The Capital Markets Authority (CMA) has released new guidelines to ensure online forex brokers give more disclosures on Contracts for Differences (CFDs).
For instance, the regulator wants brokers to give timely information about asset value, gains, and losses to consumers, prohibiting fraud and taking advantage of investors' ignorance.
A CFD is a financial contract (derivative) that allows investors to trade on the price movements of assets and indexes across local and international markets.
They enable investors to enter the market with only a fraction of the value of the asset they are buying, amplifying the potential for gains and losses, also known as leverage.
Since they focus on price movement, they are possible to short a product, meaning the trader expects the price of an asset to decrease and profit from this movement.
Its value does not consider the asset’s underlying value, only the price change between the trade entry and exit.
With CFDs, one can trade a large variety of assets, including currencies, equities, indices, cryptocurrencies and commodities.
The capital markets regulator is tightening the grip on online foreign trading which surged 80 per cent during the Covid-19 to hit at least 100, 000 active investors amid rising cases of fraud.
These traders generated an estimated daily forex volume of around $192 million close to
There are now nine local brokers that have been licensed in Kenya to accept forex traders.
"To mitigate the risks and losses associated with participating in Contract for Differences (CFDs), the CMA is working with the licensed forex brokers to ensure there are appropriate disclosures and rollout of a comprehensive investor education programme,'' the regulator said in a statement.
According to CMA CEO Wyckliffe Shamiah, the only objective of most brokers is to pocket their own commission; investors really need to understand the risks involved more than the rate of return.
"Oftentimes brokers offer juicy rates of return, blinding investors from seeing potential risks. We are working with the licensed forex brokers to ensure there are appropriate disclosures and rollout of a comprehensive investor education programme,'' he said.
He revealed that CMA has facilitated the setting up of a technical working group comprising the licensed online foreign trading brokers as well as other stakeholders including peer regulators to assess the state of the market and propose recommendations to mitigate the challenges faced.
It is also collaborating with peer regulators including the Central Bank of Kenya, the Communications Authority and the Financial Reporting Centre to protect Kenyans from unlicensed online foreign exchange brokers.
In 2017, Kenya became the second-only African country to have a regulatory regime for Online Forex Trading, with EGM Securities getting the first license.
To operate online forex brokerage in Kenya, an entity must maintain the capital adequacy ratio in all circumstances plus eight per cent of liabilities owed to forex customers in excess of Sh30 million.
A broker must be a limited company by shares and must have a CEO with more than five years of experience in buying, selling, or dealing in forex, forex futures, or futures contracts.
Money managers have this requirement set at eight per cent of liabilities or Sh5 million.