HK regulator urges Forex brokers to comply with regulatory standards
Forex brokers are expected to review their policies and controls to ensure compliance with the expected regulatory standards by January 1, 2021.
Hong Kong’s Securities and Futures Commission (SFC) is urging Forex brokers to comply with regulatory standards. The regulator has elaborated on these standards in a circular issued earlier today.
The standards for leveraged foreign exchange trading (LFET) brokers concern areas such as customer due diligence. It is important for brokers to take all necessary steps to establish the financial situation, investment experience and investment objective of each FX client; and assure themselves that the client understands the nature and risks of the LFET products they offer and has sufficient net worth to assume the risks and bear the potential losses of trading in the products.
The brokers have to inform the client that the transaction in OTC products may involve greater risk than investing in exchange traded products because there is no exchange market on which to close out an open position. The risk of slippage should also be explained to the client.
Forex brokers are also expected to provide clear and effective disclosure to clients about how their orders are executed. This concerns, inter alia, the order execution policy, explaining the methodology they use to deliver the best possible outcome when executing orders.
Brokers adopting a Straight Through Processing model or executing orders on behalf of clients have to disclose information on:
- the capacity in which they trade with or act for the clients; and
- any intra-group link or relationship between the firm and the liquidity provider with which the client order is executed or hedged.
Brokers adopting a Dealing Desk model have to disclose information on:
- the fact that they act as the counterparty of client orders and take opposite position to a client’s order; and
- the circumstances which give rise to the potential and actual conflicts of interest in their principal-dealing and market-making activities;
The companies are expected to review their policies and controls to ensure compliance with the expected regulatory standards by January 1, 2021.
The SFC today released its Report on Leveraged Foreign Exchange Trading Activities Carried Out by Licensed Corporations which summarises the findings of a survey of the leveraged foreign exchange trading (LFET) activities conducted by 32 firms licensed for Type 3 regulated activity between January 1, 2018 and December 31, 2018.
Key findings of the survey include:
- In 2018, the turnover in LFET market was $1,844 billion and over 99% was attributable to rolling spot forex contracts. Turnover was relatively low for more complex forex products such as options and forward contracts, which may be difficult for retail investors to understand.
- All LFET products were traded on an over-the-counter basis.
- Of the total 15,096 active LFET clients reported by the brokers surveyed, 98% were retail investors.
- More than 60% of the LFET clients of a sample of brokers made net trading losses in LFET.