How to Start a FX/CFD Broker in South Africa
It has become increasingly popular to start a FX/CFD broker in South Africa over the past years. Partly because it has become increasingly expensive to start a FX/CFD broker in Europe. Due to the increasing uptake of smartphones and other internet-enabled devices in South Africa, which means there are now more prospective clients in the country and wider region than there was a decade or more ago.
FX/CFD trading in South Africa is regulated by the Financial Sector Conduct Authority (FSCA). If you want to start a FX/CFD broker in South Africa, there are two types of licenses that you can get from the FSCA.
The primary reason we executives getting our FX/CFD license in South Africa today is because of the comparatively low cost, regulatory framework, and a range of services one can provide with the license. A South African entity can also act as a regional hub for broker operating in Africa.
Why start a FX/CFD broker in South Africa?
- Low capital requirements
The FSCA FX/CFD license does not have pre-defined capital requirements which you will find in many onshore jurisdictions. Instead, brokers must have sufficient capital to meet their operational expenses.
- Less restrictive regulations
South Africa does not have restrictive leverage or certain market practices, such as offering deposit bonuses. Brokers that want to offer these services are thus free to do so.
- Entry way to Africa market
A lot of companies will start a FX/CFD broker in South Africa but use their FX/CFD license from the FSCA to on board clients across the region. The FX/CFD industry is not unique in this regard, as lots of global companies will have their Africa headquarters in South Africa.
South Africa FSCA FX/CFD License Overview
- Time to launch: 6 – 12 months
- Company registration and licensing costs: $20K to $200, 000
- Company annual operational costs: $100, 000
- Tax: 28% of the profit
- Accounts filing: Required
- Physical presence: Required
- Capital requirements: There are capital requirements
- Anonymity: No
- CFD regulations: CFDs are regulated
Licenses for FX/CFD brokers in South Africa
There are wo types of FX/CFD licenses in South Africa, both of which are issued by the FSCA. These are called a Category 1 license or a Category 2 license. There are some important differences between the two, which are worth considering before you start a FX/CFD broker in South Africa.
- FSCA Category 1 License
The FSCA Category 1 license is typically used by FX/CFD brokers to provide intermediary services – in other words being a broker. A holder of this license can get advisory permissions as well as but the likelihood is anyone starting a FX/CFD broker won’t want to do that. Another important component of this license is the permissions you hold. When you apply to the FSCA, you have to specify what instruments you want to deal in as a financial services business. That could mean you get a license where you are only able to deal in derivatives like CFDs. Alternatively, you may want additional permissions, so that you can add things like equities.
- FSCA Category 2 License
The FSCA Category 2 license is really an add on to Category 1 license. It allows FX/CFD brokers to provide discretionary services to clients. In simple terms, you can provide a service where you are allowed to make buy or sell decisions over a client’s account. The primary reason to get this license is if you want to add copy trading or similar services. You cannot offer that service without this license.
South Africa Over-the-counter derivatives providers (ODP) license
The FSCA introduced a new requirement in 2018, for FX/CFD brokers to operate as over-the-counter derivatives providers. This is referred to as ODP license.
Getting approved as FX/CFD broker does not require explicit permissions to offer derivatives and the ODP license is separated out in such a way that it can make it look as though the license is distinct from the Category 1 and Category 2 license listed above. This is not actually the case. In effect, an FX/CFD broker will have category 1 and or category 2 permissions, offering FX/CFDs as an ODP is a component of these licensing regimes, you will still need to apply separately for an ODP license and the application process can stretch from 6 to 12 months.
Steps to get a FX/CFD broker license in South Africa
The process to start FX/CFD broker is a lot like in other onshore jurisdictions. It involves registering a company, putting together a set of documents, and then submitting your application to the FSCA.
Below is not a exhaustive list of the requirements but it should give you some ideas as to what you have to do:
- Registering a company
Registering a company in South Africa is the first step.
- Putting together your FX/CFD license application for the FSCA
The application to start a FX/CFD broker is long and requires a lot of supporting documentation.
- Notarized identify documents and personal records
This will mean gathering a range of documents that you will have to get notarized by a lawyer or other officials:
- Passport
- Driving license or other form of ID
- Bank reference letter
- Police records
- Educational qualifications
- Business plan
The business plan is essentially a range of documents showing what your plans for your FX.CFD brokerage business are, including things like target customers, marketing and sales tactics and revenue forecasts.
- Business operation documents
These are a set of documents that detail your back-office plans for your FX/CFD brokerage business. The key things here are risk management policy, anti-money laundering policies, and security policies.
- File application and respond to any further questions
Once you have put together all the documents above you will be able to submit your application to start a FX/CFD broker to the FSCA. You are likely to be asked by the regulator for clarifications and to submit other documents if they believe some are lacking in detail.
How long does it take to start a FX/CFD broker in South Africa?
The suggested timelines we have seen would indicated that it takes up to 6 – 12 months.
The defining factor is to ensure that you have put together all the documents correctly before you submit your application to the FSCA.
How much does it cost to start a FX/CFD broker in South Africa and get an FSCA FX/CFD license?
Research and experience have shown that the price ranged of starting a FX/CFD broker in South Africa is &120,000 to $180,000. The cost of starting a FX/CFD broker in South Africa range because there is no fixed capital requirement. This is actually a big positive for the license as it means your capital requirement is going to be more suited to your business model.
What are the capital requirements for starting FX/CFD broker in South Africa?
The FSCA does not have a fixed requirement for FX/CFD brokers. Instead, the capital requirement ranges depend on your business plans. You must demonstrate that you have operational capital. This is not just about money in the bank; it is about operational resilience. You must demonstrate that your business has the capacity to withstand financial operational risks. We view this as one of the main strengths of the South African licensing regime for FX/CFD brokers.
What are the yearly costs of running a FX/CFD broker in South Africa?
We estimate that a good ballpark figure for running a FX/CFD broker is $100,000 annually. The key costs to be aware of are renting an office and hiring local employees. You also have to meet certain requirements, like filing accounts, and paying annual fees to the regulator, auditing and tax payments.
What are the physical presence requirements for FX/CFD broker in South Africa?
South Africa does have a physical presence requirement for FX/CFD brokers. You must have both local employees and local office. With regard to employees, there are two roles that must have locals, one is a compliance officer who must make sure your business is meeting its compliance standards you cannot outsource.
The other role is what the FSCA calls “Key Individual”. A key Individual is someone that effectively oversees your business. The regulator defines a key individual as someone overseeing the activities of a company providing financial services.
The best way to think about this is that the person is a local CEO whose role is primarily operational and compliance based. They have to make sure the business is run properly and it also meets compliance standards.
The other part to be aware of is the physical office. You don’t have to register your business at the same address as your office, but you must have a physical office – you cannot use a post box or similar to run your company
Are FX/CFDs regulated in South Africa?
FX/CFD trading is regulated in South Africa. Companies have been fined for not getting the requisite ODP permissions.
Final thoughts
The FSCA licensing regime for FX/CFD brokers is a favorable one and we think the country is actually overlooked by start up players, for whom it is possibly the most affordable onshore jurisdiction to get licensed in.
South Africa ultimately offers decent banks comparatively low start up and operational costs, and a regulatory framework. Although it’s likely to be favored more by FX/CFD brokers looking to expand in Africa, we actually think the license could be used in much the same way many providers today are using offshore licenses, like those issued in the Seychelles or Mauritius
More information, contact us
info@mctg-consulting.co.za
