CAPE TOWN – Finance Minister Tito Mboweni kicked off a minor storm and no small measure of confusion when responding to a parliamentary question on online forex trading last week.
At first, Mboweni seemed to directly contradict current Financial Services Conduct Authority (FSCA) regulations by stating that online forex trading was illegal in South Africa and that residents were not allowed to speculate against the rand.
The FSCA is responsible for overseeing the development of the South African financial market and its main goal is to ensure the efficiency and integrity of the whole experience.
Mboweni pointed out that the illegal online forex trading platforms should not be confused with authorised brokers who used trading platforms to manage and execute market positions. The brokers do not trade in actual foreign currency but offer products with exposure to underlying referenced assets, which may include foreign currency.
TradeForexSA, a South African forex trading centre that rates brokers and provides education for beginner traders, said in a statement that while the minister did clarify his statements by saying that illegal forex trading platforms should not be confused with brokers who offered derivative trading, there seemed to be some confusion over how online forex trading worked and what was legal and illegal in South Africa.
Chief executive of TradeForexSA Jeffrey Cammack reacted to the minister’s comments with some surprise. “While the minister is correct in noting that derivative Forex speculation is legal in South Africa, some of his earlier comments seem to show some misunderstanding of how the industry operates.
“But I also want to credit the FSCA, it immediately published its own clarification of the remarks, stating that the online Forex trading is legal in South Africa, as long as it is speculation on Forex derivatives through a licensed broker,” he said.
The regulator also pointed out that it was illegal to purchase forex from firms or people without the proper authorisation and that it was also illegal to speculate against the rand.
The misunderstanding seems to stem from what exactly online forex trading is, according to TradeForexSA. Online Forex trading is a form of Contract for Difference (CFD) trading. CFDs are financial instruments that derive their value from an underlying physical asset, such as the exchange rate of a currency pair, or the price of a precious metal or equity.
Because CFDs only derive their value from the price of an asset, they are known as derivatives. When trading CFDs, neither the trader nor the provider of the CFD take ownership of any physical asset.
Trading CFDs is legal for South African residents and CFD brokers are regulated by the FSCA and allowed to operate with the correct licence. There is no law that prohibits South African residents from trading with forex brokers based overseas, even brokers that are not regulated by the FSCA.
“As far as we are aware, there are no illegal brokers operating in South Africa that offer forex trading with real currency – true forex trading requires many millions of dollars and is the preserve of banks and hedge funds. All online forex trading in South Africa is derivative trading. While the recent liquidation of JP Markets shows that there are problems in the online Forex trading industry, I don’t think illegal currency exchange is one of them,” said Cammack.
JP Markets is now under final liquidation as per the order of the Gauteng High Court after it was accused of not paying out client withdrawals, not posting client’s deposits to their trading accounts and even manipulating data feeds.
The FSCA recently introduced a new licencing scheme for all online derivative providers in South Africa called the Over the Counter Derivative Provider (ODP) licence. The fact that JP Markets did not hold this new licence at the time of the FSCA’s investigation allowed the FSCA an easy victory.
This regulatory regime requires brokers to conduct due diligence on their clients before they can trade high-risk products, introduces stricter capital adequacy requirements and forces all forex brokers – and other ODP companies – who have a physical presence in the country to provide continuous access to all transaction data to the FSCA.
Cammack said JP Markets’ sudden demise, though appropriate considering its transgressions, has added to the aura of notoriety swirling around the domestic forex industry.
He said the minister’s comments, and the original question from DA MP Dennis Ryder, seem to be a reaction to these recent events and are welcomed. The more the Forex industry is discussed in the public domain the better.
“Honest and regulated forex brokers need to be freed from the reputational damage inflicted by their dishonest peers and South African residents should be fully educated on the risks of forex trading.
“But it would serve the public to have as little confusion as possible over the rights and wrongs of these issues,” reads the statement.