The Bank for International Settlements triennial FX survey, published in early September of 2010, revealed that the currency markets, already the largest traded market in the world, had risen to record levels. The leap in average daily volumes from $3,300bn in 2007 to $4,000bn this year was lead by an almost 50 per cent increase in spot FX, to $1,500bn per day. The survey also revealed the increasing participation of hedge funds, pension funds and mutual funds in FOREX, which many see as confirmation of the growing acceptance of foreign exchange as an asset class.
Such growing acceptance may be the direct result of currency markets having a low correlation to other markets. During the financial crisis, most risk assets fell sharply and correlations across asset classes increased, but investors who were long ‘safe haven’ currencies or short ‘risk’ currencies generated good returns. Since FX pairs are simply a ratio of one currency to another, FX markets cannot crash in unison with other asset classes because when one currency falls, by definition, the other must rise.
Fund managers have now realised that pursuing an active FX strategy can go beyond reducing risk and add real value to a portfolio. Take-up of FX strategies is also being fuelled by the development of new investment vehicles. The size and liquidity of the FOREX market lends itself well to vehicles that allow for frequent redemptions, such as mutual funds, exchange traded funds and exchange traded currencies (ETCs). ETCs enable investors to gain exposure to foreign exchange movements through a listed security, which tracks currency indices that aim to reflect movements in exchange rates between two currencies, plus exposure to local interest rates.
Under the Malta Investment Services Act (ISA), providing a service in relation to foreign exchange acquired or held for investment purposes, in or from Malta, is a licensable activity. Thus businesses which provide services in relation to FOREX are required to obtain a licence from the MFSA. The same can also be said for businesses which provide services in relation to derivative instruments such as options, futures, swaps, forward rate agreements and CFDs which latter instruments are commonly used in relation to FOREX. Derivative instruments such as CFDs and derivatives in relation to FX also qualify as ‘instruments’ under MIFID, and thus enjoy automatic passporting rights throughout the European Economic Area (EEA). Furthermore, certain types of spot FOREX contracts (rolling spot FOREX) may be deemed to be equivalent to transactions made using derivatives and may thus also be passportable.
Firms who wish to obtain an investment services licence in order to be able to provide services in relation to FOREX in or from Malta have a number of different options to consider depending on the type of activities they wish to undertake in relation to foreign exchange, such as whether they will only be acting as intermediaries and holding customer’s money or assets or trading on their own account.
The growth which Malta is experiencing in the Foreign Exchange sector shows that it is very well placed to be a base for investment firms interested in obtaining a licence to provide services in relation to FOREX. The local legal and regulatory framework ensures clarity and legal certainty in an area of the law that may not be as clear in other jurisdictions. The right to passport to other EEA countries from Malta is also another important factor contributing to this interest in Malta from FOREX firms.