There is a big misconception that FX/CFD trading is not permitted in Hong Kong. This is not true. FX/CFD trading is permitted in Hong Kong but with significant restrictions.
FX/CFD regulation in Hong Kong bears some similarity to the US, where – again contrary to popular wisdom – there are limitations on what brokers can offer but CFDs are not explicitly banned.
As we’ll see, the so-called ‘ban’ on FX/CFD trading in Hong Kong is more due to several regulatory quirks in the jurisdiction. In simple terms, CFDs are regulated as a gambling product, much like spread bets in the UK, and are prohibited unless explicitly permitted by the financial regulator.
What FX/CFD products are permitted in Hong Kong?
FX/CFD brokers in Hong Kong can offer CFDs on the spot price of currencies and precious metals. This is why you tend to see brokers based in the jurisdiction only offering gold, silver, and currencies to trade in.
To clear one point of confusion up, we often see people making a distinction between CFD trading and FX or ‘forex’ trading. This distinction runs so deep that for the sake of searchability and comprehensibility, we use the term FX/CFDs on this website.
Nonetheless, it is important to understand that a broker offering ‘forex’ trading is offering CFDs on currency pairs or whatever other asset classes they have. Many brokers muddy the waters further by saying things like, ‘we offer indices, FX, and CFD trading’.
Whether this is deliberate or simply the result of incompetence stemming from a lack of understanding of how these products work is hard to say. But the reality is when you trade FX, precious metals, indices, or shares with a ‘forex’ broker, you are trading a CFD on those products.
To clarify one other point, we often see people making a distinction between ‘rolling spot FX contracts’ and CFDs. A rolling spot FX contract is a type of CFD and is defined as such by regulators, including the FCA, as well as in the KIDs produced by many brokers.
How are FX/CFD brokers regulated in Hong Kong?
Forex CFD trading regulations in Hong Kong
FX/CFD brokers offering currency pairs trading as a CFD are regulated in Hong Kong as leveraged foreign exchange trading financial institutions (LFETs).
Brokers offering this service are regulated by the Hong Kong Securities and Futures Commission (SFC), the jurisdiction’s main financial regulator.
Gold and silver CFD trading regulation in Hong Kong
Spot precious metals trading is not regulated in Hong Kong. This means brokers that offer gold or silver CFDs in Hong Kong are unregulated.
In theory, these should not be allowed because of the ban under gambling regulations. However, this is a quirk of Hong Kong’s gold market and the way in which brokers facilitate spot trading.
In very simple terms, Hong Kong brokers offering gold trading do so based on prices derived from the Chinese Gold and Silver Exchange (CGSE). The CGSE is a market for spot trading in physical gold and silver.
The reason that brokers can do this is because the CGSE allows traders to roll spot contracts perpetually by paying a swap fee. This means the buyer or seller can trade in such a way that they never have to deliver or receive the physical gold or silver.
As a result, you can trade gold or silver spot prices on leverage, perpetually, without ever taking delivery of the underlying asset. They may not want to call it this but this type of contract is effectively exactly the same as a CFD.
Another significant point to note here is that the CGSE has sizeable margin requirements for brokers. Because CGSE rules are effectively passed on to clients, Hong Kong brokers that offer gold or silver trading do not give clients massive leverage, despite theoretically being capable of doing so.
Why FX/CFDs are not banned in Hong Kong
We believe the confusion around FX/CFD trading in Hong Kong comes from the fact that CFDs are not regulated as explicitly as they are in many other jurisdictions.
CFDs are partly governed by gambling laws and partly by the SCF. In effect, Hong Kong’s gambling laws prohibit CFD trading unless it is explicitly permitted by the SCF.
Those gambling laws do not prohibit exchanged-traded CFDs. But as CFDs aren’t normally exchange-traded, this is often viewed as a de facto ban on the product.
The exceptions to this come from the odd quirks discussed in this article. One is that the SCF has a specific regulatory regime for non-banks offering trading in leveraged foreign exchange contracts to retail traders.
The other quirk comes from precious metals trading on the CGSE. The CGSE does not call the product it offers a CFD. But in practice, the ability to trade the spot price on metals with leverage, and without you ever owning the physical asset, mimics exactly the way in which you would trade a CFD.