LeapRate Exclusive… Further to our report from last week that China regulators are changing their tune when it comes to Retail FX and starting to kick foreign FX brokers out of the country – which seems to have generated a lot of buzz and discussion in the industry – we have a follow-up report indicating that several Chinese government websites have indeed started posting warnings. The warnings, which seem to be escalating in nature, indicate that the government considers leveraged Retail FX and CFD trading to (technically) be illegal, unlicensed in its current form, and that it plans to be more stringent in enforcing against those who operate outside the law.
The warnings (more details below) are somewhat reminiscent of the approach the Chinese government and its regulatory authorities took with Bitcoin exchanges late last year – first posting warning notices, and then formally banning any Bitcoin exchange in the country as well as (now) going through the accounts of local crypto investors and companies suspected of facilitating trades on offshore cryptocurrency sites.
We also present below a follow-up conversation with BMFN, the broker whose story formed the basis of our previous article. The previous conversation was with BMFN CEO Luis Sanchez, while the one presented below is with parent company Boston Merchant Financial Ltd. director Paul Belogour.
First, to the Chinese government and its recent postings on the matter. As presented below, a number of Chinese government websites including www.gov.cn, www.nifa.org.cn, and www.safe.gov.cn have been posting articles over the past few weeks with titles such as:
The SAFE and the Ministry of Public Security jointly convened a meeting on the summary of the work of cracking down foreign exchange criminal activities, see https://www.gov.cn/xinwen/2018-02/06/content_5264321.htm
Risk Alert on Illegal Financial Trading on Online Platforms, see https://www.nifa.org.cn/nifaen/2955875/2955895/2969167/index.html
To paraphrase from some of the articles (translated):
This article published by the FX Bureau states that 2018 will be the first year following the 19th National Party Congress to build for the good of society and terminate all unwanted foreign exchange activities…
NIFA stresses that any company without the approval of Chinese regulatory bodies who are offering FX, Gold, Futures or Indices (Including foreign indices) are illegal. The trading of such products through mobile/PC software are illegal. Foreign entities offering such products are not allowed by China’s laws. Chinese authorities did not approve such products to be offered and investors are not protected when they trade such products.
Especially in 2018, regulatory bodies will be finding criminals who are in both ends of the industry who are using FX to conduct illegal activities online, the crackdown will be both deep and thorough.
What is somewhat interesting to us is that the “mainstream” Chinese language FX industry news sites have not been reporting on these pronouncements, despite (we are sure) being aware of them. Probably, because the pronouncements and statements likely doom their business models, heavily dependent on advertising from brokers looking to reach the China FX market.
Those who have operated for a long time in China, especially in retail or financial areas, understand that anyone who claims to “know” how it is safe and assured to operate in China simply doesn’t know what they are talking about – since, unlike in places like the US or the UK, the rules are purposely left somewhat obscure, and subject to the whim of Chinese authorities and what they deem at any point in time to be in the best interest of the Chinese public. Just ask the Bitcoin exchange operators.
We’re now pleased to review these issues with BMFN director Paul Belogour – as well as get more insight into BMFN leaving the Chinese Retail FX market.
LR: Hi Paul. We’d note our earlier article about BMFN and its sudden departure from China. Can you elaborate or add anything more and substantiate some of the facts in regards of the Chinese government, and changes to the rules in general, when it comes to FX and CFDs or overall Derivative products?
Paul: Thank you for your time to speak with me. I in no way consider myself an expert on the changes in China’s financial rules and regulations nor overall policies of the Chinese government. But after 13 years servicing business in China, first with IFX Markets, then City Index and now BMFN and spending on average of 2 to 3 months per year in the country, I think I can explain and clarify some things that I learned from my personal experience.
First and foremost, I have a tremendous respect for the country of China and its people. I believe in the past 13 years I have witnessed a complete transformation of the Chinese financial markets and regulations. What one day was a country open to new ideas, markets, testing new financial products, China has matured and became more selected in terms of what the Chinese financial regulators think where Chinese citizens should and should not invest. I don’t see this as a bad thing, in contrast a good thing. It just tells me that China is following similar developments and increase in the rules and regulations within the western financial markets, specifically in regards of Forex, CFDs and leveraged products.
