Lack of Retail Forex Trading Regulations in Africa & its Impact on Traders

It’s hard to imagine why a billion dollar industry like retail forex trading is left unregulated in Africa. Many forex traders in Africa abide by laws set up and meant for oversea jurisdictions.
4 August 2022
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Regulations exist everywhere, and they help prevent abuse of processes. It’s hard to imagine why a billion dollar industry like retail forex trading is left unregulated in Africa. Many forex traders in Africa abide by laws set up and meant for oversea jurisdictions.

Firstly, what does retail forex trading mean? It refers to a small segment of the forex market popularized by individuals. You make a profit/loss by buying and selling currencies.

For you to trade forex as a retail trader, you need to have a forex broker who you would use to place trades in the market. There's an increasing number of forex brokers on the continent, but most African countries don’t regulate them.

Currently, out of all the major countries, only South Africa and Kenya have put regulations in place to oversee online retail forex trading in their jurisdictions. There are around 30+ South African brokers that are licensed by the FSCA, and there are around 7 Non-dealing CMA regulated forex brokers in Kenya.

South Africa tops the chart as the largest forex market in Africa and according to the 2019 BIS report, South Africa has a turnover on an average of $20 billion daily on forex instruments. This although does not indicate the retail trading turnover, but by fair estimates, the volume of retail trading in the FX market is the highest in South Africa compared to other African countries.

Many Africans are beginning to embrace retail forex trading but this doesn’t mean that the venture is profitable for all of them. Statistics show that as high as 90% of retail forex traders lose money due to several reasons including the absence of regulation in majority of African countries. Let's look into the effects non-regulation of the retail forex market has on retail traders.

Avoidable Loss of Funds

There are lots of scam brokers out there to defraud retail traders. Since there is no regulation in most of Africa, it’s hard to determine if a broker can be trusted or not. Traders may think that because a broker holds a license, it’s safe to deal with them.

However, foreign brokers especially those licensed from island nations such as the Bahamas, Panama, etc., target African jurisdictions but they are poorly regulated, leaving retail traders at their mercy.

There is a prevalent rise in clone brokers, they disguise as regulated brokers with a good name; robbing innocent Africans of their money.

Unregulated and poorly regulated brokers attract retail traders by offering them excessive leverage ratios. Leverage allows a trader to open a big trade position with little funds. This means that the broker borrows the trader funds to trade, and gets a refund after the position is closed.

In Australia and Europe, leverage ratios are restricted by the government to between 30:1 and 2:1. However, in Africa, these same brokers can offer clients leverage as high as 1000:1.

For example, you want to trade EUR/USD. With a deposit of $100, and leverage of 1:1000, you can open a trade 1,000 times large which is $100,000. However you can also record losses 1,000 times your initial deposit.

High leverage can lead to increased profit. However, if a loss is made, it can be disastrous because you may end up owing your broker. The higher the leverage ratio, the riskier the trade.

Currently, out of all the major countries, only South Africa and Kenya have put regulations in place to oversee online retail forex trading in their jurisdictions.

Asides from an excessive leverage ratio, forex brokers operating in Africa, engage in rigorous advertisement, encouraging people to trade without informing them of the associated risks.

They offer bonuses on any amount you deposit, which entices the public to invest with them. While regulated brokers in developed nations are forced to display the statistics of losses on their websites, this doesn't apply to them when they operate in Africa.

Investor Compensation Funds usually pay some form of compensation to a trader when he loses money, but this is when you trade with a broker regulated by your home country. Since most African countries don’t support retail forex trading, their citizens are not compensated when they are defrauded or when their online forex brokers become insolvent.

The Securities and Exchange Commission (SEC) of Nigeria has advised the public to abstain from retail forex trading as it is not regulated by them and may be subject to abuse in the country. Retail traders using foreign forex brokers have a lot to lose whilst trading.

