This March, Finance Magnates reported on the European Securities Markets Authority’s (ESMA) new rules governing contracts-for-differences (CFDs). With caps on leverage and mandated marketing rules, firms look set to struggle through the period with many brokers shutting up shop or moving off-shore.
Halfway around the world in Malaysia, authorities were also moving to regulate the CFD industry. Less than two weeks after ESMA announced its new rules, the Securities Commission Malaysia (SCM) released a fresh set of guidelines on CFDs to be implemented on Sunday (July 1, 2018).
These new rules are certainly not as severe as ESMA’s. For one thing, they don’t appear to be targeted at retail brokers who most regulators in Europe seem to regard with disdain.
“They [the new rules] are not targeted at the retail industry,” a source close to the development of the SCM’s guidelines told Finance Magnates, “they are just aimed at strengthening the country’s existing guidelines on CFD trading.”
Expanding derivatives products
An explanatory document released by the SCM would seem to support this. Unlike ESMA regulation which appears to be intent on limiting the products available to retail investors, the SCM’s guidelines state that the regulator wants to expand the number of products available to investors in Malaysia.
The SCM’s guidelines are, surprisingly, fairly clear and easy to understand. This came as a shock to the author who is used to trawling through ESMA documents that are Biblical in length and Joycean in language.
CFDs are categorized by the SCM as derivatives. This means that, from today, any company with an existing license to deal in derivatives is allowed to deal in CFDs, although they must first give the SCM notification that they intend to do so.
Any firm that starts dealing in CFDs must adhere to a set of financial requirements that bare some resemblance to liquidity requirements banks must adhere to in Europe. For instance, firms that deal in derivatives or who deal in derivatives and provide clearing services must have a minimum paid-up capital of RM10 million ($2.48 million) as well as a minimum adjusted net capital higher than RM500,000 ($124,00).
Companies that wish to deal solely in CFDs have a different set of requirements imposed upon them. As well as having minimum paid-up capital of RM10 million, they must also hold a minimum of 50 percent of their shareholders’ funds as liquid capital at all times.
Educating the public
A number of other new requirements are now going to be imposed upon CFD dealers. For instance, people in a number of key positions, such as compliance officers, licensed directors, and individuals in management roles must sit licensing examinations.
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Exemptions can be made for those required to take examinations. If an individual has five years of experience in the CFD industry and has been licensed, in a jurisdiction recognized by the SMC, for over three years, then he or she will not have to take the SMC’s examination.
Firms that offer CFDs will also have to provide educational programmes to investors so that they can better understand the product they are investing in. These programmes must be held, at a minimum, on a quarterly basis.
Finally, firms will have to pay into the SCM’s Capital Market Compensation Fund. This is a fund that aims to provide investors, who cannot get their money back from a licensed broker, a means of recourse. CFD dealers will have to pay RM30,000 ($7500) into the fund upon being licensed. After this, they will have to pay an annual fee of RM5000 ($1250) into the fund.
Good laws, no enforcement
On the surface, all of this looks like good news. The SCM’s new rules are not too harsh on brokers, provide a level of protection to clients and ensure a legal framework in which both parties can feel reasonably secure.
And yet, the attitude of brokers already operating inside the country suggests the new regulation may be almost meaningless. Malaysia remains a very corrupt country and brokers operating there are not renowned for paying a great deal of attention to the authorities.
“No one cares about the government,” an industry insider told Finance Magnates, “even if they toughen the law, brokers [who don’t meet regulatory requirements] will still find a way to operate.”
A new government was voted into power this May, but they seem unlikely to stem the tide of corruption. One example gives an idea of just how deeply embedded corruption is in the country. In 2016, the prime minister, Najib Razak, was embroiled in a scandal that saw him receive a ‘gift’ of $681 million from the Saudi Arabian government.
Not only was Razak not prosecuted for this but he was allowed to finish the remainder of his term, stepping down after losing an election, itself riddled with allegations of corruption, in May of this year.
“We will see six months down the line whether the government does anything differently,” the industry insider told Finance Magnates, “but if the political landscape is more or less the same as today, I don’t think people’s way of doing business will change.”
Malaysia’s regulations are certainly up to scratch, and both broker and investor should be satisfied by them. If the government is unable, or unwilling, to enforce them, however, then investors are simply left with what is effectively an unregulated broker and no security.
It may be a lost cause, but if the Malaysian government can demonstrate that it will actually apply its laws to brokers, investors and brokers could find themselves with a new hub for retail brokerage. This author isn’t going to be the first to test the waters but will be keeping an eye on developments in the East Asian country.