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Screenshot of a breaking news alert e-mail from Q2 2017
LeapRate Exclusive… Is this the end of an era?
LeapRate has learned that Chinese authorities have been approaching a number of foreign based Retail FX brokers with offices and operations in the country, demanding that they immediately shut down any physical presence in China.
The “roundup” of foreign FX brokers began about two weeks ago during the week leading up to the Chinese New Year (which was Friday February 16). The timing seems to have coincided with the two week period that many Chinese take as vacation time, right after the New Year holiday.
The representatives and management of several FX brokers on the ground in China were summarily called, one by one, to a meeting with regulators. At each meeting, they were faced with something of a show-of-force, with representatives of six Chinese regulatory and government agencies present, including the police.
We detail below in an interview with one of the people who was in one of those meetings exactly what transpired, but in brief each broker was told that it is now illegal to operate as an FX broker in China offering leveraged trading of any kind, and that they had to present a plan as to how they were going to each physically exit China within two weeks (i.e., by the time people get back to work from the Chinese New Year holiday).
We also understand that Chinese authorities are cracking down on those individuals and entities who have been linking up foreign FX brokers with Chinese IBs and money managers, whether or not those brokers have physical presence on the ground in China or not.
While no official pronouncements have yet to be made by Chinese authorities, and we believe that not all foreign FX brokers in the country have yet to be called in for a “discussion” with authorities, we believe that these incidents mark the first step of China banning leveraged trading. China has recently banned cryptocurrency trading which was becoming very popular (perhaps too popular) in the country, and it seems that hot on the heels of that decision they have decided to also ban leveraged FX and CFDs.
Here below is our conversation with BMFN CEO Luis Sanchez, as noted above one of the Retail FX managers who was summoned to and attended one of the meetings with regulators. BMFN is an ASIC and Vanuatu licensed Retail FX broker, which had built up a large presence in China over the past three years, with five offices in four Chinese cities. In less than a month, BMFN has now shut down its entire operation in China.
LR: Hi Luis. For the past two years you spent a significant amount of time managing the growth of BMFN particularly in Southeast Asia and China. What can you tell us about the latest Forex and CFD regulatory developments taking place in China?
Luis: The growth of the Chinese retail market in the past three years was unprecedented but there are the reasons why it grew so suddenly and so fast.
As the investment choices and trading of various financial products, especially the leveraged ones were shutting down or becoming staled, Forex in many cases has become the only choice and the opening, specifically of the retail customers has exploded. Two years ago the Chinese Stock exchange has collapsed and become stagnant making the Chinese investors uninterested to invest or day trade.
The investors then moved to trade various financial products offered through the loosely regulated Domestic Provincial Exchanges. The products ranged from, Gold, Silver, Oil, Rubber to some obscure products such as Cement and Asphalt. Thousands of call centers popped up soliciting the retail investors and moving them from the stock market and into the Local Domestic Exchanges. As you can imagine, that did not last too long.
The highly leveraged questionable financial products mixed with the high-pressured call centers resulted in widespread abuse of the investors. The Chinese government swiftly put an end to the Domestic Exchanges in 2016/2017 and shut most of them down within months. The Chinese investors then moved to the Binary FX products. That did not last long either as the Chinese government banned the product sometime in 2017. Then you probably know the story about Initial Coin Offering (ICO) and Bitcoins, both were shut down and discouraged sometimes at the end of 2017 and the beginning of this year.
As the Chinese government was shutting all these trading options, Forex was becoming the only option. Most of the call centers working for the Chinese Domestic Exchanges as well as some of the shut exchanges discovered Forex and moved on to get their own trading platforms, set up underground brokerage firms and started to make markets. If you attended the Money Show in Shanghai in December of last year, it was full of Forex brokers, mostly Chinese. The largest exhibition hall in Shanghai was full to its maximum capacity. No other financial industry attended the Money Show, but the Forex brokers.
LR: Do you expect the FX industry and Forex brokers to follow the same destiny and the same path in China as the Domestic Exchanges, Binary Options, ICOs and Bitcoins?
Luis: I am glad you asked that question and I am probably the best person to answer it. I believe I personally have witnessed the end of the Forex industry in China, at least the way we have known it and experienced it during the last 15 or so years. It may survive in some form or the other, may potentially move underground, but it is hard to tell that at this moment.
