Russia’s Central Bank responding to concerns on fraudulent FX schemes with new rulings

A report today by Russian authorities has highlighted once again its intention to emulate other regions which are home to an established FX industry, as the self-regulatory organization which oversees Forex companies in Russia TSRFIN has appealed to the Central Bank of Russia by way of an official letter outlining the dangers of FX firms which make promises to clients in order to gain their investment, and then disappear in a very short time.

In essence, this concern displayed by TSRFIN represents the dynamics of a high yield investment program (HYIP), which often results in the entire collapse of the fund within a very short time, therefore consuming investors’ money.

TSRFIN reported that in 2012, 11 of such companies were identified, with the same amount having been unearthed in 2013. The first four months of this year has unearthed six of such firms and with Russia keen to establish itself on the world stage, TSRFIN has directed its findings toward the Central Bank in order to appeal to put an end to such practice.

As a result of this, amendments are to be made to the Criminal Code (CC), which itself has been adapted to include a new article 172.1. The bill establishes the responsibility for creating a financial pyramid and the structural unit of the financial pyramid, as well as guidance. Under this structure, transgressors face a fine of up to 300 thousand rubles or imprisonment for up to 5 years. For the same act, combined with the embezzling of funds by soliciting members of the public, a fine of 100 thousand rubles to 500 thousand rubles or imprisonment for up to 6 years could stand, as well as 10 years imprisonment depending on the severity. The case relating to Charles Ponzi approximately 100 years ago provides the basis for these laws.

With regard to the bill relating to the FX market, new rulings were adopted in their initial state in June 2013, with the second reading set to take place before the end of June 2014 – but the professional market participants, in particular the National Association of Securities Market Participants, criticized have criticized the new rulings.

First Deputy Chairman of the Central Bank Sergei Shvetsov, reported in late March that the amendments to the bill on the regulation of dealer activities in the Forex market provides the obligation to notify the dealers advertising their services on the risks of trading Forex. Moreover, Forex dealers will be required to publish quarterly information on how many customers lost money as well as information on how to profit from the market. Forex trading organizations should be notified in all advertisements that the exchange rates at which they conduct transactions customers may not coincide with the quotations on the live Forex market.

The authorities will also seek to limit order size and leverage. In the United States, according to Mr. Shvetsov, maximum leverage is limited to 50:1, ie client account size of $ 20 thousand can make a deal worth $ 1 million, with the European Union having considered a similar restriction. Approximately the same rule is planned to be established in Russia, a region in which some Forex dealers offer leverage of 500:1.

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