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Firms entering the forex brokerage market stand to earn potentially huge returns; turnover in global forex markets reached an estimated $6.6 quadrillion per day in February 2024! But to become a forex broker and legally offer trading services to clients, a start-up brokerage will need to obtain a forex license.
A forex broker license is essentially an FX trading business permit. It’s granted by the regulatory authority in the country where the firm is located. For example, firms in the UK need to obtain a license from the Financial Conduct Authority (FCA), whereas firms in the USA need to obtain a license from the National Futures Association (NFA).
A forex trading license is not just a legal and regulatory requirement; it also demonstrates to potential clients that the firm is a legitimate counterparty with solid risk management.
What is the process for becoming a forex broker?
Opening a forex brokerage involves several steps. The first step is to choose between two different business types.
One option is to become an IB (Introducing Broker), a commission-based business model that funnels customers to more established brokers. Setting up an IB is the easiest and least expensive way to enter the brokerage business. It’s a turnkey process that allows brokers to swerve many of the technology and regulatory complexities that would otherwise be involved. Since the trading platform and infrastructure are already provided, the broker’s only job is to attract clients.
IBs in high-profile markets such as the US and the EU will need a forex broker license. Although other jurisdictions may not require a license, obtaining one can still give new business credibility with its clients.
Alternatively, brokers can launch their brands using a white-label trading platform. This route is more labor-intensive and time-consuming; it entails overseeing all the incorporation, registration, and regulatory aspects of setting up a forex brokerage company. However, it has the advantage of providing complete control of all operations.
No matter which route a brokerage chooses, it will need to complete several steps to obtain a forex broker license. First, it should determine which instruments to offer forex trader clients since some instruments require additional licenses. It should also decide on its order execution model (STP or B-booking) and whether margin trading will be involved, which entails obtaining a different license type.
From here on out, the overall process generally entails registering the company, opening a corporate bank account, and preparing a selection of notarized documents. These may include a business and risk control plan, a list of directors and shareholders, and extensive financial documentation.
Once the company has met the chosen regulator’s requirements, it can begin the licensing application process. This typically involves paying an application fee, submitting to a background check, and providing proof of all key executives’ identity, residence, and educational credentials. In many jurisdictions, applicants will also need to obtain “know your customer” (KYC) and anti-money laundering (AML) certificates to demonstrate that they have not obtained their funds through criminal means.
Although the specifics will vary across other jurisdictions, the following breakdown of the licensing system in the USA and the UK provides a general idea of what to expect.
| USA | UK | |
| Relevant regulatory bodies | National Futures Association (NFA) Commodity Futures Trading Commission (CFTC) | Financial Conduct Authority (FCA) |
| Business registration procedure | Register as a corporation or LLCSubmit registration forms to the CFTC | Register with Companies House |
| Membership application process | Apply for NFA membership | Apply for FCA authorization |
| Other requirements | Meet NFA capital requirementsSubmit required documentationSuccessfully undergo background checks on key personnel Develop compliance programs, including KYC and AML policies Pass relevant exams such as the National Commodities Futures Examination (Series 3)Pay NFA and CFTC fees | Meet FCA capital requirementsSubmit required documentationUndergo the Fit and Proper Test for key personnelDevelop compliance programs, including KYC and AML policiesPay FCA application fees |
Brokers should be aware that once they have obtained their license, they may need regular audits to demonstrate continuous compliance with the relevant government bodies’ legal regulations.
What are the advantages of forex brokerages?
By extending their offering with forex trading, existing brokerages can attract a broader range of clientele, mainly if they obtain multiple licenses. This can be lucrative and can help the brokerage grow. Forex brokerages also benefit traders because they give individual traders access to the global forex market, which would otherwise be difficult to enter without substantial capital and institutional backing. Finally, increasing the number of forex brokerages strengthens the overall financial market; having more service providers sparks product innovation and improves risk management as firms look for creative ways to differentiate their offerings.
What are the regulatory requirements for setting up a forex brokerage?
The details of getting approval for setting up a forex brokerage, including the timeline, cost, and range of required business plans and other corporate documents, vary depending on the local regulatory agencies’ licensing processes. Regulatory, compliance and legal requirements are typically more complex and onerous in high-profile forex trading jurisdictions like the US, the UK, and Singapore.
In addition to fulfilling the relevant AML and KYC regulations, potential forex brokers will need to meet minimum capital requirements and factor in application fees. This can add up to a hefty sum, particularly in high-profile markets like the UK. The timelines associated with incorporating or obtaining the necessary licenses can also vary widely; for example, setting up as a forex broker in the US can take as long as two years. In contrast, the Seychelles Financial Services Authority offers a forex broker license with a $50,000 capital reserve and a two- to three-month processing time.
What comes next?
Once a forex brokerage has obtained a license, the next step is to create a marketing plan to attract customers. This could include optimizing the brokerage business’ website with a sleek user interface and effective SEO strategies, building customer trust and engagement by publishing educational content and creating loyalty programs, raising awareness by launching trading competitions, or even seeking social media influencers or sponsorships.
If you’re ready to launch your forex brokerage, the Devexperts team is here to help. With a detailed guide and a comprehensive range of innovative software solutions, we’re poised to support your foray into the exciting world of foreign exchange.
Get in touch today, and set out on the path to success!
