Retail forex trading has to do with speculating on currency prices. While it is regulated by government agencies in two African countries (South Africa and Kenya), the case is different in the rest of Africa.
For instance in neighboring South Africa, the FSCA which is the country’s financial sector regulator, has given a nod to select forex brokers who are considered safe to operate in South Africa. By virtue of the license they hold, they have been found to be fit and proper to manage client funds. South African traders can go to the FSCA for succor and arbitration when issues arise with an FSCA licensed broker. This is not the case for Malawian traders. The Republic of Malawi is one of the numerous African countries where retail forex trading is not regulated.
Retail traders in Malawi are faced with serious threats, obstacles and challenges due to the lack of regulation of retail forex trading. These threats include; restrictions on retail forex trading related activities, margin call risk, and exposure to fraud, among others.
Aside from this, Malawi traders are faced with forex regulations that could prevent them from trading via foreign regulated brokers.
Difficulty in dispute resolution & fund recovery
To recover money lost in trading, the first and most important step is to report any suspicious activities that have occurred but in the case of Malawi, to who exactly? It should be reiterated that forex trading in the country is not regulated in the first place.
Reporting any fraudulent act to any government body or regulatory agency in the country is synonymous with reporting oneself. This is another risk posed by retail Forex traders in Malawi. It is so difficult to recover funds from a broker in case of bankruptcy or fraud. Such an investor is also not considered for the compensation fund for the prompt report.
As a result of the absence of forex regulation, investors go offshore to trade with foreign brokers. Since there is a lack of local regulation who would offer any support, recovering funds from foreign ‘scam’ brokers becomes difficult and might not even be successful at the end of the long run.
It should be noted however that, in a regulated environment, once an investor is confirmed to be scammed, such an investor may be eligible for compensation from an Investor Compensation Fund. As its name implies, it is a fund set aside for investors to compensate them in case of a fraudulent act from the regulated investment firm. However in Malawi, such a fund doesn’t cover forex traders as they are left on their own.
Currency Risk
Since there are not locally regulated forex brokers, and most of the foreign brokers required traders to deposit in USD or EUR or GBP, retail traders face problems on how to deposit to fund their trading account.
The supply of foreign exchange is limited and this has a substantial impact on retail Forex traders. Since the major global currency is the USD, and most of the brokerages required traders to deposit in major currencies such as USD, sourcing dollars for retail traders to trade with will become a cumbersome task.
Recently, the Government had to devalue Kwacha by 25% due to strength of the US Dollar, and in order to make exports attractive. But this has created currency risk for local retail traders.
When a financial transaction is conducted in a currency other than the local currency of the firm, foreign exchange risk, also known as FX risk, exchange rate risk, or currency risk, arises. It is a term used in foreign exchange which shows that the exchange rate between the local currency and the denominated currency changes negatively before the transaction is completed.
The regulations on foreign exchange in Malawi as provided by the Diaspora Portal Information for Reserve Bank of Malawi are strict. The residents are not allowed to withdraw foreign currencies directly except if it is converted to the local currency at the rate stated.
With this conversion, the traders could end up with a lesser value of their money which constitutes a loss for them. Also, without permission, any resident of Malawi is not permitted – by law – to send Foreign Exchange out of the country. This has led retail Forex traders in Malawi to a tight corner.
As a result of these issues, many potential professional investors & retail traders who want to participate in foreign markets face challenges on making deposits to foreign regulated brokerages.
Margin call risk
Margin call is a condition whereby your forex broker notifies you that your account has fallen short of the Margin level.
Margin call takes place when your mark to market or floating losses exceed your account equity and is mostly caused when you use excessive leverage to trade. The two terms shouldn’t be taken for each other as they are just complementary with one leading to the other. The Margin Level is a specific percentage and a benchmark set by your broker which triggers the Margin Call.
The Margin Call is a real-time call or notification which is sent to you once your Margin level falls below the specific benchmark. What gives rise to both of these terms?
Understanding the state of forex trading in Malawi, unregulated foreign brokers offer high risky leverage up to 1:1000 available to traders in Malawi. Trading with high leverage is a very dangerous thing to attempt for traders, especially when there is a lack of regulation to protect against any losses.
The term ‘leverage’ involves borrowing money from a broker which is used to elevate the trading position of such trader. As much as leveraging can increase the trader’s profit, it can also bring about huge losses.
Example, if you have an account balance or ‘equity’ of $5,000 and $1,000 is required as initial margin to open a new trading position, your used margin will be $1,000.
This means your margin level is ($5,000/$1,000 ) = 20% and this is healthy as ideally when it falls below 20% your broker will decline any new trade orders you put on the table.
Assuming your trade ends in a loss and you lose the $1,000 your account balance or equity falls to $4000. If you decide to open another trade that still requires you to set down another 20% margin, you margin level becomes 20% of $4,000 = $800. But in this example, your order size will be smaller.
If you sustain this losing streak and your margin level reaches 20%, all attempts to open new orders will be rejected by your broker. In the end, you could receive a margin call to deposit more cash to restore your margin level back above the required level.
Forex brokers in developed nations are strictly regulated and the amount of leverage they offer clients is controlled- in UK it’s between 30:1 and 2:1. Lower leverage means you will be required to contribute more while your broker borrows you less and this will reduce your risk and prevent you from abusing the opportunity. It’s safe to always opt for lower leverage.
Risk management keeps you safe
Consider doing the following to mitigate the discussed risks:
Carry out extensive research to understand the rules and regulations that could prevent you from trading with any trading platform before venturing into it.
Once you have understood the regulations, choose tier-1 regulated brokers to work with. You can verify your broker’s particulars by visiting the regulators website and conducting a search. Reducing your effective leverage by not over-leveraging your trading account.
