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What are the risks of trading with offshore forex brokers?

Offshore destinations are famous for its light touch regulation, if any. They are attractive locations to forex and binary options brokers, as it is relatively easy and cost-effective for startups to register and run a brokerage business. Besides, offshore zones are generally known for their lax regulation and non-existent corporate taxes.


One of the most popular offshore jurisdictions are Belize, Mauritius, Saint Vincent and the Grenadines, Marshall Islands, British Virgin Islands, Cayman Islands, the Seychelles, Dominica and Vanuatu.

CAPITAL REQUIREMENTS


Forex brokers registered in some of these offshore zones have to satisfy some prerequisites, such as capital adequacy to demonstrate their good financial standing:

 

$500,000 - Belize;
$100,000 - Cayman Islands;
$28,000 (MUR 1 000 000) - Mauritius;
$2000 - Vanuatu;


By comparison, brokers regulated by UK’s FCA and by Cyprus’ CySEC are required to maintain net tangible assets amounting to minimum EUR 730 000 and keep the client funds in segregated accounts.

 

POSITION REPORTING


Trading with offshore brokers is extremely risky. Many of these brokers are scam companies seeking to cut financial and regulatory corners. Unlike with the FCA and other EU financial watchdogs*, regulatory bodies in offshore zones place little emphasis on compliance-checking, reporting and supervision and, more importantly, companies are not required to report individual transactions. This means that an offshore broker can simply delete your profitable trade or deny withdrawal, and you can do nothing to get your money back.

 

COMPENSATION SCHEMES


We are not suggesting that all brokers regulated offshore indulge in fraudulent practices, however we advise traders to be extremely cautious when dealing with such. Clients of offshore brokers basically have no protection in case something goes wrong - none of these companies is obliged to arrange a compensation scheme in the event of insolvency.


That is why it is highly advisable that traders avoid offshore brokers and invest with brokers supervised by proper regulators, such as UK’s Financial Conduct Authority (FCA). All clients of FCA-regulated brokers are protected by the Financial Services Compensation Scheme up to £50,000 per person, in case the company goes bankrupt. All CySEC-licensed brokers, on the other hand, are members of the Investor Compensation Fund, which is able to pay compensation up to €20,000, If the company is in default.


*MiFID I introduced a harmonised transaction reporting regime across the EU in 2007. MiFID II (which will come into effect in 2018) broadens the scope of instruments subject to reporting and expands the current objective of detection and investigation of potential market abuse into monitoring of the fair and orderly functioning of markets.

 

TAGS: offshore  offshore broker  offshore forex broker  risk 
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