The Securities and Futures Commission (SFC) today released a report on its survey of the leveraged foreign exchange trading (LFET) activities of licensed corporations between 1 January 2018 and 31 December 2018 (Note 1).
The survey found that 98% of active LFET clients were retail investors and more than 99% of turnover in the LFET market was attributable to rolling spot forex contracts (Note 2). Turnover was relatively low for more complex forex products such as options and forward contracts, which may be difficult for retail investors to understand. All LFET products were traded on an over-the-counter basis.
As part of the survey, a sample of brokers were selected to provide more detailed information (Note 3). These brokers reported that more than 60% of their LFET clients made net trading losses in LFET (Note 4), and some investors suffered losses over $1 million. Investors should carefully consider the risks and suitability for themselves before participating in LFET.
“Leveraged foreign exchange trading may not be suitable for everyone. It is done on a margin basis and these products may involve complex or non-standard features. Even experienced investors may suffer huge losses in such trading, especially in times of high market volatility,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “Brokers should ensure that their clients fully understand the nature and risks of these products and have sufficient financial resources to assume the risks and bear the potential losses.”
For firms involved in LFET, the report highlights some expected regulatory standards and good industry practices observed by the SFC during the course of its regulatory supervision. The expected regulatory standards cover customer due diligence, handling of client orders, conflicts of interest and information for clients.
In a circular to licensed corporations, also issued today, the SFC reminds firms’ senior management to assume responsibility for developing and implementing policies and controls to comply with the expected regulatory standards.
- The survey data covered the 32 firms licensed for Type 3 regulated activity (leveraged foreign exchange trading) which reported on their LFET activities in 2018.
- The payout for rolling spot forex contracts is based on the fluctuation of foreign exchange rates and the initial maturity of two business days is automatically extended (by one business day at a time) if the contract is still open at the close of trading on the second business day. These products include economically equivalent leveraged foreign exchange contracts.
- The sampled brokers contributed 77% of market turnover and their clients accounted for 41% of total active LFET clients.
- According to the Report on the IOSCO Survey on Retail OTC Leveraged Products published by International Organization of Securities Commissions in December 2016, some overseas jurisdictions also observed that around 70% to 90% of retail investors trading leveraged forex or similar retail over-the-counter leveraged products suffered losses.