The Capital Market Authority of Rwanda (CMA Rwanda) announced, through a public notice dated March 1, new Regulations for Leveraged Foreign Exchange Trading in Rwanda, which it said are intended to ensure market transparency and investor protection in the business. The regulations of February 26, 2024, were published in the Official Gazette on February 27. Leveraged foreign exchange trading—commonly known as online forex trading—means a capital market business that is Over-The-Counter (OTC) and internet-based that enables traders to trade on price movement of currency pairs, that is, the rising or falling prices of foreign exchange. This includes trading in contract for differences (CFDs), where traders need to deposit a small percentage of the full value of the trade to open a position, allowing to magnify returns as well as losses, as they are based on the full value of the position. Investopedia gives an instance where an investor might buy the euro versus the U.S. dollar (EUR/USD), with the hope that the exchange rate will rise. The trader would buy the EUR/USD at a given ask price. Assuming the rate moved favourably, the trader would unwind the position a few hours later by selling the same amount of EUR/USD back to the broker using the bid price. The difference between the buy and sell exchange rates would represent the gain (or loss) on the trade. Investors use leverage to enhance the profit from forex trading. The forex market offers one of the highest amounts of leverage available to investors. ALSO READ: Rwanda moves to regulate online forex trading Here are 10 provisions in the regulations you need to know: 1. Scope of application These regulations apply to all players carrying out leveraged foreign exchange trading business in Rwanda, with foreign exchange as the underlying asset and any other category of contract for difference, subject to the Authority’s approval – the Authority being the Capital Market Authority of Rwanda. 2. Key terms used in the business Leverage Under the regulations, leverage is defined as a loan provided to investors, which is expressed in the form of a ratio based on a small deposit called margin, so that they can gain a larger exposure to the foreign exchange market—which could lead to bigger profits or losses, as they are based on the full value of the position and not just the initial margin. Position A position means a market commitment or exposure or total amount of currency held by a trader on the leveraged foreign exchange market, according to the regulations. Contract for differences Contract for differences (CFD) means a derivative product that enables traders to trade on the short-time price movement of underlying assets, such as foreign exchange, commodities, shares, indices, and exchange-traded funds, among others; it is an agreement to exchange the difference in the value of an asset from the time the contract is opened until the time it is closed. Cornering activity In relation to foreign exchange, this refers to the use of currency held in significant amounts to be able to manipulate its price. Initial margin It is the minimum amount required to be deposited by a client with a leveraged foreign exchange broker for each contract opened. Margin stop-out protection This means protection that ensures the closure of all open positions in leveraged foreign exchange trading if the client’s account balance decreases to a certain percentage. Negative balance protection - No Negative Balance It means the protection of traders from losing more money than they deposit into their trading account, which ensures that a trader with a losing position does not end up with a negative balance in his or her leveraged foreign exchange trading account. Money Manager It is an entity licensed by the Authority to engage in the business of managing and trading in leveraged foreign exchange on behalf of clients in return for a fee based on the profit made from the trading. Slippage, and negative slippage Slippage means the difference between the client order price or expected price of a trade, and the execution price or a price at which the trade is executed, while “negative slippage” means unfavourable price difference. 3. Eligibility criteria for obtaining a license An applicant for a licence provided for by these regulations is eligible if it is a company incorporated in Rwanda and limited by shares; 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. The applicant must also have 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. It must also 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. Still, it undertakes to maintain at all times in banks licensed to operate in Rwanda, a 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. ALSO READ: How new law on forex trading affects transactions in foreign currencies 4. Activities to be carried out by a leveraged foreign exchange broker and money manager A dealing leveraged foreign exchange broker or non-dealing leveraged exchange broker may carry out activities including opening clients’ accounts; accepting deposits and withdrawals; providing access to the trading platform; providing access to market information that the clients may utilise in formulating their strategies; monitoring and control traders’ positions; (managing accounts; and to provide end-of-day reports). A dealing leveraged foreign exchange broker can also trade as a principal trader and market maker. In the case of a money manager, he/she can carry out activities including trading on behalf of clients; and while they are not eligible to receive clients’ money, they may work with leveraged foreign exchange brokers to onboard clients and record their orders; to have trading rights and access to funds deposited directly by a client into the client’s segregated account through the dealing leveraged foreign exchange broker or non-dealing leveraged foreign exchange broker. 5. Suspension, revocation of a license The Authority, after allowing a licensee to be heard, may by written order, suspend the license of a dealing leveraged foreign exchange broker, non-dealing leveraged foreign exchange broker, or money manager for a period as the Authority may specify in the order. The Authority may take administrative action if it discovers that the entity has engaged in price manipulation, insider trading, or other unlawful activities in leveraged foreign exchange transactions. This action may also be taken if the entity’s financial position has deteriorated to the point where it is no longer in the interest of investors for the entity to continue operating, or if the entity has conducted its activities in a way that is harmful to the public interest. When such malpractices persist, or the licensee has been found guilty of fraud or convicted of a criminal offence; the Authority may by written order, revoke the license, to protect investors. 6. Obligation to clear liabilities about the suspension or revocation of a license Despite a suspension or revocation of a license under these regulations, a dealing leveraged foreign exchange broker, non-dealing leveraged foreign exchange broker, or money manager is responsible for clearing all outstanding obligations up to the date of the revocation or suspension of the license. 7. Client agreement, and risk disclosure statement A leveraged foreign exchange broker or money manager enters into a written agreement with each client before the commencement of the business relationship. The client agreement draws his/her attention to the potential risks and they must be expressed in a risk disclosure statement. It should be received, acknowledged, signed, and dated by the client, thereby confirming that he/she has received and understood it, including the nature and the contents of the risk disclosure statement. A dealing leveraged foreign exchange broker, non-dealing leveraged foreign exchange broker, or money manager provides clients with adequate information so that clients can understand the features and operations of the products and services offered to them as well as risks involved in such business to make balanced and informed investment decisions. 8. Proper handling of clients’ orders A dealing leveraged foreign exchange broker, a non-dealing foreign exchange broker, or a money manager observes a high standard of integrity and acts honestly, fairly, with due skill, care, and diligence, and in the best interest of the clients’ orders. In this context, he or she executes clients’ orders on the best available terms and avoids any dishonest and unfair execution practices, such as asymmetrical treatment of positive and negative slippage which allows them to retain profits arising from positive slippage. Passing losses from negative slippage on the client ensures that electronic trading platforms are designed in a way that any slippage is based on real market situations, and settings of slippage parameters designed to execute orders are applied uniformly regardless of the way the market has moved. 9. Leverage ratio that was set The maximum leverage ratio is 100:1 in leveraged foreign exchange trading. A client is required to deposit an initial margin of at least 1 per cent of the total value of the opening position. A dealing leveraged foreign exchange broker or a non-dealing leveraged foreign exchange broker that wishes to offer lower leverage ratios is not precluded from doing so. The broker may, at his or her discretion, set appropriate maintenance margin levels, provided that the principle of negative balance protection is observed at all times. The Authority may revise the leverage ratio from time to time as may be necessary to stabilise the volatility in global and local currencies or for investor protection. 10. Payment to clients A dealing leveraged foreign exchange broker or a non-dealing leveraged foreign exchange broker ensures that any instructions given by a client relating to payment are executed within two working days.
