The allure of forex trading has captivated many Rwandans, but the unregulated nature of the market has posed significant risks.

To protect investors and ensure fair practices, the Rwanda Capital Markets Authority (CMA)recently introduced new regulations for leveraged foreign exchange trading.

Leveraged foreign exchange trading, commonly known as online forex trading, has emerged as a lucrative avenue for wealth creation and is increasingly gaining popularity in Africa.

Forex trading is an internet-based trading business or an electronic market place for the trade of international currencies. Traders in this market trade on the rising or falling prices of foreign exchange.

The forex market is described as the largest most liquid market in the world by trading volume, attracting millions of traders globally.

Due to its global reach and speculative nature, forex trading is considered high risk and prone to fraud. Regulation is, therefore, imperative to protect investors and ensure fair practice.

A case in point is that of Davis Manzi, an online forex trader behind Billion Traders FX, who’s currently battling an alleged fraud court case that involves $10 million.

Manzi is accused of defrauding 600 people whom the prosecution alleges he convinced to give him large sums of money, promising them significant returns from online forex trading.

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Forex trading regulation

In response to the growing popularity of online forex trading, CMA introduced new regulations in March 2024.

According to Jerome Ndayambaje, CMA&039;s Information Technology Manager, the regulations were implemented to address the increasing number of Rwandans engaging in unregulated foreign exchange trading.

"Rwandans and especially the young people were engaging with brokers outside the country, which is risky. Should the deal go wrong, we as the regulator, cannot intervene as we have no control of what happens outside our country's borders,” he said.

He added that the regulations are also meant to help curb large-scale movements of money out of the country, putting downward pressure on the local currency and leading to depreciation.

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Licensing requirements

The leveraged foreign exchange trading regulations contain licensing requirements for three categories of people, including the dealing broker, the non-dealing broker, and the money manager.

The dealing broker engages in the business of leveraged foreign exchange trading as principal and market maker and one that can take the opposite position to a client’s order.

The non-dealing broker, on the other hand, provides traders access to the trading platforms, where they can view quotes of currency pairs, analyse the markets, and place orders.

The money manager engages in the business of managing and trading forex on behalf of clients in return for a fee based on profit made from the trading.

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As part of the licensing requirements, the dealing broker is required to have a minimum paid up capital of Rwf500 million, Rwf300 million for the non-dealing broker, and Rwf100 million for the money manager, in banks licensed to operate in Rwanda.

To further protect the investors, both the dealing brokers and the non-dealing brokers are also required to maintain a minimum liquid capital of Rwf300 million, and Rwf50 million for the money managers, at all times, in banks licensed to operate in Rwanda.

Operations requirements

According to the CMA regulations, players must ensure that clients' funds are in Rwandan banks until the client has lost the trade.

The players are also required to issue clear disclosures including risk warnings that enable the clients to make an informed decision, and avoid misleading advertisements.

"To protect investors, we also require the use of the appropriate leverage ratio and fairness in pricing and avoiding conflict of interest," Ndayambaje explained.

Rwanda’s regulations define leverage as a loan provided to investors, which is expressed in the form of a ratio based on a small deposit called a margin.

"In Rwanda, the maximum leverage ratio is a hundred to one (100:1), where a client is required to deposit an initial margin of at least 1 per cent of the total value of the opening position,” Ndayambaje explained.

To ensure enforcement of the regulation, inspections of books of accounts and records will be carried out with the regulator taking action for non-compliance on the relevant laws and regulations.

Despite the availability of a forex trading license, no online forex traders have yet applied for it. This may be due to the stringent requirements set by the CMA, particularly regarding minimum paid-up capital.

Consequently, it's likely that a significant number of forex traders are operating illegally without the necessary authorisation. Still, it is not yet clear how CMA plans to crackdown on illegal traders.

"There is no mechanism per say to know those involved in the trade illegally,” he noted, cautionioning investors against engaging with players within or outside the country without verifying whether or not they are licensed.