What are offshore brokers?
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Whether you are new or experienced in forex trading, you may be considering trading with an offshore broker with several among the selection of best forex brokers. At the same time, you may be wondering about the meaning of offshore broker in the first place.
This is where we can help. Here we will look at exactly what an offshore broker is, how they operate, and how you can trade safely through an offshore broker that is still well-regulated.
Let’s get started.
What does offshore broker account mean?
An offshore broker is a broker who is operating from a location such as the Bahamas, Belize, Seychelles, Cayman Islands, Mauritius, or Vanuatu. There are usually three reasons why a broker may be based here:
- They may be paying fewer taxes when dealing with international customers
- These countries often offer financial regulations that may not be top tier, but they are recognized by the majority of the world
- Offshore branches from such locations are not subject to strict financial trading regulations.
When dealing with an offshore broker, it is very likely that they offer a greater range of asset availability alongside higher leverage up to 3000:1 and a good range of bonuses.
Are offshore brokers reliable?
Offshore brokers can be perfectly reliable. With that said, you need to take care to choose the right one as your money will be sent offshore and can be challenging to retrieve if there are any problems.
In that case, it is ideal to choose offshore brokers who also have top-tier regulation in place from some of the following. FCA in the UK, CySEC in Cyprus, or any other European regulation since they all conform to ESMA rules in Europe, ASIC in Australia, the CFTC and SEC in the United States of America, IIROC in Canada, or the FSCA in South Africa.
When it comes to offshore brokers, they will then be regulated not only by local regulators in that country but also have the ability to accept international traders.
Most popular offshore regulators
The reputation of an offshore regulator is extremely important. Trading with an unregulated broker you would have a very high risk of losing your funds. Generally, traders can apply for an offshore account with a broker only if permitted by their local regulator. EU traders, for example, can’t deal with an offshore broker if they are not also regulated in Europe. Some of the most popular offshore regulators are below:
| Regulator body | Country |
|---|---|
| IFSC | Belize |
| FSC | Mauritius |
| BVI | British Virgin Islands |
| SCB | Bahamas |
| SVG | St. Vincent and the Grenadines |
| FSA | Seychelles |
| CIMA | Cayman Islands |
| BMA | Bermuda |
Offshore brokers protection
Offshore regulators are regarded as Tier 3. This means they could be considered by some as quite lenient or not overly safe in the protections they provide. The use of segregated accounts and negative balance protection for example is not mandatory though they are still usually offered.
The leverage on offer under these offshore regulations also tends to be extremely high as it is often not limited by the regulator.
Difference between offshore and major regulatory bodies
There are a few key differences to note between offshore and major regulators. These are outlined in the table below and it is still always suggested to choose a regulated broker and try out a no-risk demo account first which many brokers will offer.
| Features | Offshore regulation | Major regulation |
|---|---|---|
| Money protections | Dpends on the broker | Mandatory segregated accounts and negative balance protection |
| Leverage | Higher amount set by the broker | Generally capped at 1:30 |
| Bonus | Yes | No |
| Services offered | More flexible | More restricted |
| Taxes | Established on tax haven countries | Subject to capital gain tax |
| Privacy | Strict rules | Transparent |
| Trading risks | Higher | Lower |
Offshore broker pros and cons
Pros
- These brokers are not subject to major regulatory bodies’ limitations
- Access to international markets can be offered
- They can often benefit from lenient tax laws
- Your assets remain well protected with offshore brokers
- They follow strict regulations in regard to keeping client privacy
Cons
- The costs can still be high depending on each broker
- Trading risks can be high with extensive leverage offered
- Some tax laws in these regions can be complex to navigate
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