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The following guest post is courtesy of Brandon Russell, CEO of Etana Custody.
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On March 27, the Australian government passed a law designed to protect foreign exchange clients, closing a hazardous loophole that allowed brokerage companies to use client funds for operating capital or marketing campaigns, among other uses. Allowing brokers to use forex funds this way exposed clients to a higher risk of loss, especially in the case of broker insolvency.
The Treasury Laws Amendment (Measures No 1) Bill 2016, also known as the Retail Client Money Law, was passed by Australian Parliament months after the government announced its intention to introduce changes to retail over-the-counter foreign exchange and contract for difference (CFDs) sector legislation.
Because of this loophole, Australia has so far been an exception from the group of strictly regulated forex jurisdictions such as the UK, the U.S. and Cyprus, where a multitude of brokers base their headquarters. A mandatory requirement for brokerages in these jurisdictions is to completely segregate client funds. Brokerages in Australia will be given a period of one year to comply with the new regulatory framework.
While the reform of Australia’s client money regime received strong support by leading foreign-based brokers and was also welcomed by the Australian Securities and Investments Commission (ASIC), some contingencies of the forex industry had concerns.
Opponents were worried that it might lead to operational difficulties for particular entities, such as straight-through processing (STP) brokers, while favoring only large market makers, mounting pressure on smaller less sophisticated firms as well as on thinly capitalized brokerages. Without the use of customer funds, hedging may become too capital intensive for fully STP brokers, while in frequent cases the return on capital for them may be far from reasonable given their risk exposure.
Others were concerned that the legislation would create barriers to entry for new brokerages, which could adversely affect competition. Consequently, with the STP segment growing thinner and competition within the industry decreasing, the average retail forex client will likely be faced with an even tougher choice where to place funds and under what terms and conditions.
Despite those concerns, the passage of Australia’s bill has benefits that far outweigh these concerns, in our opinion. The legislation not only brings them in unison with approved international standards, but more importantly, enhances the integrity of their financial system. The Australian CFD and FX Forum, have noted that by segregating and placing client funds in a third-party trust company, the new regime would help restore confidence in the entire industry, put an end to doubtful practices and, ultimately, increase trading volumes. The bill also now empowers the ASIC to write client money reporting and reconciliation rules.
The passage of the Retail Client Money Law in Australia was largely considered as a reasonable and necessary move, because it has the potential to resolve a series of issues within the forex industry. It was with these benefits in mind that we founded Etana Custody, with the goal of generating sound partnerships between forex brokerages and registered custody service providers. The need for greater security for their broker clients (traders), spurred our development of an independent resolution to the existing conflicts of interest between these two parties.
We also believe the passage of legislative acts such as the Australian Retail Client Money Law may not necessarily lead to the dissolution of smaller STP forex brokers. By working with a registered custodian such as Etana, brokers of different sizes have the potential to enhance their credibility, reduce customer acquisition costs, minimize risk and achieve a robust business growth. At the same time, its clients will be able to focus on their trading strategies without concerns whether market quotes are being manipulated or whether they will be able to withdraw their funds. Etana Custody aims to increase market transparency and reduce customer complaints, a compatible goal with those of global regulatory authorities.