BMFN has been servicing Chinese Retail customers in Pudong for the past ten years. About two weeks ago we received a call from the Financial Services Bureau of Pudong to come and visit them and face other various Chinese Financial Regulators such as the Municipal Bureau of Financial Work, China Securities Regulatory Commission, The State Administration of Foreign Exchange, Administration for Commerce & Industry Bureau and Pudong Public Safety Department (in short, the Police Department).
You can imagine what my reaction was, what is going on, what did just happen, did we do something wrong and is this the end? It happened that by coincidence I was In China at that moment, so I called the Bureau couple of more times to better understand the nature of the meeting, should I personally worry about my own security, what should I expect and why so many people will attend it. The lady was very nice, she informed me that the people attending it want to speak to us in regards of the new financial rules and regulations in China and would then ask us for our business plan that should reflect those changes.
I spent two hours in front of the six agencies who were telling me about the new rules and regulations that have taken place in China. To make a long story short, I would rather provide you with some of the inserts from our response letter from the BMFN Compliance department to the regulators that we submitted this week. Here is what we had to say.
Regarding BMFN’s presence in China, clarification of its business activities and proposed business plan;
“Thank you for inviting BMFN China and its representatives to the offices of the Financial Services Bureau of Pudong on 2/11/18 and helping us to better understand the changes taking place in the financial regulations within the People’s Republic of China. We were proud to service our Chinese customer base in Pudong for the past ten years. We sincerely appreciate your engagement with the representative office of BMFN China and guiding us in the right direction where BMFN will fully comply with the changing financial rules. For the past ten years BMFN operated in China within the authorized guidelines of the State and Local laws. BMFN China representative office located in Shanghai, Pudong operated within the scope of our business license registration and complied with all the rules and regulations.”
LR: Luis, were you at any risk during the meeting?
Luis: At the beginning of the meeting we spoke a lot about BMFN China, our activities in China, our ten-year history. We asked them are there any complaints or any legal issues, did we violate any existing rules? They were nice enough to tell us that until now we have been compliant within the scope of our current business license and no issues or complaints were registered, including with the police. But after all the pleasantries the tone of the conversation has changed, and they started to address the changes in the rules and regulations, especially in relation to Forex, Chinese client base, IBs, Money Managers and other issues. Let me show you more inserts from our response to the regulators, as we had to clearly acknowledge that we understand what has been said.
“During our meeting with you we received a clear message from six State and Local government agencies and understood that the financial rules and regulations have changed. We understood that supporting and soliciting the Chinese clients in China and allowing them to engage in Over the Counter Foreign Exchange, FOREX, Contract for Difference or any other Leveraged and Derivatives Financial products trading has become illegal.
We also understood that supporting the network of unregistered and unregulated Introducing Brokers (IBs) and Money Managers (MMs) who introduce and trade on behalf of customers has also become illegal. We also understood that introducing and managing clients’ money or enabling Chinese nationals to trade Forex, CFDs or any other Leveraged or Derivatives Financial products has also become illegal. We also understood that enabling and facilitating Chinese nationals to wire funds abroad to fund their trading accounts and engage in trading of Forex, CFDs or any other Leveraged or Derivatives Financial products has become illegal.
We sincerely appreciate your new guidelines presented to us during the meeting. BMFN is willing to fully cooperate with all State and Local regulatory agencies, accept the new financial guidelines and terminate its representative office activities and presence in China. Additionally, in no way our understanding of the newly issued Chinese Financial regulatory policies in the Republic of China presented by you and presence of our Registered Representative Office for the past ten years is admittance of any wrong doing. We would like to state again that BMFN has operated its Representative Office in the People’s Republic of China within the scope of authorized business activities constantly maintaining a good standing of our business license.”
LR: Luis, after they told you that, what type of reaction they expected from you, what did you say?
Luis: Of course the interesting part was that the meeting took place just several days before the Chinese New Year. We explicitly asked them if this meeting constitutes the end of the BMFN office in China. They were polite in the Chinese way to say that they only need our response letter and the business plan how we are planning to exit the Chinese market and close the office.
Right after the meeting we sat down with the management of BMFN and BMFN China to understand what they wanted us to do immediately, right after the meeting. What should be our next step? Telling us that the rules have changed, and Forex is now illegal in China and asking us to write a business plan, was a bit confusing and we were not sure this is what they really wanted us to do. However, we did what they wanted us to do. We wrote them a letter, part business plan and during the Chinese New Year proceeded to close the office in China. I don’t believe we could have reopened the doors to the office, had our employees to come back from a vacation and continue business as usual. So, this is the last part the letter and our business plan that we submitted to the regulators.
