The Financial Sector Conduct Authority (FSCA) has provided detailed guidance in its 2022/23 Regulatory Actions Report concerning the licensing needs for various trading activities, including those involving crypto derivatives and copy trading / mirror trading.
Licensing Requirements for Derivative Traders
In February, the FSCA imposed a R50,000 fine on Globex360° (Pty) Ltd for operating as an unlicensed over-the-counter derivative provider (ODP). Although Globex held a Category I license for offering advice and intermediary services in derivatives like CFDs in equities, currencies, indices, and commodities, they lacked proper authorization as an ODP.
This case underscores the criteria for determining when an ODP license is necessary. For instance, if a Financial Service Provider (FSP) is engaged in fully hedged or back-to-back trading, issuing two identical CFDs (one by the FSP and another between the FSP and the CFD issuer for hedging), it is deemed as operating as an ODP. This holds true regardless of the automatic and seamless nature of these derivatives (straight through processing) or the FSP’s market neutrality. An FSP in such a situation must possess an ODP license and should not amend the terms of the CFD nor be liable to the client in favorable market turns.
Additionally, the involvement of two platforms in the execution chain strongly indicates ODP operation, as per the FSCA.
FSPs acting as intermediaries for CFDs must ensure that their liquidity providers or ODPs are properly licensed. Failure to do so breaches the FAIS General Code of Conduct. Furthermore, the nature of the CFD (rand-denominated or foreign-currency-denominated) determines whether an FSP needs a derivative or forex license.
Licensing for Master Traders in Copy/Mirror Trading
Mirror trading, increasingly popular on CFD platforms, requires master traders to have an FSP license. The FSCA’s action against Pioneer FX (Pty) Ltd and Quintin Moorcroft in 2022 illustrates the necessity of such licensing for discretionary financial services. The variety in master/copy account relationships does not exempt master traders from requiring either a Category I license (for advice and/or intermediary services) or a Category II license (for discretionary services).
Crypto Asset Derivative Trading
Regarding crypto asset derivatives, the FSCA clarifies that these are considered derivative instruments under the Financial Markets Act (FMA) and, consequently, are securities as defined in the FMA. Therefore, they fall under the FAIS Act, making financial services related to crypto asset derivatives subject to existing regulations. This understanding is further reinforced by the FSCA’s enforcement actions, such as the case of Mirror Trading International, and remains unaffected by the recent declaration of crypto assets as a financial product. FSPs involved in crypto asset derivatives trading cannot avail of the temporary exemption from licensing requirements.
Source: Moonstone
