Russia to crack down on Forex firms. Again.

Every few months you can find alarming reports in the Russian press about the Russian Federal government regulation authorities who

Every few months you can find alarming reports in the Russian press about the Russian Federal government regulation authorities who aim to put a stop to Forex trading. A regulatory body called Federal Service for Financial Markets (FSFM) is threatning time after time to cease Forex operations in Russia. We’ve seen this about a year ago when the same body said that Forex firms have been using its license in their marketing efforts, even though that agency isn’t regulating Forex at all, and that this is no longer acceptable. Forex firms probably stopped using FFMS’s license ever since but their unregulated activities weren’t affected one bit.

We can also see the same body targeting, at least verbally, the Forex market again. Last week FSFM head Vladimir Milovidov announced (use Google Translate or Chrome) that he’s serious this time saying that ‘Unlike other institutions (banks, investment companies, pension funds, etc.) activities of the Forex practice are not regulated by the Russian law, and it is therefore unlikely that domestic authorities will be able to resist the “Monetary Totalizator” (don’t even ask me what that means – MG).

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Mr. Milovidov also said that Forex brokers mislead customers by advertising unthinkable gains. Forex brokers aggressively advertise to customers beckoning them to make risky online investments “in real time on the difference in exchange rates, without leaving home.” As a result people, including adolescents, are drawn into these financial games, ending up not only not getting the promised gains, but losing the initial deposit as well. “There are plenty of complaints, including from overseas customers, and this disorder must be addressed”.

Not surprisingly there were no real steps announced in this statement nor was the FSFM ever sanctioned to deal with the Forex market.

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Russia is a very active market for online Forex trading with a few dozens very active broker companies battling it out for clients money. The market is predominantly controlled by companies such as FXClub, FXOpen and Alpari which jointly control more than 90% of the market share while other brokers are rivaling for the remaining pieces. Forex is completely unregulated in Russia and no agency overseas Forex activities and, to the best of my knowledge, this isn’t planned in the near future either.

Several Russian brokers have teamed up and created a Self Regulatory Organization (SRO), much like the NFA in the US, called KROUFR (http://www.kroufr.ru/eng/). However the regulatory mechanism behind this SRO is essentially flowed for several reasons:

  • Only 7 brokers, out of a few dozens, are listed as its members (leading others to call KROUFR a cartel).
  • KROUFR membership isn’t mandatory like in the US (CFTC requires Forex Dealer Members to register with the NFA – so membership isn’t as voluntary as some might think).
  • KROUFR doesn’t have real ‘teeth’ as it is not really sanctioned to police the industry by any governmental body and the website even states that its main goal is to ‘coordinate market participants activity’.
  • Scrolling through its lean website one cannot help but wonder whether this SRO is even active at all as there are only several very basic pages of information on it. I also presume that the agency’s board is constituted from the brokers themselves therefore I find it hard to believe that they can even fine or punish a certain broker. No information about previous actions can be found, unlike on the NFA’s website, leading me to believe that no punitive action ever took place.

In my humble opinion, if the Russian Forex brokers are serious about their intention to get regulated, they must step under a governmental agency’s umbrella which will officially sanction and empower a Forex SRO. As the time goes by and regulation all over the world tightens its grip over Forex brokers it is in the best of interest for Russian brokers to get themselves regulated.

In the meanwhile, as a result of a local non regulatory environment, many Russian brokers get regulated elsewhere – such as in Cyprus, UK, Mauritius and US. This is an indication that brokers will get regulated where they can if they are given a real chance and fair regulatory environment. For the Russian government this can only be a win-win situation – local brokers will become regulated, small and aggressive scavengers will disappear, and some cash (‘voluntary’ contributions) will enter into the country’s treasury.

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