Online trading scams: Investors urged to assess legitimacy and licences of global trading platforms

The rising instance of fraud in South Africa has led to the Financial Services Conduct Authority (FSCA) tightening regulation on local markets and cracking down on this criminal activity.

According to Roger Eskinazi, managing director of Tickmill South Africa, investors can avoid falling prey to scams and fraud by ensuring the trading platforms they use are correctly licensed and legitimate. 

He therefore urges traders to ensure they are making use of reputable platforms that have the necessary licences in place. “One example is an ODP licence, which demonstrates that a trading platform is following global best practice and is granted to financial service providers that contract in over-the-counter (OTC) derivative products (ODPs) such as contracts for difference and options, as well as certain indices and commodities. 

“Tickmill recently became the first foreign-domiciled ODP licence holder in South Africa. The process of obtaining this licence took two years and involved a steadfast commitment by Tickmill to ‘stay the course’.”

Traders beware: the rise of forex scams

“The potential losses are simply too great to entrust your money to brokers and platforms who do not hold the appropriate licences. Regulation provides one of the most important safety nets for online traders and has made a significant contribution to providing investors with a safer, more secure trading environment.

“We have always been overtly transparent about the risks of trading in any instruments and the consequences thereof. We believe that well-informed, educated and empowered clients who are disciplined and realistic about risk/return tradeoffs and, more importantly, about their own abilities, tend to fare better and enjoy longevity as traders,” says Eskinazi.

This is where ODP licensing fills the gap, by requiring brokerage platforms to comply with a code of conduct, characterised by strict parameters on aspects such as portfolio reconciliation, reporting, liquidity and the safeguarding of collateral. Entering into agreements with unlicensed entities that are not governed by this code of conduct exposes investors to a high level of risk and the potential of falling victim to costly scams. Some of the most common scams involve the trade of forex – a popular OTC product that is traded outside of a centralised exchange.

An ODP licence and what it means for SA traders

The past few years have highlighted the high-risk nature of trading in derivatives, as opposed to listed stocks. Investors in listed entities on the Johannesburg Stock Exchange, for example, enjoy the protection provided by the JSE Market Regulation division’s regulatory oversight. The trade of OTCs, however, involves a significant counterparty risk, which up until fairly recently has not been mitigated by regulation.

Up until five years ago, the trading environment for OTC products was largely unregulated and mired in irregularities and trade agreements that offered investors no protection against fraud and other financial crimes. In 2018, the FSCA stepped in and intensified its scrutiny of OTC brokers in the hopes of bringing more transparency to the market. Interventions such as these have been pivotal in creating a robust regulatory regime for new and emerging trading platforms and avoiding catastrophes like the 2008 United States subprime lending crisis, which was a watershed moment for regulators worldwide.

“This process has been designed in this way by the FSCA to ensure the highest level of public protection and that platforms have the right tools to help clients understand not only the potential rewards but also the risks involved.”

Although Tickmill’s offering goes beyond trading in OTC derivative products only, it is Eskinazi’s opinion that, historically, they have not been regulated to the extent that traditional instruments have been.

A further, more comprehensive layer of regulation is therefore a positive development in this arena, given the inherent complexity of these derivatives. Tickmill has therefore welcomed the FSCA’s ruthless clampdown of rogue operators in this sector and its willingness and commitment to clean up this part of the industry.

An important safety check

South Africans who are new to the world of OTC derivatives and who are looking to explore their options in this market are encouraged to check that their provider of choice has a legitimate ODP licence. This will be clearly indicated on the provider’s website and should be readily available should traders wish to review it.

As Eskinazi concludes: “The regulator left no stone unturned in ensuring we are able to perform in terms of protection of client funds, client service and risk management. We handpicked a world-class executive and operational team in South Africa with decades of experience and institutional knowledge, and committed significant capital – well in excess of the statutory requirements.

“In the end, the regulator found the necessary comfort in our extensive global footprint, our systems and processes, a significant group balance sheet, and our unequivocal commitment to local resources and presence on the ground in the major locations in South Africa.”