“BMFN will immediately terminate as of 2/20/18 any support and cooperation with the unregistered Introducing Brokers (IB) and Money Managers (MM). BMFN will facilitate the termination of IB/MM relationship with the underlying clients. BMFN will encourage its Mainland China customers to close their trading positions by March 15 or whenever they willing to do so.
We understand that the State and Local authorities may from time to time request information on our network of IBs and MMs such as IB agreements as well as our customers such as source of funds and banking information. BMFN will be willing to serve the requested information to the appropriate Governmental agencies within the scope of BMFN’s privacy policies and procedures. BMFN will fully cooperate with all requests coming from any State or Local regulatory agencies of the People’s Republic of China and comply with the newly issued guidelines in regards of the financial regulations.”
We decided not to challenge them and took the changes to the rules seriously.
“At this time, we want to announce that we have taken your new guidelines and changes in the financial regulatory environment very seriously and started a process of shutting down the operations of our representative office in China. After ten years of presence in China, BMFN’s office in Pudong will be permanently shut by the end of February. We have terminated employment contracts with our employees as of 2/20/18 and will pay their salaries through the end of February. We will honor all FESCO employment obligations in regards of vacations, retirement pension and any other social compensations owned to our employees. Again, we thank you for your time and guidance and clarification when it comes to the ever-changing Financial Regulations of China.”
LR: Luis how do you feel about this, what kind of feelings going through your mind, BMFN ten years in China and such an abrupt ending.
Luis: You can imagine my feelings toward what was happening, especially telling this to the employees of BMFN. Most of our employees were with BMFN for ten years. Many of our employees got married, built families and BMFN to them was like their second home during those ten years. Many of them expected ten more years or even more and perhaps retirement within the company. All their friendships and friends were in the office, that’s how the Chinese culture operates. I spent close to three years now doing business trips in China personally getting to know each and one of them.
Additionally, with thousands of IBs and many more customers working with BMFN we had to make a structural change, terminating the IB relationships, telling customers to close positions accounts and leave. And all this was done during the Chinese New Year break, making it the worst Chinese New Year for employees, IBs and customers.
LR: Luis, do you know of any others that ended up meeting with the regulators?
Luis: Well, this is my story and my meeting with the regulators. I am sure you will hear from the others as well. They told us that they will contact all Forex Brokers in China, all will face them.
During that Sunday I believe they had at least four other brokers visiting them. When we were coming people were leaving and when we were leaving, people were waiting for their turn.
The task group to terminate Forex in China apparently was created in July of 2017. They studied our industry, understood that the Forex Brokers are a mix of foreign and domestic firms, attended the shows to see what is happening there and gathered enough information to conclude that this product should not be offered within the People’s Republic of China.
I am sure that if the Forex industry in China was comprised of only the Chinese Brokers, they would shut them down without calling them, just like what they did to the Domestic Exchanges. The fact is that the Forex industry in China is represented in large numbers by the foreign firms, they gave us a civilized warning and asked us to leave in a friendly matter. Well, I am not sure if I am lucky or not but here I am the witness to the end of era.
LR: Speaking of the end of era, what do you think is going to happen to the Forex industry in China?
Luis: I believe that it will go underground.
The ease with which one can get software and offer Forex to clients as an alternative to gaming and gambling is still appealing and lucrative. The underground and mostly Chinese brokers will make sure they won’t be caught and will move around from one location to another inside of China, avoiding the police or regulators raids. The other brokers will leave China altogether to mostly Chinese speaking countries like Malaysia, Indonesia and Singapore, and will sell to China from there and be out of reach from the Chinese government.
As for the Western brokers, they will end up selling remotely to whoever is willing to buy. They will continue to work with the IBs and somehow will find a way to market their services online.
What is not clear if the Chinese government shuts down all these secondary payment providers that currently facilitate all Chinese transfers, that will ultimately make trading accounts funding practically impossible. If that happens, the Forex industry will be split between local underground Chinese brokers who will take deposits locally in RMBs, and foreign brokers that will have to convince the clients to send money by bank wire. Now, if the regulators really want to put an end to it, the banks will have to constantly update the list of prohibited beneficiaries, just like it is done by the Reserve Bank in India and this will stop any wires going to the financial brokers outside of China.
Do I see China regulating Forex? I don’t think so, they think that the leverage financial products are not good for Chinese investors and simply want that industry to be shut down.