Many traders are now looking at foreign financial institutions (FFI) such as offshore broker dealers in order to trade with new prospective. There are few noted reasons why someone would consider trading outside their country of domicile. For example, there may be trade restrictions which are not impose in certain countries and the tax benefits on income earned outside the country of domicile. However for an US person, trading at a Foreign Financial Institution does not offer much tax benefits. A US person is taxed on his worldwide income so he or she must report all earning even if it was not earned in the US. But despite that drawback, he or she will still consider going offshore because of the higher yield offered in buying government issued bonds which settles in a currency other than USD and is often only offered by firms outside the US. The highest returns are not offered to countries whose S&P rating is in the A’s such as the US government bonds. Countries with a S&P’s rating in the B’s often pays a higher yield than US products and with some as high as 15% yield. If you are receiving yield in that range it is worth the amount you would pay in taxes on that income.
Another incentive is that most FFI has competitive transaction fees and offers the same support and services you would get if you traded at a firm in your own country.
And then there is the benefit of not having certain restriction imposed on leverage and capital requirement. Some FFI offers leverage on small cap securities which are not normally marginable in the US Firms. There are firms that offer higher leverage based on capital deposit which is similar to the US Firms. And then there a few firms that offer higher leverage regardless of capital deposit or securities price requirement.
So why aren’t more people trading at FFI? I believe the answer is that most people like the idea that their money in under their mattress or resides in the same country. There is also the fear that the money is not safe at a foreign institution. And then there is the question of whether there is any insurance or security offered by the FFI that properly protects the investor.
But despite these concerns, the few who invests outside their country do it because the reward outweighs their concerns. And once they do the research on the FFI, it become apparent that facts are not always as tangible as looking at what your neighbor is doing from your backyard.
It is actually a misconstrued fact that Foreign Financial Institutions are more risky than a domestic financial institution. They have similar practices to most US firms regarding anti-money laundering and are often directly regulated by a central banking system.
Foreign Financial Institution were one of the first to implement know your client (KYC) practices and are less prone to identity thief.
The requirement to establish an account at a FFI is often more stringent in requiring the individual to provide a written recommendation from professional individuals such as Accountants, Attorneys, Law enforcers and Bankers. And as long as you invest at a FFI that has a good history of integrity, registered with a regulatory body and published updated financials information your money should be relatively safe.