Escaping the ever tightening CFD restrictions? South Africa doesn't look so friendly anymore - Op Ed - FinanceFeeds

Escaping the ever tightening CFD restrictions? South Africa doesn’t look so friendly anymore – Op Ed

Andrew Saks

It is down to IG Group to ensure that the regulatory tyranny that has taken place in Britain, Australia and Europe doesn’t tarnish the quality and opportunity of the CFD industry in South Africa

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Britain, Australia and the European Union are all represented by governments which have taken a harsh approach toward CFD companies over recent years.

In the United Kingdom, which is the largest market in the world for CFDs, represented by several large home-grown companies with their own platforms and public listings on the London Stock Exchange, and the reputational holy grail of a longstanding and loyal domestic market client base.

Over fourty years years have passed, and CFD trading remains as instrumental to the British electronic markets structure in the retail sector, with very little to have diminished its progress.

The two main companies, IG Group and CMC Markets, are both well established and have been led by extremely elite executives throughout their corporate timeline. Peter Hetherington, a ‘Marmite’ CEO – you love him or you hate him – was an exemplar of precision and kept IG Group in pristine condition throughout his quarter century long tenure. The company was in such good condition when he resigned that the management team now just needs to steer it on a daily basis.

Mr Hetherington supervised its IPO, its growth and its standing as one of the largest retail CFD firms in the world. The company even provides Hargreaves Lansdown with its CFD solution which is integrated into Hargreaves Lansdown’s proprietary Vantage system via a white label solution. Hargreaves Lansdown is Britain’s largest retail financial services company, is worth $6 billion and is highly respected by the population and hedge funds, wealth managers and fund providers alike.

CMC Markets was founded in 1989 by Peter Cruddas, once the third richest man in London, and a former Conservative Party treasurer.

The company has flourished since its establishment and Mr Cruddas is still at the helm. Six years ago, the company spent over $100 million on the development of its Next Generation platform.

Amateur, these companies are NOT. Far from it.

The way they are treated by financial markets regulators, however, is quite appalling.

It is my opinion that Mr Hetherington finally had enough of battling the onslaught against the retail CFD sector by the Financial Conduct Authority (FCA), as its reasoning was absurd. It has been clear from the outset that the exchanges are lobbying the regulator to try to make it difficult for OTC CFD firms to operate, because they simply cannot innovate as quickly or provide retail traders with the array of quickly executed, cheaply accessed assets that OTC CFD firms can, so the only way to get the retail business back is to bully the OTC industry via the regulators.

When it comes down to it, who would win? London Stock Exchange or IG Markets?

Cronyism is one of those bugbears in British regulatory circles. It is highly political and something of an old school tie network.

Australia, a former Crown Colony of the United Kingdom, followed suit. It may be based on British ethos, but Australia’s regulatory authority, the Australian Securities and Markets Authority (ASIC) is somewhat more sophisticated.

It has real time surveillance systems, one of which was built in house and the other provided specially for the regulator by financial markets software firm First Derivatives, and can catch regulatory irregularities immediately without having to try to find them during compliance inspections.

ASIC understands the FX industry well, and Australia is home to some of the largest and most well respected FX firms in the world.

This pristine copybook doesn’t stop ASIC’s warfare against CFDs, however.

The regulator has been ramping up its restrictions for some time, and now leverage, methods of marketing and trading terms are all curtailed, as they are in the United Kingdom.

As these two markets are the largest in the world for CFDs, they matter tremendously to the home-grown companies that serve them. Europe is a little less critical, and ESMA’s toeing the anti-CFD line has been less of an issue, however it does demonstrate the direction of most copycat regulators who want to be seen to be following the seemingly prestigious FCA’s lead, even if that lead was created by an ulterior motive.

Three years ago, I began to advocate South Africa as a region of choice for CFDs.

It has a very similar environment to Australia and Britain in terms of business structure, law and banking prowess.

It is an Anglophone country with an entrepreneurial spirit, and has a top level financial markets, banking and technology environment.

