Whenever it comes to the Forex arena, a lot of focus is usually placed on the EU, UK and US. This is because these are the most active regions in the Forex arena and have the most impact to the arena as a whole. Nevertheless, there are still other regions around the world where Forex trading is quickly becoming a major industry, and one of them is Russia. The Forex industry has been growing rapidly in Russia, and this has necessitated a change in directive to increase transparency. In this post, we shall look more closely at the current state of the FX industry in Russia and the changing regulatory environment. (Are you aware that: ESMA Finally Puts Its Foot Down On MiFID II Directives)
What is the current situation in Russia’s Forex arena?
In order to understand how the Russian Forex arena currently stands, we would need to look at the size of the arena itself first. Only then can we establish the regulatory framework in the area and understand the changes that are coming to the industry in 2019.
Growth of the Forex arena in Russia
There’s no secret it’s possible to make a lot of money trading Forex. If you have been a successful trader for several consecutive years, then this should be obvious. Looking at some of the most successful traders of all time, we can also see it’s possible to make huge profits from only a number of trades. Knowing this, then it should not be a surprise that the industry has been growing fast in Russia with more and more people joining for an opportunity to make money. Also remember that Russia has one of the fastest growing economies in the world. (Learn more about the: Growth Of The Forex Arena In Africa And Other Developing Countries)
Accordingly, many Forex dealers also made their services available leading to a huge number of dealers. A LeapRate reporter was quoted as saying there were over 200 Forex dealers offering their services in the country and about 500,000 clients trading with them. While that may not be a huge number for a country with over 100 million people, it does represent a rapid increase in the number of traders since retail trading started to become popular at the turn of the century. (In case: You Wanted To Know How Many Traders Lose, Now You Know)
Increasing Forex fraud in Russia
Wherever a thriving industry carries on, scammers will always find a way to interfere with it and make a quick buck. This is exactly what happened in Russia as soon as the Forex arena began to grow. The issue became so rampant that even the police started to issue warnings regarding Forex scams. Back in January 2018, Tolyatti Police issued a warning following a complaint made by an individual who had been scammed. Apparently, this individual had been invited by the dealer to their actual office for a presentation of the investment opportunities. The dealers explained in complex terms how they would invest the money and earn huge returns. (Can You Actually Get Your Money Back From A Fraudulent Dealer?)
This individual was just one of the many who were duped by the same dealer under the same promises. In fact, other victims had gone as far as selling their apartments and other properties to raise capital under the belief they could make all of it back… and more. Thereafter, the dealer quickly transferred the money to offshore bank accounts, making it irreversible and not recoverable by the police. Unfortunately, the name of this particular dealer was not revealed by the police, so we could not warn others against them. (Are you planning to start trading: Think Twice When Making A Deposit In A FX Company)
Another more popular case of Forex fraud involved six suspects who had been running another scam brokerage. The scam ran between 2012 and 2013, urging investors to deposit their monies into managed accounts that would be used to trade FX arenas. After just a few months, the brokerage closed up shop and disappeared with RUB 32 million of clients’ money. The police raided the offices and arrested the scammers, with the mastermind receiving 3 years and 2 months in jail. Add to that, the individuals were also required to return the money they stole, which is probably why the jail sentences were shorter than expected. (These are the: Top 10 Most Outrageous Forex Arena Scammers)
These kinds of cases have become very common in Russia, showing that the cases of fraud have been on the rise. Forex fraud is nothing new to the industry in all areas of the world as we have covered in previous posts. In fact, some other scammers had managed to steal a lot more money from their clients. The only difference is that regulators in stricter jurisdictions are often caught and face very tough jail sentences and fines. In Russia, it seems the sentences are a bit lenient, and this is giving the scammers more confidence in their activities. Nevertheless, it’s encouraging to see that the authorities are not just resting on their laurels, but are actually doing something. (Lessons on self-defense: Forex scams)
Forex directives in Russia
The police, prosecutors, courts and all others involved in ensuring transparency in the Forex arena cannot act on their own, but rather have to operate based on a set of directives. Therefore, we need to look at the current directives guiding the FX arenas in Russia, the changes they’ve gone through and their impact on the arenas.
