How has CMA changed Kenya's retail forex trading
BIS reported in 2019 that Retail Forex Trading by individuals, family offices and smaller hedge funds accounted for 3% of total daily volume of OTC foreign exchange instruments at $201.65 billion daily. Most of this trading was done through retail brokers or aggregators using OTC derivatives.
Online Forex Trading or FX CFD trading industry which is a part of this retail forex trading has also grown rapidly. According to a report by Finance Magnates, the FX/CFD volumes grew by 27% during Q1 2020 from Q4 of 2019, this growth was attributed to volatility resulting from Covid-19.
Online Forex Trading worldwide is offered as CFD products/OTC derivatives which is regulated by regulatory authorities in almost every major country around the world. CFD & online forex investment regulations are quite developed, mature and time tested in developed regions like Europe, US, Japan, Singapore and Australia.
But in Africa, South Africa and Kenya are the only countries in Africa where online forex trading and CFD trading is legalized and is overseen/monitored by the local market regulatory authorities. For over a decade, South Africa was the only country in Africa which allowed online forex trading.
And most brokers operating in Africa applied for the FSB license to onboard clients from other African countries and African traders relied on FSB's oversight for protection against broker's malpractices. South Africa has had a forex regulation under FSB (Financial Services Board) since 2004 under FAIS Act which allowed brokers to operate as Forex Investment Providers. This was later complimented with new ODP regulations in 2018 to include CFD & other derivatives under newly formed FSCA (Financial Sector Conduct Authority). Brokers could now offer various CFD instruments under this new regulation. This encouraged over 60+ entities to get regulated under new ODP regime.
It took more than a decade for another country in Africa to regulate the online forex industry.
Kenya became the second only African country to regulate the online CFD & Forex industry. When in 2016, CMA of Kenya published a public draft for public discussion on these regulations citing concerns about safety of traders who were trading with offshore brokers and for monitoring of the players in this market.
Capital Markets Authority (CMA) is the independent local financial market regulator that licenses, monitors and supervises the capital market players in Kenya. Following public discussions, CMA passed its regulations on online forex and CFD trading 25th August, 2017 to safeguard the rapidly growing number of traders in Kenya.
According to Trade Forex Kenya, "Since the legalization of online forex trading in 2017, Kenya has witnessed a dramatic surge of 80% in forex and CFD trading volume with the addition of over 40,000 new traders to the market."
Noticing the successful implementation by Kenya & SA and growing domestic demand for forex trading, Now, many other African countries like Nigeria, Ghana, Tanzania are following the similar foot-steps with plans to legalize the online forex trading.
COVID 19 pandemic of 2020 had a huge impact on growth & demand of the online forex and CFD trading in Africa as many new retail traders are looking for making money with opportunities to invest in the global forex, stock & commodities markets which online CFD brokers have made it easier for many with low barriers to entry.
Lower barriers for entry and high leverages have attracted a large number of traders in Africa towards forex and CFD trading. Although, despite the regulatory frameworks in countries like Kenya & SA, online forex & CFD trading involves a significant measure of risk and traders must make adequate efforts to mitigate them.
Here, we take an extensive look at the CMA licensing scheme and regulatory framework in Kenya for forex & CFD industry. We also analyze its potential impact on the traders and the state of the online forex trading industry in Kenya.
CMA Forex Licensing - The Need and History
CMA has followed the suit of similar international regulations in financial markets as per IOSCO particularly OTC derivatives and also to meet its UN Sustainable Development Goals to become an emerging market economy. The regulatory guidelines aimed to increase transparency, participation in the forex market, stability in the economy, and ensure liquidity in FX and CFD markets.
The global financial crisis in 2008 highlighted the importance of liquidity in capital markets. The Capital Markets Master Plan (2014-2023) by the CMA aimed to enhance savings levels and increase liquidity in the market to position Kenya as a global investment destination.
The Capital Market Authority in Kenya projected the big 4 agendas to promote capital markets for national and international investors. The big 4 agendas include The Kenya Vision 2030, Third Medium Term Plan, Capital Markets Master Plan, and United Nations' Sustainable Development goals to strengthen the capital markets and their impact on the economic development in Kenya.
It was also estimated that nearly 50,000 retail traders were trading with the foreign online forex and CFD brokers before 2017. A significant amount of corpus of Kenyan investors was allocated each month towards unregulated forex and CFD brokers. Some reports suggested that average monthly deposits to be around $363 with these brokers. To, enhance their grip over these rapidly emerging markets, CMA drafted the ONLINE FOREIGN EXCHANGE TRADING REGULATIONS in 2017 for online forex trading in Kenya.
With the introduction of this regulatory framework, online forex trading was added with other existing capital market institutions. And the activities of online forex brokers now directly came under CMA's monitoring. This was in line to promote transparency in the capital markets and ensure investor protection with measures of regulatory oversight.
Subsequently in 2018 & 2019, the authority granted a license to two intermediaries offering online forex trading services to traders in Kenya. CMA also granted the first money manager license to Standard Investment Bank (SIB) to operate as an online forex investment manager.
The Gazettement of Capital Markets Regulations, 25th August 2017, has forced most of the forex and CFD brokers in Kenya to obtain a regulatory license from CMA to continue their business in Kenya.
