This is how forex trading works and what is legal and illegal
Confusion lingers over Tito Mboweni’s response to parliamentary question on online dealings
Finance minister Tito Mboweni triggered a minor storm, and no small measure of confusion, when responding to a parliamentary question on online foreign exchange trading this week.
At first, Mboweni seemed to directly contradict current Financial Sector Conduct Authority (FSCA) regulations by stating that online forex trading is illegal in SA and that residents are not allowed to speculate against the rand.
While the minister did clarify his statements by saying that illegal forex trading platforms should not be confused with brokers who offer derivative trading, there still seems to be some confusion over how online forex trading works and what is legal and illegal in SA.
While the minister is correct in noting that derivative forex speculation is legal in SA, some of his earlier comments seem to show some misunderstanding of how the industry operates.
I want to credit the FSCA though: it immediately published its own clarification of the remarks, stating that online forex trading is legal in SA as long as it is speculation on forex derivatives through a licensed broker.
The regulator also pointed out that it is illegal to purchase forex from firms or people without the proper authorisation, and that it is illegal to speculate against the rand.
The misunderstanding seems to stem from what exactly online forex trading is. It 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 SA residents, and CFD brokers are regulated by the FSCA and allowed to operate with the correct licence. No law prohibits SA residents from trading with overseas-based forex brokers, even brokers that are not regulated by the FSCA.
As far as we are aware no illegal brokers are operating in SA 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 SA 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.
The reference to JP Markets’ recent collapse is pointed. The FSCA has recently introduced a new licensing scheme for all online derivative providers in SA called the ODP licence. That JP Markets did not hold this new licence at the time of the FSCA’s investigation allowed the FSCA an easy victory.
JP Markets’ sudden demise, though appropriate considering its transgressions, has added to the aura of notoriety swirling around the local forex industry.
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 should be freed from the reputational damage inflicted by their dishonest peers and SA 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.
• Cammack is CEO of TradeForexSA.
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