Johannesburg, an absolutely magnificent international, multi-cultural city of 9 million people is the world’s largest man made forest, and is one of the 50 international Alpha Cities.

It is home to a wealth of resources, an enviable, highly luxurious lifestyle, quite simply magnificent surroundings and a world-renowned social lifestyle, and is also the most important business city in the entire continent of Africa.

Johannesburg may well be located in the middle of the southern tip of the African continent, but it combines 400 years of Western culture and education with ultra modern infrastructure, a very well educated population who are used to extremely high quality, and as a result is the opportunity center for a massive, resource-rich, unexploited continent which views Johannesburg as the epicenter of civilization for all of Africa.

Indeed, many brokerages which had been looking toward emulating Australia’s success saw moving into South Africa as a good option, largely because it has similarly well organized regulations as those in Australia, a world class banking and financial infrastructure environment – Standard Bank, Mercantile Bank, Investec and Standard Chartered are among the world’s best Tier 1 institutions – and has access to an entire continent that looks upon South Africa as a bastion of business sensibility with English common law and culture, rather like the relationship between Australia and the APAC region on which its success has been built.

With this important region being very much at the center of FinanceFeeds remit to assist brokerages and their prospective and existing partners in refining their business and developing closer relationships, South Africa’s sophisticated and well organized network of introducing brokers and asset managers is a vital component in today’s retail FX industry.

On November 16, 2019, FinanceFeeds produced its second Professional Trading Thought Leadership Conference, held at the prestigious Bryanston Country Club in Sandton, which is Africa’s largest and most important financial district.

The event took the form of an all day conference, its format very similar to that of our London Thought Leadership Conference which took place in May this year, however the focus in South Africa has been on top level Introducing Brokers, FX hedge fund managers and proprietary traders which use brokerages to execute their trades.

In South Africa, the large companies have massive operational headquarters, with FSB regulation and are as important to their management as any office in Asia or Europe. The reason being that South Africa’s IB network is gigantic and very well organized, often operated by master IBs who represent the entire trading and investment portfolio of the smaller, satellite towns that they reside in, and have the total trust of their clients.

What could possibly go wrong?

Well, now South Africa’s regulator has started to turn the screw.

IG Group is the largest provider of CFDs in South Africa, and has an office in Johannesburg. The company keeps its presence relatively quiet outside South Africa, likely as a way of preserving its market dominance. The ‘don’t tell them how good it is, they’ll all come here’ ethos.

My interactions in South Africa with many Introducing Brokers in the region as well as professional traders is that IG Group has a stellar reputation and is preferred to the array of dishonest bucket shops that have come into South Africa from overseas and taken advantage. Ask any South African IB and they’ll all tell you the same names of the bad apples, and will all stand by IG Group, even though IG Group doesn’t operate an IB model as such.

It is therefore a case of modern history repeating itself as IG Group’s South African entity has had trouble bringing CFDs onboard for client trading primarily due to the fact that South Africa’s Financial Sector Conduct Authority (FSCA) does not regulate such financial products at the moment.

IG Group’s local entity is indeed licensed by the FSCA to provide execution only service, but it has not been able to receive any status to offer OTC derivatives – the category of CFDs. The broker has applied for such authorizations back in 2019, but was denied. Now the broker has filed an appeal and interestingly enough, the regulator has given IG Group a temporary exemption from “Regulation 2(1)(a) of the FMA Regulations”, meaning that existing customers may actually be able to trade CFDs for the time being.

During the exemption period the broker must disclose certain information and metrics relating to existing clients’ trading of CFDs. Nonetheless, it remains to be seen if the broker can achieve a breakthrough in getting authorization to provide CFD trading on a full-time basis, given the regulator’s current classification of CFDs as OTC derivatives “on a principal-to-principal basis”.

From what I gather, IG group is set to contest this matter, however it does show that the regulators are beginning to zone in on CFDs in South Africa.

I hope IG Group gets this straightened out. This would represent a move by an industry participant against regulatory bureaucracy which would keep the path clear for operations in South Africa.

It is still an excellent jurisdiction and a land of opportunity. Let’s keep it that way.

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