FCA to change license requirements for STP forex brokers | Forex Factory

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FCA to change license requirements for STP forex brokers

  • #1
  • First Post: Mar 8, 2018 8:53am Mar 8, 2018 8:53am
UK’s Financial Conduct Authority (FCA) is looking into forcing the straight-through processing (STP) forex brokers to upgrade their licenses to those for full market makers. (https://www.forexbrokerz.com/news/FCA-to-change-license-requirements-for-STP-forex-brokers%E2%80%93media)
Apparently, FCA has sent a letter to a number of its charges to inform them of prospective changes to the regulatory environment. According to the document, the watchdog is planning to force the STP brokers to upgrade their licenses in order to ensure better negative balance protection from losses of their clients in case of extreme market volatility.
The main changes would be in regard to the capital requirements for the brokers and they would most likely be raised in order to be able to cover a large negative balance. Currently there are different capital requirements for the FCA-regulated brokers, depending on their trading volume and number of clients, but not less than GBP 1 million.
  • #2
  • May 6, 2018 9:24am May 6, 2018 9:24am
this could be good
  • #3
  • May 6, 2018 4:39pm May 6, 2018 4:39pm
IMHO its not very good. As from now even STP, ECN and so on type brokers will become market makers to provide negative balance protection. When this requirement will come to effect - you basically will be trading against you broker. Otherwise broker won't be able to provide negative balance protection.
But that shows how actual retail FX market works. Most of these ECN, STP and so on brokers are pure MM, just all this crap wrapped up in nice ECN package.
  • #4
  • May 7, 2018 2:06am May 7, 2018 2:06am
Quoting johnnycash
IMHO its not very good. As from now even STP, ECN and so on type brokers will become market makers to provide negative balance protection. When this requirement will come to effect - you basically will be trading against you broker. Otherwise broker won't be able to provide negative balance protection. But that shows how actual retail FX market works. Most of these ECN, STP and so on brokers are pure MM, just all this crap wrapped up in nice ECN package.
Not really. In correlation with the upcoming ESMA leverage restrictions brokers are at a way smaller risk. Therefor they easily can take the ECN model without keeping the trades within their house.
  • #5
  • May 7, 2018 2:34am May 7, 2018 2:34am
This is a problem. Because of reduced leverage - reduced volume. Reduced volume - reduced income. ECN model will be even less profitable after new regulations will be in place.
And broker have to act as market makers to guarantee negative balance protection. With ECN business model - broker passes all trades to counterparty taking tiny small cut on commissions, but has to guarantee negative balance protection in black swan event. SO they exposing themselves to very small profits and very huge losses.
IMHO all these ECN, STP type brokers taking some risk on their own books anyway to increase profit margins. Only now they will take even more risks as they are basically forced to do this.
  • #6
  • May 7, 2018 3:31am May 7, 2018 3:31am
I can only repeat my argumentation. Your assumptions are wrong imho. Exactly your point of having a "large" risk passing the trades to liquidity providers is way smaller by having nearly not mentionable leverages of below 30. It is nothing else than the measure they are already applying sometimes during risk events today.
On the contrary their commission are not small at all. Do not underestimate the large amount of trades that makes the cake here.

Even nowadays there are already tons of EU ECN brokers offering negative balance protection and ignoring the bucket shops in this basket you still have reliable ones left here.

B-booking is maybe a comfortable way on the first look, but you will not build a large "professional" client base using this model.
  • #7
  • May 7, 2018 4:02am May 7, 2018 4:02am
I am still very curious about how a broker can guarantee a negative balance protection in case of a flash crash or black swan event, unless of course they are a market maker.
  • #8
  • May 7, 2018 4:07am May 7, 2018 4:07am
Quoting Drolph
I can only repeat my argumentation. Your assumptions are wrong imho. Exactly your point of having a "large" risk passing the trades to liquidity providers is way smaller by having nearly not mentionable leverages of below 30. It is nothing else than the measure they are already applying sometimes during risk events today. On the contrary their commission are not small at all. Do not underestimate the large amount of trades that makes the cake here. Even nowadays there are already tons of EU ECN brokers offering negative balance protection and ignoring...
Most retail brokers do not have "professional" clients.
By the way, sending every trade to the liquidity provider isn't even possible since most liquidity providers only take orders larger then 1 lot or 10 lots.
Banks often require a minimum of 100 lots.

Most retail ECN brokers keep all trades in house (there are a few exceptions), and then hedge their exposure with their liquidity providers to stay market neutral.
I know only 2 true ECN brokers that are available to retail clients.

It is all in the legal documents, only thing is most people will never read them properly.
  • #9
  • May 7, 2018 4:20am May 7, 2018 4:20am
There is no need for this kind of general discussion. I am aware of the situation. Still my argumentation is valid as I said that even ignoring all the scammers and false claimers you have reliable ones left. Furthermore "professional" refers to retailers earning money on a regular basis, but do not necessarily have to 50-100k+ capital to enter the "real professional" area (futures for example). Just as a term to filter all the newby gamblers losing their money within some month.

random pick:

https://www.jfdbrokers.com/en/post-trade-transparency

Quoting Dkam
{quote} most liquidity providers only take orders larger then 1 lot or 10 lots. Banks often require a minimum of 100 lots.
Where is the source for your numbers? I disagree as already lotsizes starting from 0.1 lot are sufficient based on my knowledge.
  • #10
  • May 7, 2018 5:05am May 7, 2018 5:05am
Quoting Drolph
There is no need for this kind of general discussion. I am aware of the situation. Still my argumentation is valid as I said that even ignoring all the scammers and false claimers you have reliable ones left. Furthermore "professional" refers to retailers earning money on a regular basis, but do not necessarily have to 50-100k+ capital to enter the "real professional" area (futures for example). Just as a term to filter all the newby gamblers losing their money within some month. random pick: https://www.jfdbrokers.com/en/post-trade-transparency...
I am not familiar with JFD Brokers and i am not going to read all their legal documents but it is possible that they belong on the short list of legit brokers, i see they have LMAX as their liquidity provider, which could explain how they can find a counterparty for small trades.

I have been out of forex and in to futures for a time, so i am not aware of every broker out there.
The brokers i was talking about above are most discussed brokers like Pepperstone, IC Markets, Fx Pro, Tickmill, ..

Minimum size those liquidity providers and banks accept is also (mostly) to be found in their legal documents.
  • #11
  • Last Post: May 7, 2018 5:09am May 7, 2018 5:09am
Quoting Drolph
There is no need for this kind of general discussion. I am aware of the situation. Still my argumentation is valid as I said that even ignoring all the scammers and false claimers you have reliable ones left. Furthermore "professional" refers to retailers earning money on a regular basis, but do not necessarily have to 50-100k+ capital to enter the "real professional" area (futures for example). Just as a term to filter all the newby gamblers losing their money within some month. random pick: https://www.jfdbrokers.com/en/post-trade-transparency...
There is a huge difference between retail and professional clients, making money on a regular basis is by far not enough to be seen as a professional trader.
Every broker has a lot of legal documents on their website, in there you can find everything you need to know, also when you will be handled as a professional trader.

https://www.jfdbrokers.com/documents/JFD_Brokers_Agreement_Appendix_2.pdf
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