The CSA has noted an increase in complaints relating to Forex market participants from other jurisdictions seeking to attract customers in Canada.
Regulation of Forex in Canada
Forex trading is generally regulated as trading in either a security or a derivative, and its regulation varies under applicable provincial and territorial securities and derivatives legislation.
Under either of these categories, firms or individuals seeking to offer Forex trading services (be it by way of providing access to the market such as by acting as a broker or by providing advice with respect to trading, or both), must be appropriately registered in the province in which they intend to so act and must also be a member of the Investment Industry Regulatory Organization of Canada (IIROC) if they intend to offer forex trading services on margin. For more details, please see National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Investors can use the CSA National Registration Search and also verify IIROC registration at http://www.iiroc.ca/investors/knowyouradvisor/Pages/default.aspx.
In addition, in jurisdictions where Forex trading is regulated as trading in a security, such trading may also involve the distribution of a security and therefore be subject to the prospectus requirement in securities legislation unless the necessary exemptive relief has been obtained. Some Canadian jurisdictions have not granted exemptive relief.
For instance, Quebec has a qualification regime for entities, other than recognized exchanges or clearinghouses, that create or market derivatives offered to the public. These entities must be qualified and the derivatives they offer must be approved by the Autorité des marchés financiers before they are offered to the public. Customers must go through a registered broker to deal with a qualified counterparty (who may also be the registered broker).
A broker or dealer seeking to register in one or more provinces should thus consult the specific registration requirements in the province(s) it wants to offer its services. Details can be obtained from the CSA website at http://csa.dev.simalam.ca/aboutcsa.aspx?id=99#ab. Click on the desired province to verify how a broker or dealer can be authorized to practice in the selected jurisdiction.
Some Canadian jurisdictions have issued cautions to investors:
In the United States, the examination of existing Forex market operators by the United States Commodity Futures Trading Commission (CFTC) indicated many brokers and dealers lacked robust safeguards to protect consumers, while others were clear frauds.
Specific areas of concern included:
- Insufficient disclosure of the mark-up over the spread and/or commissions and fees.
- Non-segregation of client funds from those of the broker/ dealer.
- The absence of controls to ensure best execution.
- Misrepresentations as to past and future performance.
- Very high leverage.
- Trading is typically done on margin, compounding the risk.
- The non-institutional Forex market is almost completely speculative.
- Lack of internal supervision.
- Insufficient capitalization of firms.
- Conflict of interest.
- Insufficient or no disclosure of risks to the investor.
The CFTC has issued a consumer advisory (http://www.cftc.gov/opa/enf98/opaforexa15.htm) and established a website warning of the significant risks inherent in Forex (http://www.cftc.gov/enf/enfalert.htm).
On July 20, 2011, the United States Securities and Exchange Commission (SEC) also issued an investor bulletin highlighting some of the most significant risks that Forex transactions may pose for individual investors (http://www.sec.gov/news/press/2011/2011-150.htm).
On December 5, 2011, the European Securities and Markets Authority (ESMA) issued an investor warning with respect to Forex (http://www.esma.europa.eu/news/Investing-foreign-exchange-forex?t=326&o=home).