The Investment Services Act, Chapter 370 of the laws of Malta (“ISA”), establishes the principal regulatory framework governing the provision of investment services relative to Forex trading models, specifically trading in contracts for difference, derivatives in relation to foreign exchange and/or rolling spot forex in Malta or from Malta.
Online trading in contracts for difference, derivatives in relation to foreign exchange and/or rolling spot forex is typically undertaken in one of the two following ways:
- the operator acting as a riskless principal (often as a ‘white label partner’), with each trade or position being offset by a corresponding trade or position being entered into by the operator with another principal at the same time and price, and the operator acting as counterparty to both transactions – requiring a Category 2 Investment Services Licence, covering execution of orders on behalf of clients; or
- the operator dealing on its own account, against its proprietary capital – requiring a Category 3 Investment Services Licence.
Accordingly, the specific activities undertaken by the proposed MFSA licensee will determine which investment services licence category would be appropriate, in terms of the Malta Investment Services Act.
The primary difference in the requirements which are applicable to Category 2 and Category 3 Investment Services Licences is that a Category 3 licensee may provide the following activities (which a Category 2 licensee may not):
- Dealing on own account;
- Underwriting instruments; and
- Operating a Multilateral Trading Facility.
Both Category 2 and Category 3 investment services licence holders are required to have a minimum initial capital of Euro 730,000.
Moreover, in terms of a Public Notice issued by the Malta Financial Services Authority (MFSA) to Category 2 or Category 3 Investment Services Licence holders carrying out online forex trading in terms of the Investment Services Act, various changes were effectively introduced to the Maltese FX regulatory framework including, inter alia, the following:
- New rules relative to initial capital – as indicated above, both Category 2 and 3 investment services licence holders are now required to have a minimum initial capital of Euro 730,000 (the initial capital applicable to a category 2 IS licence holder previously stood at Euro 125,000.
- New rules relative to the applicant’s shareholding structure – the MFSA will now only accept an application for such a licence if at least one entity holding a direct qualifying shareholding (i.e. over 10%) in the applicant is already regulated in the provision of financial services for similar activities in a reputable jurisdiction.
- New rules applicable to risk management function – Category 3 IS Licence Holders are expected to have a full-time dedicated risk management function in place.
Once a Malta investment services licence is obtained, it is possible for the Malta company to avail itself of the benefit of passporting such licence into any or all of the EU Member State countries by following some basic procedures of notification in accordance with the Markets in Financial Instruments Directive (MiFID). This would enable the Maltese Company to provide its services within the relevant Member State/s either (i) through the establishment of a branch or (ii) on the basis of the cross-border provision of services.
Malta’s investment services legislative regime is complemented by various other incentives to set up business in the jurisdiction including a corporate tax system whereby shareholders in Malta-based fund management companies could benefit from a net effective Malta tax rate of 5%, subject to proper tax structuring, and the highly qualified persons scheme whereby senior personnel relocating to Malta and employed by the fund management company may benefit from a favourable personal income tax rate of 15% subject to the satisfaction of certain requirements.
The aforesaid senior positions include, inter alia, Chief Executive Officer; Portfolio Manager; Chief Investment Officer; Senior Trader/Trader; Senior Analyst (including Structuring Professional); Chief Risk Officer (including Fraud and Investigations Officer); Chief Financial Officer; Chief Operations Officer; Head of Research; Head of Investor Relations and others.