Cyprus seems to be the choice of many Forex brokers who have opened their doors for business in the last few years.  Why do they select Cyprus to headquarter their companies?  Maybe its because of the high security and privacy which applies to all registered companies in Cyprus.

Simply put, the operators can hide their identity; their location; and most of all - their money.  So, for example, when you open a trading account with a Forex broker located in Cyprus, you really don't know to whom you're giving your money. I'm not accusing all the Forex brokers in Cyprus of being dishonest or even shady, but why operate behind a veil of secrecy if you run an upstanding, honest business?

Here is one possible explanation: Cyprus joined the European Union in 2004 but it still enjoys the unique advantage of being able to structure tax free offshore companies.  It is very easy to incorporate a company in Cyprus and open a business bank account which includes an internet banking platform (that can be used for both business and personal Forex trading); and a  virtual office with telephone, fax and mail forwarding services. You can actually operate a Cyprus business without ever stepping foot on Cypriot soil.  In fact, not physically operating in Cyprus is the preferred modus operandi.

A company can operate tax free offshore and still enjoy the benefits of being incorporated in the European Union. There is no withholding tax on the payment of dividends, interest or royalties by a Cyprus non-resident company, to non-resident individuals or companies.

To be non-resident, the company must be managed and controlled from outside of Cyprus. This means that the Directors and Shareholders must be non-resident and not do business within Cyprus. The company can continue its non-resident status even if it has an office in Cyprus, but it is then taxable on profits arising only within Cyprus, at the low rate of 10%.

Yes, operating a business in Cyprus can be an extremely lucrative enterprise. Ava Financial, Easy Forex, eToro, Forex Yard, FxPro, GIGFX, Lite Forex, UFXBank, and Windsor Brokers are just some of the Forex brokers I found operating out of Cyprus.  Cyprus Investment Firms (CIFs) register with the Cyprus Securities and Exchange Commission.  I checked their register and only found Easy Forex and Windsor Brokers listed.

If you take into account the similar companies operating in Seychelles, Belize and British Virgin Islands (BVI), you begin to understand why the trading public's perception of Forex brokers leans toward the negative.  

Here's a real world example.  Last July, I was in Antigua for a few days and decided to pay a visit to the FXCast offices at 241A Peninsula Drive in Jolly Harbour. That's the address they publish on their website. I couldn't find Peninsula Drive anywhere in Jolly Harbour but I did find 241A Jolly Harbour Drive. It was an empty villa for rent. Maybe just a coincidence.  When I returned home I sent FXCast an email asking for clarification on their office location and they responded that, "in the summer, the FXCast staff is either in St. Johns or in Europe."  

Maybe I just couldn't find the correct address that day and went to the wrong place.  But if that was the case, why didn't the FXCast staff member who responded to my email tell me that I had the wrong address? You just never know, with offshore companies, who you are dealing with.

It gives me a sense of comfort when I can walk into my local Charles Schwab office to transact business.  If there is an issue with my Schwab account I know exactly how to get in touch with them by phone or (and this is the point) in-person.  

You can't do that if your brokerage company is in Cyprus and you really don't know where the broker is.

 

There are less than 60 days remaining for U.S. Forex dealers to modify their platforms to comply with the new "hedging" requirements.  However, while NFA-registered brokers are busy offering creative hedging alternatives to get around the new regulation; and the U.S. trading public is crying out that NFA has no business interfering with how a person chooses to trade; no one is shining any light on the part of the new regulation that may have more significant implications than the hedging controversy. The NFA has stipulated that brokers must close out offsetting positions each day and that those positions must be closed on a first-in-first-out (FIFO) basis.  

Yes, FIFO is the elephant in the room that no one is talking about. The implications of FIFO are complex to say the least. For example, let's say that a trader opens a long-term position and a short-term position on the same currency pair, and the stop-loss is hit on one position.  The stop order will be executed against the first opened position on that currency pair. Think about that one for a minute.

FIFO will require more sophisticated strategies to deal with these types of scenarios if holding offsetting positions on the same pair is your chosen strategy.  Think of all those autotrading robots that utilize offsetting strategies that will no longer work after July 31st and now have to be re-analyzed and re-programmed.  Now consider what the brokers have to do to their platforms in order to accomodate the rule change. 

So, U.S. Forex brokers have one thing more to deal with that, some think, will make them less able to compete internationally.  FXCM's U.S. traders are already abandoning U.S. accounts for the UK.  Some U.S. brokers are contemplating offering one trading platform for domestic traders and another for offshore traders in an effort to preserve their client base.  Others are petitioning NFA to modify other rules to counter the impact of the new regulation. 

Whatever the outcome, Forex trading in the U.S. has changed once again and the only way to adjust to the change is to first admit that there is an elephant in the room -- and his name is FIFO.

The IRS is gathering data on U.S. merchants who may be diverting online credit card sales revenue to offshore accounts.

A federal judge has granted permission for the IRS to force big credit card processor First Data to provide details on any U.S. merchants who have arranged since 2002 to have payments from credit and debit cards deposited in offshore accounts with the assistance of First Atlantic Commerce, an obscure company headquartered in Bermuda.  

Credit card companies now.  Can questionable Forex operators be too far behind?  More at Forbes...

I just received an email from FXDD announcing that they are not going to make any changes to any of their platforms with regard to CFTC's new anti-hedging regulation.  The email read:

"In our effort to provide the best solution for your trading regarding the NFA's new rule on hedging, please know that we have been in contact with the NFA and have offered several solutions which we believe will accommodate almost all types of trading strategies and comply with the NFA rules. Our discussions with the NFA are ongoing and we will keep you advised. In the mean time, know that FXDD is making no immediate changes to any platforms and that you will be fully advised prior to any proposed changes."

This is getting better than the soaps.  First, FXCM tells all their U.S. customers to transfer their money to FXCM UK to avoid the hedging regulation.  Now FXDD is dragging its feet on modifying their platforms to comply with the new regulation.  Sounds like there's a rebellion afoot.

Anybody having fun yet?

I just wrote a "guest" blog entry at Forex Magnates about NFA's proposal to limit the leverage Forex brokers can offer their clients.  Effectively, the proposed regulation would limit leverage to 100:1 on major currencies (GBP, CHF, CAD, JPY, EUR, AUD, NZD, SEK, DKK, NOK ) and 25:1 on all others. 

Inexperienced traders will be opposed to the proposed regulation because they'll feel leverage limits will inhibit their ability to make big profits.  Brokers, on the other hand, have a different concern.  They are worried about their ability to compete in an already tough global market.  With offshore brokers still offering up to 400:1 leverage, U.S. brokers could find itself in a customer retention battle. FXCM is already encouraging U.S. traders to move their accounts to the UK to avoid the new anti-hedging policy.  We still haven't determined how effective a marketing strategy that will turn out to be, but it does put more pressure on domestic brokers.

So is the recent blitz of regulations good for the industry (both traders and brokers) or is it just a knee jerk reaction to the current global economic crisis brought on by years of lesser oversight?  I thnk we're going to find out -- pretty quick.