Introduction to Forex

Trading

Forex Trading History in South

Africa

Retail over the counter Forex trading in South Africa started 16 years ago when local companies started offering Forex trading facilities to self directed traders using offshore brokers. At that time there were no regulations or restrictions prohibiting individuals or companies from starting their own online company. Sadly however, most companies eventually led to spectacular failures that cost South African Forex traders and investors hundreds of millions of Rands. This situation however was not unique to South Africa and similar fraud and greed occurred in most countries in the western world, forcing authorities to regulate these institutions more stringently. It is therefore necessary and prudent for traders to check that the brokers they choose to deal with, are regulated in their respective countries and offer protection to traders and investors should that company close down.

Forex Trading Regulation in South Africa

Forex trading in South Africa is regulated by the FSB, the UK by the FAS and the US by the CFTC and FTA. Europe and other countries have their own regulatory authorities.

Is Forex Trading in South Africa Legal?

It is perfectly legal for individual South Africans residents to trade the Forex Market, either through a local or overseas broker. When trading through a local broker it is possible to trade with a rand denominated currency. The local platforms are not that great because the spreads are far wider than the offshore brokers. Trading Forex is available from brokers or platforms and through the futures market with SAFEX or Global Trader (GT24/7). These institutions are suitable for corporations or individuals who are unable to invest funds offshore due to exchange control regulations in force in South Africa.

Your Annual Foreign Investment Allowance

The current annual investment allowance for South African residents is R4,000,000 (four million). This allowance is available to South African Tax Payers over the age of 18 years and can be invested in offshore investments, property, bank accounts or other types of investments. Tax payers may only invest offshore once they have obtained a tax clearance from SARS(South African Revenue Services). SARS will also only issue clearance certificates to residents who are registered tax payers and whose tax liabilities are up to date and can prove the source of the funds they wish to invest offshore. Funds may only be transferred through your bank by presenting your clearance certificate from SARS and requesting your bank to do the transfer for you. Banks and other financial institutions are obliged to establish the validity for offshore funds coming into or leaving the country and report to the South African Reserve Bank. Due to the limited facilities of trading platforms most individual traders elect to trade through an offshore broker, using the above procedure to transfer their funds to the brokers.

Limited Local Trading Facilities

Due to reserve bank regulations it is almost impossible for local financial institutions to offer true spot Forex retail trading facilities as the major Forex clearing houses are all based offshore, thus prohibiting the local institutions from complying with daily settlement regulations. Offshore Forex brokers are reliant upon major clearing houses to provide liquidity and protect the broker from unnecessary risk. Forex brokers who offer trading facilities to retail clients without the support of liquidity providers often rely upon the trader losing his money in order to turn a profit and can be prone to price manipulation, stop hunting, and slippage to ensure that novice traders soon lost most of their capital. Brokers traditionally make their money from the bid ask spread each time a trader enters a trade. The trade is then immediately passed on to one of their liquidity providers (via STP or straight through processing) who then assumes the ultimate risk should the trader make money; thus limiting the risk of the broker. This also protects the trader as the broker has no need to use unscrupulous methods to ensure the trader loses his money. The more money the trader has the more money the broker ultimately makes and the longer they both stay in the trading business. Large financial institutions like some of our top banks are forced to deal with offshore brokers to offer retail OTC(Over the Counter)facilities to South African Forex traders.

About Introducing Brokers

An introducing broker is a person or institution who earns a commission from a broker for introducing their product to other traders. In terms of the FAIS (Financial Advisory and Intermediary Services) act 2002 which became law in 2004, it is illegal for any person or institution to act as an introducing broker for an offshore broker unless, that person or institution is registered as a Financial Service Provider by the FSB (Financial Services Board)