Which is the regulating body in Russia?
For decades, there had not been any direct directives to govern the Forex arena and Forex dealers in Russia. Perhaps this is why there had been so many cases of Forex fraud and scams running in the country for so long. The problem had become so severe that even government institutions and officials just saw the industry as gambling and not worth considering. For example, the Vice Chairman of the Central Bank, Sergey Shvetsov, once said, “the Central Bank not assist in the growth and expansion of the Forex arena.” He went further to say “Forex is a casino” meant only to fulfil people’s desire for gambling and is not “an asset for investment”. (This is: Why FX Trading Should Not To Be Treated Like A Casino)
Because of the complete lack of directive, victims of fraud had no recourse because even the authorities could not really do anything about it. As a result, the scammers were able to get away with their activities because one could not even prove they had been defrauded. The thing is, when you ‘choose’ to engage in an unregulated business, you’re essentially consenting to their rules which the authorities cannot monitor. (These are the: 10 steps of successful participants)
Due to the rampant fraud going on in Russia, good dealers who ran their companies from Russia were often criticised and avoided; everyone thought they were scammers too. Of course, not all of them were, but that was the overall impression. It stifled the growth of the industry in the country and held many people back from achieving their dreams. Considering that there was so much potential in Russia, some innovative people formulated a plan – to create their own regulatory body that didn’t rely on the government, which was already disinterested. After all, various FX trading technologies, successful traders and good dealers are from Russia – just think of MetaQuotes creating MetaTrader platform. (Here is: Everything You Need To Know About The cTrader FX Trading Platform)
An enterprising Forex dealer thus created the Financial Arena Relations Directive Centre (FMRRC) in 2011 to act as the regulator. All legitimate dealers at the time got a certification from the FMRRC to prove that they were indeed legitimate and not scammers. Because the institution was created by a dealer with knowledge of the arenas, they only certified other legitimate dealers who they knew had good business practices. This way, traders who were looking for a reliable dealer had a more reliable list to choose from and avoid scams. They also established a compensation fund for their certified clients so that complainants would be compensated. (Do you know: How Is Spread Betting Different From Forex Exchanging?)
The idea was very innovative and helped to reduce Forex fraud, but only up to a point. First, the FMRRC does not actually have any authority as the Central Bank has never actually given it any recognition as a governing body. This means that, even though a dealer licensed by FMRRC commits fraud, the institution cannot actually take them to court and prosecute them. Second, the institution itself was not very adequate in their actions. Their website did not keep the list of certified dealers updated, making it difficult for traders to identify the real dealers. Other important information about a dealer’s past and details were also not kept updated or available. Finally, the FMRRC operated based on its own set of rules, which may not be completely fair. Remember that the institution was kept alive by the dealers who sought a certification, so it had incentive to tailor their rules to be more suitable to the dealers rather than the traders who don’t pay for anything. Over time, FMRRC became more of a certification body rather than a regulatory body, losing its reliability among traders and dealers. (Should You Invest In CFDs Or Stocks To Make More Money?)
Then in December 2014, the Russian government started to take the need for Forex directives seriously and planned to start regulating the industry. President Vladimir Putin signed into law the Russian Forex law and started the countdown for dealers to comply or get prosecuted. Perhaps they finally acknowledged that the Forex industry is indeed a legitimate financial arena worth regulating or they just got tired of all the scams and fraud – we’ll never know. All we know is that the State Duma proposed a set of rules to govern the FX arenas, and these rules became active on the 2nd of May 2017. However, the rules had been active since the start of 2016 after discussions with the Forex dealers throughout 2015; the 2nd of May was just the deadline for compliance. Under these new directives, the country’s Central Bank becomes the main regulator for Forex dealers, phasing out the need for the FMRRC. (Choose from: The 3 Most Trusted Exchange Authorities in The World)
Today, the FMRRC is sought by dealers just as an additional certification to increase their status, but only the Central Bank of Russia’s approval matters. Having been given authority as an act of parliament, the central bank actually has the authority to prosecute any dealers who do not follow the rules unlike the FMRRC. So far, the central bank has only issued nine licenses, meaning that these are the only dealers allowed to operate in Russia legally. (Is It Time To Upgrade To Metaparticipant 5: Features Of MT5)
What are these laws governing Forex trading in Russia?
