Russia sets no limits on compensations to clients of bankrupt FX brokers


Bank of Russia, the watchdog soon to be responsible for the regulation of the country’s Forex industry, has today published a draft Normative act that seeks to clarify the rules of the Forex law concerning the establishment of a Compensation Fund for clients of Forex brokers that go bankrupt.

A quick look back on this topic. All Forex brokers in Russia will be obliged to be members of a Forex self-regulatory organization (SRO) and this organization should set up a Compensation Fund. All Forex companies will have to participate in the Fund – refusal to do so results in their licenses being taken away. To be accepted in the Fund, each member should submit an entry fee of RUB 2 million ($35,629).

If the sum does not loom big to you, keep reading…

Given the strong resemblance of Russia’s Forex regulation and that of western countries like the USA and the UK, we had been curious to see whether the Compensation Fund in Russia will bear any resemblance to the Financial Services Compensation Scheme (FSCS) in the UK, for instance.

One difference is clear straight away: Russia’s Compensation Fund imposes no limits on compensations that clients of insolvent Forex brokers may receive.

The catch? There are two: 1)Timing and 2) Compliance of other (normally functioning) Forex brokers.

If a Forex broker (or a Forex dealer, as such companies are formally named in Russia) goes bankrupt, the Compensation Fund will first accept claims of clients of the broker and then create a special register for compensation payments. Under the law, any individual client of an insolvent broker can claim compensation from the Fund, with some minor bureaucratic paperwork in store for any such claimant.

bank of russiaThe act mentions nothing on the size of a maximum compensation. This is the difference from the FSCS, which guarantees deposits up to GBP 50,000. But the Normative act mentions that the money in the Fund may be insufficient to cover all compensation claims.

  • In such a case, the Fund will disburse a first tranche of payments proportionately to the size of the agreed claims, until all of the money in the Fund is distributed.
  • Then, there is a second tranche, which gets its money from the other (healthy and steady) members of the Compensation Fund.

Here come the catches: one is that traders will have to wait until the rest of the amount owed to them is calculated and, then, FX brokers will have to submit the money needed into the Fund.

Under the Normative act, FX brokers will have to submit the extra money needed within 30 days after being informed of the amount due. There is no time restriction, however, on the disbursement of compensation. Technically, traders may have to wait forever. There is also no clarity of what happens to a company that refuses to pay the extra amount to the fund to compensate the clients of an insolvent rival.

So, here is the big problem. Russian Forex brokers may end up being forced to support a hefty number of clients of insolvent companies, whereas traders may be endlessly waiting for their money.

We are curious to see whether the Normative act will be enacted in its current version or someone will voice concerns over these matters.

To view the text of the Normative act (in Russian), which is now open for public consultation, click here.

Comments are accepted until June 21, 2015, at this email: lomakinpn@cbr.ru.

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Russia sets no limits on compensations to clients of bankrupt FX brokers

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