The importance of brokerage licensing
Author: Baiana Kashaeva
When a broker begins their journey, they might opt for working with regions or being based in a country where licensing is limited or not required at all.
This decision is led by many factors, including wanting to start operating sooner, not having enough funds for often expensive licensing, or wanting to try being a broker first and seeing if further investments make sense.
Some brokers still believe that working in a market where no license is required is a smart choice. However, such a take on running a business represents many hidden risks and questionable ethics. The recent SVG licensing situation has highlighted that operating without a license is unfavourable, no matter where your business is registered.
In today’s article, we will share our perspective on brokerage licensing and the key benefits it presents and have a look at the top jurisdictions that might be of interest to anyone looking to join the brokerage business.
Why is licensing important for brokers?
Getting broker licenses can be expensive, time-consuming, or both. However, it is vital for all market participants that everyone respects the rules and regulations.
Proper licensing ensures that the broker follows the rules of conduct, such as guaranteeing fair trading, keeping all track records, and acting as the trader’s guarantee. As regulations evolve and progress, it may require extra effort on the brokers’ side, but it ultimately makes the industry a safer and nicer place for everyone to operate in.
The risks of not having a license
Besides guarantees of proper business conduct, a broker license gives its holders additional benefits and protects them against risks.
For example, knowledgeable traders are reluctant to work with unlicensed brokers because there is less (if any) legal protection for them that way. And if they agree to trade, the volumes will likely be lower as a part of their risk management strategy.
Another complication that brokers without a license often encounter is limited access to the infrastructure. Certain reputable liquidities and other institutions are reluctant to partner with brokers unless they are fully licensed. This leads to a disadvantage as brokers are then left to deal with less experienced and advanced partners.
The key steps to obtaining a license
Getting a brokerage license can be very easy or very hard depending on the location. Below are the key steps that all brokers should follow when beginning the licensing process:
- Run a market analysis and identify potential markets for business.
- Set up a local company if required by the local regulator.
- Create an account with a reliable bank.
- Begin the KYC process.
- Verify documentation with local financial authorities.
- Submit the final documents.
Popular jurisdictions to obtain a brokerage license
Brokers should get the licenses for the markets where they are planning to operate. However, if you’re not yet licensed and considering your options, here are the popular choices:
- Cyprus. The beauty of Cyprus is that it has been a brokers’ hub for many years, so it currently hosts an advanced infrastructure with many professionals available for hiring and all supplementary firms and services in the region. Another key point is that a Cyprus license unlocks access to the EU market.
- Mauritius. Just like Cyprus, Mauritius has a long history of being a financial hub with a vast infrastructure and international presence. Unlike many other regions, obtaining a license here requires less capital, and the timeframe is around 6 months.
- Malta. The final country on our list is Malta. Just like the two other candidates, this region is very broker-friendly, offers adequate conditions for obtaining a license, and the market provides everything that the broker might need.
And when you’ve sorted out your licensing, the next step is to build a robust IT infrastructure to support the high-paced environment of trading. Whether you choose to become a WL broker and benefit from ready-to-use environments or build everything from scratch, reach out to TFB and we will be happy to help you set up the liquidity bridge, data monitoring systems, and anything else you might require.
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