; the company must be registered as a legal entity approved by the Registrar of Companies by submitting a trade name and purposes document that must be drafted by a lawyer. Then, if we are talking about a commercial company, it must be registered for tax purposes and have a corporate bank account. It is important to note that up to this point it is the same process in the TRNC. Once registration is complete, the investor is required to obtain a Forex Trading License provided by CySEC.

 

To sum up, if you intend to set up a Forex company in Cyprus, you need to fulfil both the requirements of the Registrar and get a license from CySEC. In TRNC, you can seek a license from Turkey to branch out in TRNC but there is no regulation for margins, leverage ratios or safety nets for neither the investors nor the brokers. If you intend to invest, always look for a license and try to avoid unrealistic leverage from the brokers as neither one of you may be able to benefit from it in the end.

Attr. Deniz Avkıran
  • Attr. Deniz Avkıran
  • August 2021