Why Swiss regulation is so strict
In Switzerland, starting from April 2009 only banks are allowed to offer Forex services to retail customers. The price to be a Swiss Forex Broker is set high - 20'000'000 CHF as minimum capital, full compliance with Swiss Banking regulations and requirements. Out of about 200 Swiss Forex Brokers, only 3 have applied for banking licenses and only 2 have finally received them.
Laurent Bellieres, Chief Risk Officer of Dukascopy Bank, provides inside information on what it means to be a Swiss Bank today and what benefits it gives to the final customer:
A sound set of Swiss-made rules
Until 2009, regulatory obligations imposed to Swiss-based FX brokers were limited to combating money laundering. This relative freedom allowed about 200 FX brokers to flourish in Switzerland. Not all of them were safe for their clients. Then, Swiss authorities decided that starting March 31, 2009, Swiss FX brokers would need no less than a banking license to operate. The banking status is the most demanding regulatory regime applicable to a financial business. In Switzerland, among others, it requires a minimum capital of CHF 20 million and a solid organisation. For example, in most of the EU countries it is sufficient to have 100'000 EUR to get a brokerage license. Only the USA has set approximately the same limit of 20 million USD, while in the rest of the world it varies from 100'000 up to several millions. As a consequence, out of 200 active Swiss FX brokers, only 2 aligned with the Swiss banking requirements and continued operations. Dukascopy was one of them.
The stability of Swiss banks comes not only from the Swiss resilient prosperity, but also from a long term experienced mix of laws and mandatory self-regulation, which is ruling the banking business, not into all details, but pragmatically by imposing principles such as protection of clients' interests (duties of information, diligence and loyalty), the maintaining of a proper organisation, including IT, risk management and compliance, the tackling of conflicts of interests, capital adequacy, risk diversification, liquidity, corporate governance, disclosure requirements, etc. Effective implementation of these principles has built a worldwide known reputation of the Swiss Bank.
Swiss regulation also distinguishes itself by giving a certain freedom to businesses and by seeing clients of financial services as responsible adults. For that reason, unlike other mature jurisdictions, Switzerland does not cap leverage, does not prohibit credit card funding or otherwise impose detailed restrictions. This Swiss approach gives an appreciated freedom to both Swiss brokerage firms and their clients to agree on mutually satisfactory conditions.
Finally, we would like to remind about the Basel Committee on Banking Supervision, which is shaping international banking regulation standards is based in Switzerland.
A robust auditing process
Regulation without effective enforcement is like speed limit without police - useless. In some countries, FX legislation exists, but surprisingly is not enforced by mandatory audit. How is it then possible to ensure observance of regulation?
In Switzerland, both internal and external audits are mandatory for banks. To ensure independence of internal audit, this function is subordinated and reports directly to the Board of Directors and not to the Executive Management. In Switzerland, there must be a strict segregation of persons between the Board and the Executive Management and the majority of Board members must be independent.
Banks' external auditors have 2 mandates. On one hand they verify financial statements (statutory audit). On the other hand they verify regulatory compliance with Swiss banking rules (regulatory audit). To ensure its independence, external auditors report their observations and conclusions about regulatory matters directly to FINMA. In Switzerland, due to high independence criteria applicable to external auditors, only the big 4 audit firms are eligible to exercise banking audit mandates.
An effective monitoring of FX brokers by FINMA
Effectiveness of regulation depends on the authority of regulators. Among other measures, FINMA may require changes in the bank's management team (including banning certain individuals from managing positions), may impose reinforcement of risk management/compliance activities, etc. In more extreme cases, a bank may be obliged by FINMA to find new shareholders or to stop banking operations.
Disclosure requirements to the attention of traders
Traders should be able to ascertain the financial stability of their broker. For that purpose, a minimum of reliable audited financial information must be at their disposal. In Switzerland, banks have publications duties. Swiss banks must publish an annual report within 4 months after their year-end closing. Additionally, Swiss banks must publish a half-year balance sheet and income statement. Such transparency allows the customers to evaluate counterparts based on the audited financial results and make a personal decision regarding reliability of the broker.
For example, Dukascopy Bank made its annual reports available on its website. After the famous 15.01.2015 publication of successful intermediary figures attracted the worldwide attention of traders to Dukascopy Bank's conservativeness and stability. We would like to remind that Dukascopy Bank has been one of the few brokers, which rightly anticipated the abandon of the EURCHF peg by the Swiss National Bank on 15.01.2015, an extraordinary event on which many brokers tumbled or fell, even in the stringent US jurisdiction.
The ultimate parachute: the depositor protection scheme
None of the above protections may guarantee that an accident will not happen along the road.
The sole absolute protection in hands of the trader against the bankruptcy of the broker resides in the depositor protection scheme set up by the state. In Switzerland, bank deposits are fully guaranteed against the risk of bankruptcy up to CHF 100'000 per bank (or equivalent amount in another currency) and per client. This protection applies for each Swiss bank a client may deposit funds with. More information about the Swiss protection scheme is available here.
Conclusions
Stability of the Swiss Bank is not a myth, but a complicated mission and difficult daily work. Being a Swiss Bank requires high capitalisation and compliance with highest banking industry standards. The compliance is regularly verified by independent auditors. In combination with CHF 100'000 government protection against bankruptcy, Swiss regulation ensures stability for both customers and the bank.
Today, when there is war in the Middle East and financial crisis in many European countries, Switzerland remains a well regulated, peaceful and neutral country. Nothing has changed with time. As it was always, Swiss banks remain a safe place for investments.
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