So now here we are, the actual rules governing Forex trading in Russia, what you have been waiting for. To understand the full scope of these laws, we have to look at how they control the Forex trading companies and the traders separately. On the side of the dealers, the laws are meant to increase transparency and prevent scam dealers. To this effect, the first measure of the directives is to only allow licensed dealers to operate. Just like in many other jurisdictions, Russia’s central bank requires that all dealers soliciting clients from the area be licensed by them. The dealers will also need to become members of the Association of Forex Dealers (AFD), which is a self-regulatory organization approved by the central bank. The structure is somewhat similar to the US where dealers get a license from the CFTC and must also become members of the NFA.
As we already mentioned, only nine dealers have a license so far including the likes of Alpari Forex, Forex Club, InstaForex, Trust Forex, TeleTrade, FINAM FOREX, VTB 24 and Promsvyazbank. These are also the only dealers allowed to advertise their services to clients in Russia. In September 2017, the central bank released a press release indicating that they were going to be blocking 400 websites belonging to unlicensed dealers. Among the websites blocked included fraudulent companies or course, but also legitimate dealers licensed in other jurisdictions. This was possible because the Ministry of Economic Development drafted a bill that allows Russian authorities to block foreign websites. Thus, all websites for foreign dealers that are yet to receive a license can be blocked to prevent access by Russian residents. (When Choosing A FX Agent, Pick The One With Winning Clients)
In order for a dealer to get a license, they must prove to have a net capital of 100 million RUB (about $1.6 million). For dealers holding more than 150 million RUB in client deposits, they must have an even larger capital to get approval. Then the dealer will need to deposit 2 million RUB into the self-regulatory organization AFD. Finally, they must have an actual base in Russia to allow for close monitoring and tracing in case of a complaint. This means that even foreign companies must set up shop in Russia before getting approval too. For these foreign companies, their requirements go further. Such a foreign Forex dealer must have a 5-year experience in the field of finance and regulated to perform this function. Plus, they cannot be regulated by an offshore regulator, which probably means their foreign regulator must also be in Europe. Many other documents including recommendations, financial statements, etc. will also be needed before they can get that license from the Central Bank of Russia. (Do you know: How much money FX agents make?)
Besides issuing licenses to the dealers, the central bank also determines the extent of services that they can offer. Licensed dealers in Russia are only allowed to offer Forex trading of currency pairs, but they cannot offer CFDs trading. As you know, a lot of dealers provide other assets like stocks, indices and commodities in the form of CFDs rather than the actual assets. For traders in Russia, though, they will have to forgo these other trading instruments and stick only to the Forex pairs. Once a dealer complies with all these requirements, then they are good to go and can start signing up clients without any worries. (Do you know: Which Are The Best Commodities To Trade In The Autumn?)
For the traders, the only limit is on the amount of leverage, which has been capped at 50:1. This leverage could be raised depending on the financial instrument in question, but the limit rarely goes beyond this. Binary options have also been banned in Russia, and no dealers are allowed to provide this instrument. This is not surprising considering that nearly all other Forex regulators have done the same. (Concepts Every Trader Should Understand: Leverage, Margin and Hedging)
There will also be some difficulty in creating an account with a Russian Forex dealer because clients will need to provide reliable client identification. This would probably mean walking into the dealer’s office and submitting your identification documents before an account is opened. They made this a necessity to prevent money laundering by individuals, similar to what the Chinese did with crypto exchanges; perhaps even for the same reasons. (This is: How to protect yourself from margin call)
How effective are Forex directives in Russia?