This compelled many unregulated forex and CFD brokers in Kenya to either stop taking Kenyan clients or to acquire the regulatory license for expanding their business in Kenya.
Online Forex Market in Kenya - State and Size
After South Africa and Nigeria, Kenya is the third-largest forex trading market in Africa in terms of daily trading volume and number of traders. The figures have surged rapidly in the last few years. The impact of introduction of the CMA regulatory framework and 2020 pandemic have increased the number of participants by almost 80% in the online forex and CFD markets.
There are now more than 90,000 retails forex traders which is significant increase from previous figures of 50,000 in 2017. The trading volume has spiked by 50-60% during the 2020 pandemic. According to the data provided by CDSC in October 2020, the net asset base of online forex brokers was reported at Ksh 340.42 million in Kenya.
CMA's Online Forex Trading Licensing framework and Requirements for Forex Brokers
Since the passing of regulations, CMA and its licensed forex brokers have made adequate efforts to educate the traders regarding the risks involved in trading forex and CFD online and warning them against unregulated participants.
CMA's regulations have made trust, integrity, transparency & accountability pillars of their CAPITAL MARKETS (ONLINE FOREIGN EXCHANGE TRADING) REGULATIONS, 2017. According to these regulations, 3 types of licenses are being offered to online forex brokers.
- Dealing Forex Brokers: These brokers are also called market maker brokers as apart from spreads, they make profits by providing liquidity to their clients. They often become the counterparty in trades when no matching counterparties are available at the liquidity provider.
- Non-Dealing Forex Brokers: These brokers do not take part in any of the trades and simply match the client's orders with other clients or large-scale liquidity providers. NDD brokers make a profit by charging a commission on each trade or by slightly expanding the spreads.
- Money Managers: Forex brokers having this license can offer investment advisory and can also manage the portfolios of clients on their behalf.
Basic Requirements & Compliance for brokers include:
- 1.Local company in Kenya limited by shares.
- CEO with 5 years' experience in the Forex market or FX Futures.
- Office with adequate space and trained personnel.
- Capital Requirements for different licenses i.e.: Ksh. 50 Mn, Ksh. 30mn & Ksh.10mn.
- Liquidity requirements i.e.: Ksh. 30 Mn or 8% of liabilities.
- Approval from CMA Licensed Trading Platform or Forex Broker in case of Money Manager.
- Risk Disclosure is mandatory to clients.
- Brokers must not have any Conflict of interest with their clients.
- Own & Client Funds must be segregated.
- Reporting & Auditing Requirements - Brokers are required to keep books upto 7 years and auditor must be hired. Brokers need to report data to CMA every 15 days.
- CMA can check broker's books at any time.
- Must have AML officer for AML Policies & Procedures.
- Brokers must hire a compliance officer for Complaint & Grievance Redressal.
- Leverage cap of 1:400.
Currently, many foreign forex brokers are operating in Kenya but only 4 have the non-dealing desk CMA license namely EGM Securities Limited, SCFM Limited, Pepperstone Markets Kenya Limited, and Exinity East Africa Limited with license numbers 107, 123, 128, and 135 respectively. The only broker to have the money manager CMA license in Kenya is Standard Investment Bank with license number 116.
No other online forex and CFD broker is regulated by CMA in Kenya than those mentioned above. The CMA also prohibits traders in Kenya from trading with any other broker even if it is regulated by foreign regulatory authorities.
CMA has issued notifications to the foreign brokers not to serve any Kenyan client(s). If found in violation, CMA holds the right to punish the concerned parties with severe litigations.
Impact of CMA's Regulation on Kenya's Retail Forex Market
Ever since the first regulatory license in Kenya was granted in Feb 2018 to EGM securities, the trading volumes have increased manifold. As licensed brokers & CMA have put a lot of efforts in educating investors about Forex through press & online media.
The regulated brokers have benefited from increased participation from the masses as many potential traders who were reluctant and unaware of the forex and CFD markets are looking at opportunities in CFDs & Forex just like any other legalized capital markets. Regulated brokers can now freely advertise/market their services in Kenya, traders now have trust of CMA and brokers who have local offices.
Due to increased competition among the brokers, the service quality and offerings of features & bonuses have also enhanced since the imposition of the regulatory framework. Exinity and Pepperstone are the most recent regulated entrants in Kenya with attractive pricing and several features to improvise the trading experience.
Concerns & Future
The availability of high leverage ratios and low barriers to entry is constantly attracting more traders to online forex and CFD markets. Traders in Kenya can trade with leverages as high as 1:400 which can be very risky for beginners and lesser experienced traders.
Despite having strict liquidity & transparency guidelines, CMA regulations are comparatively newer and are not as mature as counterparts in Europe and Australia. Offering high leverage to new traders with lesser proficiency can lead to low trading quality.
The local regulated brokers offer a limited range of products and capital markets with a decent brand presence in Kenya. Many retail traders still prefer the foreign forex and CFD brokers with a wider range of offerings including cryptocurrencies.
The
CMA regulations have surely boosted the online forex and CFD trading
environment in Kenya. Although, a cap on maximum leverages and involvement of
more trading instruments can further enhance the capital markets in Kenya.
