90% of market players have no intentions of changing anything

Opinion: Forex Regulation in Russia Will Kill the Market

Open Mic blog: Igor Volkov from MFX criticizes the manner used in the Russian Federation to regulate forex trade.

A growing number of experts from the Russian OTC market are publicly voicing their professional opinion, and Forex Magnates Russia is happy and proud to give them the opportunity to do so. In our “Open Mic” section we have a new entrant, a pro and a forex market vet, Igor Volkov, who shares his unorthodox viewpoint about this market’s regulation in Russia.

I think both traders and brokers are getting fed up with the question of forex market regulation in Russia. Industry insiders have taken two opposite positions overall: some publicly praise any initiative by the government, happy with the start of a period of regulation, and others would rather wait silently and see what happens. Yet these two camps have one thing in common: 90 percent of market players, I believe, have no plans of changing any aspect of how they do business when January 1, 2016 comes.

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All parties involved want regulation

The discussion about the Russian forex market needing regulation has been going on for a while already. There are enough supporters of this idea. Clients want regulation because they need some kind of security and the opportunity to work in “non-banana republic” jurisdictions. It seems that brokers also want regulation, which would make sure only legitimate companies operate in this market. Even stock brokers are backing the initiative, hoping that the improved reputation of the forex market will help the emergence of a new class of investors and will hence increase client numbers in this market. The authorities are also interested in regulation, probably tired of having to discuss complaints about “bad brokers” who have failed to give their clients the money they’re due. Besides, a regulated market will provide more income for the budget.

There is just one problem – all these statements of support look more like PR than a real willingness to change the situation.

What do traders want? Most people won’t rush to open accounts at some “pretty” new forex brokers.

Let’s see. What do traders want? They want to turn a profit, and the larger, the better, this is only logical. Are they interested in the 13% income tax that will fall on their shoulders in a regulated market? Hardly. Will they pay it willingly? Again, hardly. Unless the broker is the tax agent. Moving on. What trading conditions would a newbie trader want? Higher leverage, a lot of nice, diverse instruments to choose from (although these will be limited to just five), fast execution, and the chance to put in and take out money from their account in any way they like and fast.

What does regulation give the traders? A leverage of 1:50, a set of currency pairs in the instrument department, money transfers via banks only (which, as we all know, is far from fast), and a question about execution and guaranteed prices hanging over the market. In other words, regulation does not give traders any of the things they want.

forex is not the banking sector

What do these limitations offer? The opportunity for traders to work with a licensed broker, who will do what? In case of bankruptcy, they will pay their clients from some supposed compensation fund. That’s good. And what happens when the money in this fund runs out? The correct answer is: nothing. After all, forex, in terms of people involved in the industry, is not the banking sector, which the government is ready to support with credits from the central bank and the Deposit Insurance Agency.

What the traders – about whom everyone is so concerned – get is a substitute for regulation, which actually gives them nothing and only worsens current trading conditions. Would this interest traders? It would interest some of them. Yet I’m certain that the bulk of people operating on the forex market will not rush to open accounts at some “pretty” Russian forex brokers. At the same time, I wouldn’t be surprised if the presence of licensed Russian brokers on the market will be a bonus for traders when choosing a foreign (most commonly offshore) forex brokerage. Clients always want to work with a service provider that offers comfortable conditions. A broker offering an uninteresting and unappealing service lineup will hardly be worth their interest.

What do brokers want? They will continue operating even without a license considered by many as unnecessary

A few words about what brokers want. I’ll start by saying that the size of the capital required for licensed brokers is seriously inflated and I don’t see what its purpose is. And the problem is not that it’s too large – it’s fully affordable for many brokers – the problem is that it is pointless.

Let’s take a look at banks, which are subject to strict requirements, including ones regarding their capital. The number of revoked licenses and bankruptcies among local lenders has revealed that not everything they write in their reports that they submit to regulators is necessarily true. How many companies and individual creditors have failed to be repaid by these banks because there was nothing to repay the credits with? A lot. Will the capital of a forex company guarantee its stability? No one can say for sure.

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the capital requirement will kick out of the market a lot of smaller but stable companies

For starters, this minimum required capital will kick out of the market a lot of smaller but stable companies, which will continue their operation in the shady parts of the business world. They’ll shut down their elegant offices, remove their addresses from websites and stop advertising on Yandex but they will continue to operate. They’ll move their advertising budgets to Google and foreign platforms, will adjust their client targeting, not excluding Russia, and will focus more on cold calling and increase their presence in co-working spaces and chat rooms.

One thing is clear: these forex brokers will continue operating even without the license, which is considered unnecessary by many. The only potentially serious limitation that will make their job more difficult will be the possible ban for clients to use payment systems.

The market is once again being driven into the shadows

The purpose of regulation is not to squeeze players and products out of a market. The purpose of regulation is to provide security for both the service providers and their clients. The law that has been drafted does not offer security for either of these parties. The market won’t become more transparent, for which all forex brokers have asked, the market will only become shadier.

One more thing. The law does not protect brokers. From anything. Clients themselves are not always nice and sweet. Every forex brokerage has had some experience with cheaters ready to literally take the last shirt of the broker’s back if they get the chance. For the regulator, it seems, these cheaters are a problem that the brokers have to solve on their own.

The broker’s capital and the clients’ accounts will need to be deposited somewhere

The broker’s capital and the clients’ accounts will need to be deposited somewhere. In a Russian bank, perhaps? And what if this bank gets its license revoked? Will the broker go broke? Even if the broker puts their money in ten different, trusted banks, nothing can guarantee that in case of trouble legal entities will get their deposits back. There is no stability in this country’s banking system and they want to tie us to it even more tightly.

Also, I don’t quite understand how brokers will pay their taxes. What will their tax base be: the commissions they receive? The profit they make from their clients? How and where will these metrics be calculated and checked? Besides, there are our marketing activities to factor in. We distribute a lot of bonuses, prizes and awards, and we share our profits with our partners. How will these be accounted for? Or are we simply supposed to become the rotten bog with minimum activity that this country’s stock market used to be for a long time?

To conclude: the regulator has little idea of what needs to be done. All of this is killing the decent market

My opinion about the manner chosen for this regulation in Russia is unequivocal. It is killing the decent market. The regulatory body has little idea of what needs to be done. I have the feeling that the people involved in the legislation have forgot or refused to use the input of industry insiders, and I don’t mean the talking heads, I mean the people who know the process inside and out.

I think it would be a good idea for these regulation and licensing planners to come out of their offices and spend some time with the brokers, see how the work is done. Then there will be fewer incomprehensible initiatives, less paper wasted on all sorts of by-laws and acts that nobody reads, and more clarity and sense in what is being done.

 

Igor Volkov is the owner and President of MFX Broker and a trader. In 2006 he set up and headed as president of Masterforex, using funds he earned as a trader. In 2008 he founded and became President of the MFX Group holding. The next year he graduated from the National Open Institute of Russia in St Petersburg. His main areas of activity include financial consultancy, investments, brokerages, construction and charity. In 2013, Masterforex became a separate holding company, MFX Broker, which focuses on Southeast Asia, Russia and CIS (Commonwealth of Independent States). Currently, MFX Broker has clients and partners from 160 countries across the globe.

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