Limited Trading Instruments

Another way of trading forex is via currency derivatives. Futures and options are popular derivatives.

Firstly a currency futures contract gives you the right to buy or sell a fixed amount of currency, at a fixed price at a specified future date.

Secondly, a currency option gives you the right but not the obligation to buy or sell a currency futures contract at a fixed strike price and fixed future date.

If you fear the exchange rate of a currency will fall in future, you can buy a put option that gives you the right to sell. However, if you fear it will rise you can buy a call option that gives you the right to buy without any obligation.

To buy a ‘call’ or ‘put’ currency option contract you pay a premium. If your fears don’t materialize, you forgo the premium paid.

Options are derivative contracts and can be used to hedge risk and for speculation. Unfortunately, most African exchanges don’t deal in derivatives so many African traders miss out on this opportunity.

If retail forex trading were regulated across Africa, it would necessitate the need for exchanges in Africa to start offering currency derivatives. For example the JSE allows trading in currency derivatives, and it’s no coincidence that they have a retail forex market properly regulated by the FSCA.

Traders can lose more than their capital

Negative Balance Protection means that you can't lose the money borrowed to you by your broker. You can only lose your initial margin contribution, should a trade go against your favour.

When your margin falls below the maintenance margin level, a margin call is triggered by the broker. Your position would be closed if you don’t invest additional funds to keep your trade afloat.

For example, you open a EUR/USD position of $10,000 with a deposit of $1000. This means you have a leverage of 10:1. Due to market volatility, your losses amount to $1,700. The loss is greater than your initial deposit.

African retail traders need to self-regulate. You need to carry out adequate research to determine if a broker is trustworthy or not.

If you are covered by Negative Balance Protection, your loss is limited to the amount invested, that is, $1000. Otherwise, you have to refund your broker $700.

It’s worthy to note that some forex brokers in Africa could offer NBP initially as a way to attract customers and then stop offering it mid-way once you are in their books.

Tier-1 regulators in developed nations such as the ASIC and FCA compel forex brokers under their regulations to provide NBP for their retail clients but not professional clients.

It is the duty of African market regulators to enforce NBP, but this isn’t the case since retail forex trading isn’t even regulated in most African countries.

Slower order execution due to latency problems

Latency refers to any delay between when you place an order and its execution time. Brokers make use of computer networks such as Electronic Communication Network (ECN) and Straight through Processing (STP) to execute orders on behalf of their clients.

There is an inverse relationship between latency and execution time. When there is low latency, orders are executed speedily and vice versa. Latency is determined by how far the signal has to travel to execute orders.

Light travels in a vacuum at about 186,000 miles per second. Thus, those with servers located close to the liquidity providers execute orders faster than those far away.

Most forex brokers don't have their servers located in African countries. This means that the signals have to travel from a far distance, causing slower order execution.

Latency causes the order and execution price to be different. You may often see a lot of re-quoting when you try to place an order.

If these brokers were regulated, they would open offices in Africa and bring in their important computer servers thus reducing latency issues.

Inadequate Customer Service and Complaint Resolution

Since most brokers don't have physical offices in Africa, clients are forced to take their complaints online.

You have to reach out to their foreign numbers which can be hard to connect to. The difference in the time zones limits how often you can contact your broker since their lines are opened only during working hours.

Online brokers make use of bots to reply to your inquiries and complaints. These answers may not suit your questions; making you lose funds while waiting for a proper reply.

Emails aren't replied to on time. It's hard for you to get a prompt response while faced with trading challenges that require immediate attention.

Poor customer service and complaint resolution has led to most African retail traders losing their funds unnecessarily.

The Bottom Line

African retail traders need to self-regulate. You need to carry out adequate research to determine if a broker is trustworthy or not. Brokers regulated by Tier-1 regulators like the FCA of the UK and ASIC of Australia are considered lower risk than offshore brokers. Use stop loss orders, and engage with leverage cautiously to minimize your risks.

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