Just look at where the US was when Forex suddenly swept the retail market. It was the Wild West in the late 1990s and early 2000s – unregistered IBs, widespread customer abuse and fraud.
Then the NFA and CFTC stepped in and changed the rules.
The fact is, till this day the US rules keep changing, making the retail FX industry more bulletproof, protecting investors. The same thing recently took place in the UK, Japan and Europe. From lowering the leverage, restricting advertising to outright banning brokers to sell highly leveraged derivatives products to non-professional retail investors, the western financial markets are also reacting to the needs of protecting retail customers.
LR: Paul, you said Chinese regulators followed the West introducing changes to the regulations but with a unique Chinese way. What do you think the future holds?
Paul: China is not any different from the US or Europe. The Chinese government had to do what it needed to do to protect its citizens’ interests and investors’ rights and banned the speculative derivative products outright. New Chinese Foreign Exchange regulations, warnings and ban has been implemented incorporating the Chinese unique culture and history.
The Chinese regulators followed the rule of carrot and stick, where they warned the Forex Brokers and gave them time to respond. The same thing happened with the Domestic Exchanges, Binary Options, ICOs and Bitcoin providers – the Chinese government said we don’t want that any more here in China and gave them enough time to voluntarily stop operations. One can only imagine how sweet is the carrot of the Chinese regulators and not sure anybody wants to challenge and find the size of the stick.
As for the future of Forex, CFDs and other leveraged products in China, I cannot say anything right now, as I really don’t know. Perhaps somebody within the appropriate branch of the Chinese financial regulators will sit down and review the products to see if it can be reintroduced in China and allow foreign brokers back in. Maybe one day China will come with the set of rules and licenses and bring the product back allowing its citizens to safely trade FX inside of China rather than sending money abroad.
LR: As we listed above, there is a significant amount of information out there about Foreign Exchange and Leveraged products and how the Chinese regulators feel about them.
Paul: I just want to add a couple of more things here. There is so much more out there to depict a good picture how this line of business is perceived in China. Those links, articles, opinions can be used by anyone in any way they want. If for some brokers this is not enough to understand the intention of the Chinese government, they can certainly keep or open offices and operate in China at will.
However, I assume many of your readers represent regulated and listed companies that in some way or the other operate in China and they want to know what the new rules in China are. I can only speak for BMFN. Luis, the CEO of BMFN and I, we interpreted the warnings our way and followed our instincts enhanced by 13 years of supporting our client base in China.
In fact, I would like personally to thank Mr. Luis Sanchez for sharing his story and his thoughts with you and your readers. His personal experience in China is immeasurable and him sharing his story with the rest of the readers is invaluable. Many of your readers and the industry’s professionals know Luis personally. He has met most of the industry’s executives, built long lasting relationships and him telling and warning others who conduct business in China is his way to communicate his message to people that he respects and cares for.
LR: Do you think the same rules affect educational seminars or shows related to Forex and other derivative products conducted in China?
Paul: I believe that this session is very educational not only for two of us but for anyone who is conducting or planning to conduct business in China.
Given that Baidu outright prohibited Forex advertising and now points to a warning page tells you a lot. I don’t believe anyone offering Forex or derivative products in China can say that they are regulated by the Chinese government, no matter what type of business license or relationship with the government officials they have. If somebody tells you that they are regulated to conduct this business in China, they are lying. If somebody tells you that they are allowed to advertise Forex, CFD or Leveraged Derivatives in China to the Chinese customers, they are not telling you the truth. If somebody tells you that they are allowed or licensed to conduct promotional seminars or trade shows pitching Forex, CFD or Leverage Derivatives on the internet or mobile in China to the Chinese investors, they are certainly mistaken.
LR: Paul, is there future for BMFN in China?
Paul: BMFN is a Forex Broker offering its products and services in the countries where we are licensed or where customers are allowed to purchase our products. Since China put an end to this product in China we are definitely done having an office in China in its current form. However, for BMFN Forex is not the only product in our organization. China is very important to our organization and in 2017 we have applied for a license to sell all regulated Chinese financial products. We want to be in China, we want to sell what China allows us to sell in China and we want to grow in China. After we get the appropriate license we will be selling Chinese stocks, regulated futures and be just like any other Chinese brokerage in China conducting well defined and regulated business.