Mboweni creates a slight uproar in South Africa about the legality of internet FX trading

CAPE TOWN — When answering to a parliamentary question on online forex trading last week, Finance Minister Tito Mboweni sparked a mini tempest and a lot of misunderstanding. Mboweni first appeared to be directly contradicting current Financial Services Conduct Authority (FSCA) laws when he stated that online forex trading was banned in South Africa and that people were not permitted to bet against the rand. The FSCA is in charge of supervising the growth of the South African financial market, with the primary purpose of ensuring the efficiency and integrity of the entire process.

Mboweni clarified that unlawful online forex trading platforms should not be confused with regulated brokers who manage and execute market positions using trading platforms. The brokers don't deal in actual foreign currency, but they do sell products that give you exposure to underlying referenced assets, which might include foreign currency.

While the minister clarified his statements by saying that illegal forex trading platforms should not be confused with brokers who offer derivative trading, TradeForexSA, a South African forex trading centre that rates brokers and provides education for beginner traders, said in a statement that there appeared to be some confusion over how online forex trading worked and what was legal and illegal in South Africa.

TradeForexSA's chief executive, Jeffrey Cammack, was taken aback by the minister's remarks. “While the minister is accurate in stating that derivative Forex speculation is allowed in South Africa, several of his earlier remarks appear to demonstrate a lack of grasp of how the market works.” “However, I must give credit to the FSCA, which quickly issued its own explanation, indicating that online Forex trading is permitted in South Africa as long as it is speculation on Forex derivatives through a licensed broker,” he said. The regulator also stated that purchasing currency from organizations or individuals without the required authorization was prohibited, as did speculating against the rand.

According to TradeForexSA, the confusion appears to arise from a misunderstanding of what online forex trading is. Contract for Difference (CFD) trading is a type of online Forex trading. CFDs are financial products whose value is derived from an underlying physical asset, such as a currency pair's exchange rate, the price of a precious metal, or the price of a stock. CFDs are classified as derivatives since they draw their value only from the price of an asset. When trading CFDs, neither the trader nor the CFD provider take actual possession of any asset. Trading CFDs is legal in South Africa, and CFD brokers are regulated by the Financial Services Commission of South Africa (FSCA) and permitted to operate with the appropriate license. There is no legislation that forbids South Africans from doing so.

“As far as we know, there are no illegal brokers operating in South Africa that provide real-money forex trading — actual forex trading necessitates several millions of dollars and is the domain of banks and hedge funds.” In South Africa, all online forex trading is derivative trading. While the recent collapse of JP Markets demonstrates that the online Forex trading sector has issues, I don't believe that illicit currency exchange is one of them, Cammack stated.

After being accused of not paying out customer withdrawals, not posting client deposits to their trading accounts, and even altering data feeds, JP Markets has been placed in full liquidation by the Gauteng High Court.

The FSCA has announced the Over the Counter Derivative Provider (ODP) license as a new licensing structure for all online derivative providers in South Africa. Because JP Markets did not have this new license at the time of the FSCA's inquiry, the FSCA was able to easily win.

This regulatory regime mandates that all forex brokers – and other ODP companies – with a physical presence in the country provide continuous access to all transaction data to the FSCA before they can trade high-risk products. It also imposes stricter capital adequacy requirements and requires all forex brokers – and other ODP companies – with a physical presence in the country to conduct due diligence on their clients before they can trade high-risk products.

JP Markets' abrupt death, albeit deserved given its crimes, has added to the atmosphere of infamy circulating around the domestic FX market, according to Cammack. He added the minister's remarks, as well as the initial query from DA MP Dennis Ryder, appear to be a reaction to recent events and should be applauded. The more the Forex market is debated in the open, the better. “Honest and licensed forex brokers must be free of the reputational harm imposed by their dishonest counterparts, and South African people must be well informed about the hazards of forex trading.”