It has been less than two years since the new directives came into effect in Russia, so it’s still early to tell definitively whether the laws are effective or not. What we could say is that the Central Bank of Russia has been very extensive about these laws, and it is likely that cases of fraud will go down. Even the central bank itself stated that legal Forex trading activities in Russia have only just began. A better way to look at the effectiveness of the directives is by analysing how the various parties are reacting to them. (These are: The Best FX Events And Expos To Attend Every Year)
On the side of the traders, many will probably be more confident now trading with Russian Forex dealers knowing that the government is keeping an eye on them. On the other hand, the signing up process may be just too cumber some for most. Data from the central bank itself indicates that there are only about 3,539 clients working with licensed Russian Forex dealers compared to about 500,000 working with offshore dealers. The difference could be explained by the strict requirements placed on the dealers about their clients’ identities. Furthermore, many people will be put off by the 50:1 leverage cap, which is lower than that provided by offshore dealers. Other than that, the traders don’t really have much to complain about, and following years of rampant fraud and scams, it would be worth it to take the few extra steps to ensure their funds’ security.
The main complaints will probably come from the dealers themselves who may feel as if the rules are a bit too restrictive. For example, the minimum capital requirements may have squeezed several smaller dealers out of the arena if they could not reach it. Remember that there may be some legitimate start-ups without the capital, and this only leaves the huge established dealers to run the industry. It is also evident that the Central Bank of Russia is not in a hurry to regulate any more dealers considering they only gave two companies a license in all of 2017.
Foreign brokerage companies will also feel as if they are being kept away from the Russian arenas by the spew of requirements. For a foreign company, the requirements for a license to operate are just too much that is seems they were meant to keep them out. That is also not a good thing for the traders because it prevents them from receiving the best possible services and limits them to just 9 options (for now).
There are also other minute requirements that aren’t made expressly clear to the clients, such as the 5-second delay in quotes. Dealers are expected to process orders at the same exact quotes that existed at the time the client made the trade. This was possibly done to eliminate the problem of slippage where a client’s trade is executed at a different quote. The problem is that slippage is normal due to arena volatility, such as when major news occurrences take place on the economic calendar Forex. When slippage occurs, it can even work in favour of the client, but the central bank wants to eliminate slippage completely. To do this, they have proposed a 5-second delay, but it is not clear how it’s going to work as Sergey Kozlovsky, head of analytics department at Grand Capital, told A to Z Arenas.
For a dealing desk or STP Forex dealers, this is possible because an algorithm creates the arenas, but it’s not so simple for those on the ECN dealers list. You see, a true ECN Forex dealer merely matches client orders but does not take part in the arena themselves. So, how will they be able to match client orders when there’s a 5-second delay rule. Wouldn’t this create a discrepancy in quotes between the two opposite parties? (Can A Forex Agent Avoid Sending Trades Directly To The Interbank Arena?)
Kozlovsky also said the central bank was not clear whether the dealers were allowed to hedge their clients’ trades in the open arena. For an individual trader, you must understand how hedging works – you basically place another trade to counteract any losses that you may suffer on a previously opened trade. Forex dealers do this too in order to limit their own losses. For example, say a majority of clients have bought the US dollar and the dealer isn’t sure it’s going to go up. Since they had provided them with leverage, it’s likely they will lose a lot of money if the currency suddenly dropped. To hedge against the risk, they sell the dollar in the interbank arena just in case of such an occurrence. Major dealers like Alpari UK and FXCM have been known to go bankrupt when violent arena shifts occur, so the dealers must protect themselves.
What’s the future of Forex directives in Russia?
The steps already taken by the government to protect traders are commendable and long awaited, but there’s still a lot to be done. As we have already discussed previously, the laws governing Forex arenas in Russia are not completely clear regarding all aspects, and this means more amendments before they are complete.
The laws must be modified in such a way that they protect the clients while also allowing for healthy competition among dealers because that is how they improve their game. People will also appreciate an easier way of participating in the arenas without too many hurdles; after all, others have managed to do it. For now, we can appreciate the steps already taken and hope for even more improvements.
If you’re worried about new Forex directives in Russia and Europe, watch this video to find out how these laws affect you: