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Every once in a while you get reminded of the fact that lots of people who should know what they’re doing, don’t know what they’re doing.
For example, when St Vinny G brokers got booted about a year ago, you could read on the regulator’s website that ‘forex’ brokers were the ones that their new rules would apply to. But what is a forex broker? Presumably one that offers – at a minimum – rolling spot FX contracts, which are a contract for difference, at least according to the FCA and ESMA.
But when TradeInformer called up the regulator, they didn’t know what CFDs were. And yet they assured us that forex brokers were banned, without being able to actually say what a forex broker was. One other offshore regulator we spoke to said almost exactly the same thing.
More examples of this probably come into your inbox every day. For example, you have regulatory consultants flogging the Moheli regulator in the Comoros, even though this ‘regulator’ doesn’t exist and has been explicitly recognised as illegitimate by the country’s central bank. In these instances it’s hard to tell if the people flogging the license know this or if they themselves believe it’s real.
Anyway, at the end of last year I looked at the Labuan license as this has become a popular option for some providers, particularly as it permits crypto trading. The thing is, if you actually read the regulations that govern a money broking license, there is no mention of derivatives and they say a broker can only act as intermediary. Then in the same regulations they say you can offer leverage of up to 100:1.
These things would seem to contradict each other. How can you be an intermediary and at the same time offer an OTC contract with leverage that, by definition, means you are the counterparty to all trades?
So I tried calling them but they never answered. Then I wrote to them but they never got back. It was starting to become like that Eminem song with Dido, except much less dramatic. Then about a week ago the regulator put out a circular very explicitly saying that…
“Financial products that do not fall within the money or foreign market exchange is [sic] not permitted, this includes but not [sic] limited to contract for difference [sic] of which the underlying assets are commodities, shares and indices.”
I don’t want to draw conclusions but I like to believe that TradeInformer got the Labuan regulator to do something.
It’s noteworthy, however, that you can still offer crypto products. So this raises an interesting question. Could you just offer ‘crypto’ perpetual futures on all of the products you would offer CFDs on instead? We’ll have to get in touch again.
In the meantime, this to me is an example of how overused the word ‘forex’ is. I have genuinely heard someone describe a product they were offering as ‘forex shares’ before.
We’ll look at this in the future but, like many things in life, we can probably blame Americans for this state of affairs. In the US, CFDs are regulated as security-based swaps. Because currencies aren’t securities, regulators in the Land of the Free make a distinction between how rolling spot FX contracts are treated and how CFDs on securities are treated.
Does MetaQuotes like props?
Liquidity providers hate it…it’s the SHOCKING new industry that trades (almost) exclusively on demo accounts. We are talking, of course, about prop firms or funded trader programmes.
One of the trends we’ve seen over the past few years is MetaQuotes becoming stricter with offering unregulated brokers access to its trading platforms. Funded trader firms are an interesting counterpoint to this because, at least in theory, they don’t need to be regulated.
And many of these firms do appear to have direct relationships with the company or access to a white label. Others do not. Aside from launching their own offerings, some brokers are partnering with props and then giving them access to their own accounts.
Another factor here, as illustrated by the MyForexFunds debacle, is that funded trader companies are targeting US clients.
Again, there is theoretically nothing wrong with this if it’s not regulated. However, based on past experiences we’d advise against it, unless you like spending long stretches of time in a confined space and enjoy hanging out with Sam Bankman-Fried.
It’s this latter point that is of particular interest as TradeInformer understands MetaQuotes has warned at least one provider not to allow props to take on US clients. The exact reasoning for this is unclear but we can make some inferences.
When the MetaTrader apps were removed from the App Store, there was reasonably good evidence that it was due to scammers targeting US clients. To be fair, those people supposedly weren’t using genuine MetaQuotes software. Nonetheless, if US clients get hurt, you will also probably get hurt in the end.
TradeInformer also understands that MetaQuotes is unhappy with some providers engaging in what is typically called ‘grey label’ programmes, where they allow props to use their MT4/5 platform.
“People can get frustrated with MetaQuotes because there can be a lack of consistency or clarity on policies,” said one APAC-based consultant. “But in this instance I think it’s understandable. They are enjoying little or no financial upside from a lot of these arrangements and then face huge downside potential if there are less scrupulous guys trying to get US clients.”
One to watch.