In case you’ve been living under a rock, Cyprus has been dominating headlines for the wrong reasons. Over the weekend, Cypriot leaders and the Troika came out with a bailout deal for the euro zone’s third smallest country.
Forex Gump did a fantastic job at going through the nitty-gritty of the bailout in his recent article. In a nutshell, a Cypriot bailout is pretty interesting to market junkies because, unlike the bailouts of other failed economies in the European region, this particular one comes with levies on private and corporate bank accounts.
For instance, deposits less than 100,000 EUR will be taxed at a rate of 6.75% while larger accounts will get hit with a staggering 9.9% tax rate. It has also been proposed that the corporate tax rate in the capital city of Nicosia be raised from 10% to 12.5%.
I’m sure you’re wondering “How in the world could the Cypriot bailout have an impact on the entire forex industry when Cyprus is such a small country?” so let me give you the lowdown on forex-related firms in Cyprus.
Cyprus is an island nation that boasts of financial independence, reasonable tax laws, and a relatively simple bureaucracy. It also enjoys a strategic geographical position between international markets in Europe and the Middle East. As such, it has earned the reputation of being a favorable location to establish financial firms, which include forex and binary options brokerages.
At present, the Cypriot regulatory agency CySEC (Cyprus Security and Exchanges Commission) is overseeing 30 registered forex companies and has over 60 applications being processed. In fact, some brokers trying to escape stricter CFTC restrictions in the U.S. have opted to set up shop in Cyprus and conform to the less stringent regulations of financial authorities under the European Union.
Although the details of the levy on deposits have yet to be finalized, brokers are starting to consider the possible repercussions. In one scenario, brokers could incur a reduction of their own capital kept in Cypriot banks. Another scenario could be that brokers undergo a decrease in their client funds deposited in banks in Cyprus.
Of course brokers will still have to maintain the minimum capital requirement imposed by CySEC in their accounts. Some are hopeful that CySEC would remit any depletion of their accounts but it is likely that brokers will have to compensate for the reduction by finding other sources of funds.
It doesn’t help that, from a client’s perspective, the uncertainty in Cyprus’ banking sector puts a dent on financial confidence. As we’ve witnessed in recent debt dramas in other euro zone nations, this lack of security among depositors typically results in a bank run. In this case, a “broker run” might be possible as clients could rush to liquidate their accounts from Cypriot brokers while prospective customers could refrain from opening new accounts with them.
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