The Maltese jurisdiction has recently experienced an increasing level of interest from various market players in the field of foreign exchange, ranging from specialist software providers interested in using Malta as a base of operations, to forex specialized asset managers and forex trading platforms looking to use Malta as a launch platform from where to penetrate the EU Market. This growth is largely due to the country’s excellent legal and regulatory regime in this area, which provides high levels of clarity and legal certainty in an area which is often affected by uncertainty.

 The Maltese Investment Services Act, 1994 (“the ISA”), caters for the licensing of “foreign exchange acquired or held for investment purposes”. Thus businesses which provide services in relation to this kind of forex (e.g. a portfolio manager who specializes in investing the assets of his clients in forex) are eligible for, and indeed bound, to obtain a license from the MFSA. Although FOREX is not, strictly speaking, an instrument under MiFID (and thus pass-porting rights do not arise automatically in this context), this still gives rise to a number of interesting possibilities for FOREX firms to pass-port their services throughout the EU. In fact it should be noted that:

1)   Derivative instruments which are commonly used in relation to FOREX, such as CFDs and Futures, qualify as ‘instruments’ under MiFID, and thus, they enjoy automatic passporting rights.

2) Services provided in relation to spot FOREX can still be pass-ported if they are ancillary to other, pass-portable activities

3)     Certain types of spot FOREX transactions can be deemed to be equivalent to transactions made using derivatives and may thus also be pass-portable

Firms desiring to get an investment license to provide services in relation to forex can get a license under:

Category 1 if they provide advice, if they receive and transmit orders in relation to forex, or if they place forex without firm commitment basis. A category 1 license entails a 50,000 euro capital requirement.

Category 2 if they provide discretionary services in relation to forex. Licensing under this category is only allowed as long as the firm does not act as a market maker. This means that the firm cannot represent itself on the financial markets financial markets on a continuous basis as being willing to deal on its own account by buying and selling forex against its proprietary capital at prices defined by it. A category 2 license entails a 125,000 euro capital requirement

Category 3 if they provide discretionary services in relation to forex and act as market makers. A category 3 entails a 730,000 euro capital requirement.

As relates to forex traded for own account or for account of customers, the applicable law is the Financial Institutions Act, 1994 (“the FIA”). Strictly speaking, such an activity is not pass-portable because this kind of FOREX does not qualify as an instrument under MiFID. However, due to the high level of supervision that is exercised by MFSA, foreign authorities are often willing to allow pass-porting under certain circumstances they deem fit to impose.

The growth which Malta has experienced in this sector shows that it is very well-placed to offer its services to investment firms interested in obtaining a license to provide services in relation to forex. The local legal setup ensures clarity and legal certainty in an area of the law that may not be as clear in other European jurisdictions.

This, together with the flexibility and approachability afforded by the Malta Financial Services Authority (with which face to face meetings can generally be arranged in a matter of days) makes Malta an ideal jurisdiction for FOREX businesses looking to expand their operations or to set up in a well-connected, business-friendly environment.