Kenya’s online currency traders are now required to obtain a licence from the Capital Markets Authority, (CMA) to continue in the business following the recent enactment of tough regulations governing the market.
The CMA, which is the capital markets regulator, estimates that about 50,000 people, including brokers, dealers and money managers, are in the business and are mainly using offshore platforms that are not overseen by Kenyan regulators to offer the service.
Luke Ombara, the regulatory policy and strategy director at CMA, said the new regulations now require the traders to register with the CMA as part of efforts to exert a measure of regulatory control over online forex business.
To be registered, the forex dealers must raise Sh50 million in minimum capital, a requirement aimed at protecting consumers.
“An applicant seeking a licence as an online forex broker shall be a company limited by shares, have a minimum capital of Sh50 million, make an undertaking to maintain the minimum capital at all times plus five per cent of liabilities owed to forex customers in excess of Sh50 million and ensure that Sh40 million or 80 per cent of its capital, whichever is higher, is in the form of cash and cash equivalents in financial instruments at all times,” the regulations say.
Foreign dealers wishing to trade in Kenya will also be required to maintain an equivalent of Sh40 million of their capital reserves in financial instruments in Kenya.
The Capital Markets (Online Foreign Exchange Trading) Regulations, 2017 are contained in newly gazetted amendments to the Capital Markets Act.
“I believe these (new rules) were an inevitable development. The reason it was inevitable is that if we are serious about a derivatives market we needed to onshore this component,” independent analyst Aly-Khan Satchu said of the new rules.
Online trading of foreign currency has become a prime investment avenue that Internet savvy Kenyans are using to make money while in the comfort of their homes or offices.
Growth of the business is being fuelled by the mushrooming of online forex bureaus that offer trading platforms from what has until now been a grey area of regulation.
Online forex trading involves taking a position with regard to a particular currency and trading it through the Internet, with the basic aim of buying low and selling high.
Kenya’s online forex traders are participating in the global currency market through foreign registered brokers who provide the link to clearing centres in Europe, Asia and the US.
Currencies are traded in pairs. For example, a trader can take a position on the movement of the Euro against the US dollar or the dollar against the yen.
Mr Ombara said the new regulations are meant to ensure orderly, fair and transparent online forex trading, besides allowing more information to participants – including prior warning on the level of risk that comes with investing in such products.
“Many players have been waiting to get a licence. We expect more interest especially from global forex brokers and traders. We also expect less investor complaints and greater financial deepening,” said Mr Ombara.
To further reduce the risk factor in the business, the regulations cap the leverage a broker may offer to a client at 10 times their deposit in case of trades pairing the Kenyan shilling and hard currencies, and 20 times of deposit when pairing two hard currencies.