Labuan. Change of legislation.

Hello to all.

Before we could completely move to Labuan, we received a notice from the local agent about changes to the requirements for brokerage firms like us.
Labuan has long been striving to reach a higher level of jurisdictions. That is why every year, Labuan Financial Services Authority (LFSA) comes up with new ways of complicating life for companies. Although, if I was in their place, I would not have started at all with this, but oh well.
As I see, such information is not yet available on Forex news websites – the regulator has not yet published these changes. Well, it means I’ll be an “insider”, maybe though I’ll pick up the links to the blog for promotion 🙂
So the request to news resources – to cite my blog by reposting this material.

From July 1, 2018:

1. The minimum leverage given to company’s customers should be 1:100.
Probably, it means maximum leverage, since the wording is generally unclear in the current form: does it mean that used leverage shouldn’t be more, than 1:100?…
Given the level of knowledge of LFSA employees, I would not be surprised that this is simply a mistake in the formulation of the situation.
We asked for clarification.

2. Ensure that the broker’s liability is insured for at least 2.5 million ringgits (about $592k).
This is a classical business insurance against bankruptcy. It is not completely clear why the required insurance amount is not tied to the company’s capitalization, since the insurance coverage amount – if an insured event occurs – should be distributed among creditors (clients, in this case), and the share of compensation will be completely different if there are different volumes of company’s capitalization (for example, for a company with a $1 million capitalization, in the event of bankruptcy, clients will be compensated for about 60% of their deposits, while for a company with a $10 million capitalization – only 6%.)
However, this creates interesting opportunities on insurance of customer deposits in offshore jurisdictions: if there are insurance companies that are willing to insure an offshore broker for $590k, then they are also unlikely to be against insuring it for a larger amount.
One can create a rather interesting precedent (the first offshore broker with insurance), but all this is of course a matter of cost and requirements.

3. Audit should be carried out at least once a year.
Requirements to the auditor are not indicated. Apparently, any Mickey Mouse company can be taken as an auditor.
In any case, everything is in order with us.

4. Segregation of customer and company accounts.
It’s a common requirement (for example, in MiFID jurisdictions) under which a company must have 2 settlement accounts: one of which is a client account, and the other is a company account.
Funds from the client’s account can be transferred only to liquidity provider accounts or paid out to customers (they cannot be transferred to the company’s account).
In all regulations, this is presented as a protection for investors’ capital, although technically, there is no such protection or it is very weak: a company cannot directly transfer customer funds to its account, but it can withdraw funds from the client’s account to “their” customers’ account, or take them to “their” liquidity provider’s accounts (connection of liquidity provider is not regulated in any jurisdiction except Switzerland and the US), and quietly pockets them in this way.
In fact, the real convenience of such segregation of funds is that one of the accounts (client/company) can be frozen without freezing the other. So in case of violations/suspicions, the regulator can conduct investigations without stopping the company’s operations.
We have segregation in Standard Bank in any case.

5. A broker should place on his website information about all his representing brokers. This information should be available to clients.
It is not entirely clear what exactly was meant. It is absolutely impossible to publish information about all agents (an agent can be any client of the company). We asked for clarification.

6. All fees charged customers must be clearly indicated.
I think everything is clear here.

From January 1, 2019:

7. Increase in the authorized capital to 1 million ringgits (about $237k).
At the moment, the authorized capital is 300k ringgits (about $75k$).

In addition, there are some functional changes: increase in the requirements for the local office, increase in the license renewal fee and so on.

We have requested extensive explanations and clarifications from the regulator for all the provisions. But considering the speed of their work, I’m not sure that we’ll get answers soon.

Excerpt from the document is hereby attached.

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