A Changing Regulatory Landscape
We’ve read/heard many opinions from financial “experts” who still refer to the forex market as the finance industry’s Wild West.
Granted there have been some bad apples in this journey from the fringes to the mainstream but the same can be said of any industry. This is not specific to forex but is the reality of the “human condition”; while the vast majority of people live by a strong moral code there will always be those who are willing to lie, cheat and steal in order to get ahead.
Unfortunately any industry in its infancy is fertile territory for such undesirables looking to exploit the trust that is inherent in most people. And although it’s impossible to completely remove them from the picture, measures are inevitably introduced (regulation for example) to help weed them out.
At MFH several of our founding partners have been trading forex since 2002 (when retail traders could count their colleagues on one hand) and have literally witnessed this industry’s evolution firsthand.
The “Wild West” comparison was certainly valid when describing those early years but the industry as a whole has taken significant steps in the right direction, due largely to regulation and a higher level of awareness/discernment among traders.
Sometimes the process of “righting the ship” however, can create a different set of problems.
Consider the lead-up to the crash in the US housing market. Prior to that bubble bursting, lenders were handing out money with reckless abandon; mortgages were approved with no income verification, no credit consideration and no down payments.
In the aftermath of the crash much of the blame was pointed squarely at the bank’s overtly loose lending policies (rightfully so) and they responded by pushing policies to the opposite extreme. They went from approving almost anyone with a pulse to declining even well-qualified borrowers.
When a particular industry/environment is criticized for being “soft”, this kind of bureaucratic overcompensation is not uncommon. We have been mindful of this in our assessment of our current regulatory structure and have been looking for signs of the pendulum swinging too far in the other direction.
On the trading side, we have recently been exposed to major changes taking place in our original domiciled jurisdiction – New Zealand where the landscape is rapidly changing. The FMA has been implementing and further proposing new legislation, surpassing even neighboring Australia in terms of complexity and compliance surrounding derivative dealing and discretionary investment management services (DIMS). We experienced a great deal of confusion and inconsistency even among the professional advisers we had retained; each had a different interpretation of how we should be applying the legislation and we believe that the waters will only become murkier given the aftermath of the SNB announcement and various other recent market occurrences.
On the compliance side we experienced one of those “fork in the road” moments upon learning of new regulations that would have required our clients to submit notarized or apostilled support documents as part of their trading application given that we were considered a “reporting entity” in New Zealand.
We had been down this road before as an IB for a Swiss brokerage and our clients at that time were extremely put off by the additional expense and nuisance that came along with attaining notarizations. We believed that forcing clients of ours to do the same would create a huge hassle and certainly a competitive disadvantage.
We took these occurrences as early warning signs of things to come and evidence of that proverbial pendulum starting to swing. Our response was to explore opportunities within jurisdictions that still enforced the principles that were important to clients (safety of funds, fair trading conditions, ethical marketing practices etc.) while at the same time providing a suitable amount of operational freedom allowing us to be “enabling” towards our clients and business in general vs “restrictive”.
FSB Jurisdictive Regulation
This took us down an unexpected path but one that in hindsight couldn’t be more ideal. After a lengthy process, Managed Forex Hub’s parent company (Atlantic Pearl) has recently been approved in South Africa as an authorized juristic representative of Khwezi Financial Services (Pty) Ltd – a premiere multi-licensed Financial Services Provider in Cape Town, South Africa, holding FSB license no. 44816. This permits Atlantic Pearl to offer discretionary trading services and dealing abilities for intra-day rolling spot currency contracts under Category 1, sub-category 8 and 13 for both equities and derivatives.
Managed Forex Hub will essentially remain as the Research and Development division of Atlantic Pearl which is becoming a multi-fauceted Service Provider also providing technology, and clearing services under the new regulatory regime.
How Does This Effect Us?
Nothing has changed with regards to our ongoing analysis and R&D on trading talent and managed products, or our compliance policies. We will continue to keep our NZ office open as one of our partners works from there. We have also opened a Cape Town office for our other partner to operate out of.
We still follow an extensive risk assessment and AML protocol which was originally devised for us by a leading firm in accordance with the NZ AML Act. On the clearing side, we still operate with brokers (including our own in house clearing option), with complete segregation of client funds, run a 100% agency model and are subjected to quarterly financial soundness reviews. However we have been able to escape some policies which in our opinion were unnecessarily restrictive, such as potential leverage restrictions, and the forced “parking” of unnecessary capital in NZ institutions, and the required notarizations on our clients.
Focusing on good analysis, R&D, and protecting our client’s funds and providing an optimal trading environment on the clearing side are treated as top priorities regardless of our jurisdiction; not because it’s mandated by any outside authority but because we care deeply about our clients and our relationships. The first people to open trading accounts with our clearing division were our closest partners and clients who have been working with us for years on the managed accounts side; these are incredibly valuable relationships.
One of the things we love about this industry is that it’s never static; there are always new relationships to be made and new areas to explore. At MFH we guard ourselves against complacency and refuse to accept the status quo. Sometimes this causes our path to lead in unexpected directions but every decision we make is underpinned by our aspirations to bring further value to our clients.
We are also working towards a goal later this year of passporting through the EU under MiFID regulations which will be another fairly major benchmark for us once accomplished.
Here’s to our combined success!
The team at MFH