Opinionista Jeff Cammack 5 October 2020

The legality of online forex trading in South Africa: A response

Finance minister Tito Mboweni has kicked off a minor storm and no small measure of confusion after responding to a parliamentary question on online forex trading.

Jeff Cammack

Jeff Cammack has been the COO of TradeForexSA.co.za since 2012. His focus has been establishing the educational and research processes that ensure the company’s independence and credibility.

At first, Tito Mboweni seemed to directly contradict current Financial Sector Conduct Authority (FSCA) regulations by stating that online forex trading is illegal in South Africa 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 seems to be some confusion over how online forex trading works and what is legal and illegal in South Africa.

As COO of TradeForexSA, a South African forex trading centre that rates brokers and provides education for beginner traders, I 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.

The regulator also pointed out that it is illegal to purchase forex from firms or people without the proper authorisation and that it is also illegal to speculate against the rand.

The misunderstanding seems to stem from what exactly online forex trading is. 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; 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.

I refer to JP Markets’ recent collapse to highlight the FSCA’s role as an industry regulator. The FSCA has recently introduced a new licencing scheme for all online derivative providers in South Africa called the 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. 

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 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. DM/BM

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