Leveraged foreign exchange trading, commonly known as online forex trading, is now -- for the first time -- regulated in Rwanda following the issuance of relevant regulations, The New Times understands.
The regulations of February 26, 2024, governing leveraged foreign exchange trading in Rwanda were published in the Official Gazette of February 27, and issued by the Capital Market Authority of Rwanda (CMA Rwanda).
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In a public notice about the regulations, dated March 1, CMA observed that the regulations are in line with its dual mandate of facilitating market development while fostering investor protection in the Rwandan capital market industry.
It indicated that leveraged foreign exchange trading is an internet-based trading business carried out Over the Counter (OTC), which enables traders to trade on the price movement of currency pairs (rising or falling prices of foreign exchange) by depositing a small percentage of the full value of the trade to open a position. This, it said, allows magnifying either returns or losses.
According to the regulations, the maximum leverage ratio is 100:1 in leveraged foreign exchange trading. This means that, for instance, for one US dollar invested (in your account), you can trade up to $100 in value.
CMA's Manager for Information Technologies and Coordinator for Fintech in Capital Markets, Jerome Ndayambaje, told The New Times that the term leverage means a sort of support -- you can leverage on something to achieve something else.
"It's like a loan they [brokers] give you, it's like increasing your capacity so that you can enter the market and be able to trade," he said.
As per CMA, leveraged foreign exchange trading is one of the contracts for differences (CFD) product family where the underlying asset is currency.
CFD is an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product (securities or derivatives) between the time the contract opens and closes, according to Investopedia, which adds that a CFD investor never actually owns the underlying asset but instead receives revenue based on the price change of that asset.
This is different from forex bureaus which deal in converting currencies into others -- as real financial assets -- based on exchange rates.
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CMA indicated that the establishment of the regulations is a result of a recent demand from the market to put in place a regulatory framework for leveraged foreign exchange trading in Rwanda.
Many Rwandans, especially the youth, it pointed out, have been participating in this type of business using local and foreign players mostly over the Internet without knowing whether such players are licensed or not, which poses a high risk to them.
Eligibility criteria for obtaining a licence
The regulations provided that an applicant for the licence provided for by regulations is eligible if it is a company incorporated in Rwanda and limited by shares; and has a Chief Executive Officer and other key personnel who meet conditions, including being fit and proper, per the capital market licensing regulation requirements, having experience of not less than five years in the business of buying, selling, managing, or dealing in leveraged foreign exchange and derivative product contracts, and being members of relevant professional bodies in areas of financial markets.
An applicant must also have, among others, the necessary resources and controls including staff, office space, equipment, information technology systems, business continuity and disaster recovery plan, risk management policies, and operational procedures, to effectively discharge its activities.
Regarding financial requirements, it must have in banks licensed to operate in Rwanda, a minimum paid-up capital which may not be impaired, of Rwf500 million in case of a dealing leveraged foreign exchange broker; Rwf300 million in case of a non-dealing leveraged foreign exchange broker; or Rwf100 million in case of a money manager.
Also, it must undertake to maintain at all times in banks licensed to operate in Rwanda, liquid capital of Rwf300 million or 30 per cent of total liabilities, whichever is higher, in the case of a dealing leveraged foreign exchange broker or non-dealing foreign exchange broker; or Rwf50 million or 30 per cent of total liabilities whichever is higher in the case of a money manager.
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Commenting on financial requirements, Ndayambaje said the nature of the business requires that the licensee have adequate capital as they collect a lot of money from people, adding that they wanted to prevent the entry of those who do not have the required resources for the business.
"It's protecting people, and ensuring that charlatans do not enter the business, rather that it is done by a person who is committed and has the required capacity," he said.
Meanwhile, CMA called upon all players interested in operating leveraged foreign exchange trading in Rwanda to apply for an appropriate licence, and inform the general public looking to invest in such business to always ascertain that the players they will be engaging are licensed to operate such type of business in the country.
