The online trading regulatory landscape is about to get a shakeup in The Bahamas, one of the most popular and legitimate offshore destinations for foreign exchange and CFD brokers, with the nation’s regulator, the Securities Commission of The Bahamas, to implement a range of new regulations, including leverage restrictions.
In particular, Finance Magnates has learned exclusively that the new regulation has been tabled by the Government of The Bahamas on the 27th of May 2020. Therefore, the country’s regulator will be implementing leverage restrictions of 200:1, as well as ban binary options trading. The regulator will also impose marketing restrictions, which will limit cold calling and other aggressive marketing tactics.
Regulatory changes
Finance Magnates has seen a copy of the new rules - Securities Industry (Contracts For Differences) Rules, 2020. According to the document, the Securities Commission of The Bahamas’ will require a minimum of 0.5 percent margin; a maximum 200:1 leverage will be applied to all underlying CFD assets except for Cryptocurrencies which the watchdog will establish on a case-by-case basis and brokers will need to ensure a retail client account’s net equity does not fall below 50 percent.
Trading in binary options will be prohibited for retail clients, and the SC will place restrictions on retail incentives, where enticements and bonuses will be banned, and Negative Balance protection will be required.
Furthermore, CFD businesses will be required to register the person responsible for the supervision of the company, who will ensure the company remains in compliance with the law.
There will also be additional reporting requirements specifically regarding CFD transactions, as well as standardized risk warnings and formats, similar to those implemented by the European Securities and Markets Authority (ESMA).
The Bahamas benefits from the offshore boom
Following ESMA implementing its product intervention measures, which severely limited leverage and placed restrictions on marketing, traders started leaving the continent in search of better trading conditions.
A lot of them ended up in The Bahamas, which has led to a number of brokers acquiring licenses from the Securities Commission of The Bahamas. Although the island nation does have a broker-dealer regulatory framework, until this point, dealing CFDs was loosely defined.
Following this, the online trading space has boomed over the past few years in the country. This has been a benefit for the country, which is heavily reliant on tourism, in terms of economic diversification and jobs.
Speaking to Finance Magnates, Andrew Rolle, Executive Committee Member of the Bahamas Investment & Securities Business Association (BISBA), said: “Our aim is to help shape a regulatory environment where industry thrives within the context of protecting the jurisdiction’s reputation. The new rules are intended to satisfy consumer’s demands for protection and encourage more brokers to choose the Bahamas as their jurisdiction of choice. For the Bahamas, this leads to securing growth within the securities industry and jobs creation.”
Learning from the mistakes of others
However, this boom has led to the regulator wanting to create an environment, which balances safety and opportunity. Taking inspiration from ESMA, and from other European regulators who have largely followed its lead, the Securities Commission has decided to crack down on what it believes is the real villain - aggressive marketing and other bad practices, without having to significantly reduce leverage.
Jim Manczak, Director of Bahamas Offshore Services
“The Securities Commission of the Bahamas seems to be positioning the jurisdiction in a ‘Goldielocks zone,’” commented Jim Manczak, Director of Bahamas Offshore Services. “A set of rules more sensible than in the EU, but not as loose as most offshore jurisdictions. I’m curious about how clients and brokers will react.”
Professional Clients
Furthermore, the regulator will allow professional clients who will not be subject to minimum margin requirements. A CFD firm can designate a client as an elective professional client only after the company has tested the client to determine their expertise, experience, and knowledge of CFDs and ensure that they understand the nature of the transactions or services.
According to the document, the client must elect to attain this status and must meet two of the following criteria:
- The client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 transactions per quarter over the previous four quarters;
- The size of the client’s financial instrument portfolio, including cash deposits and financial instruments, exceeds $500,000;
- The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Will other offshore jurisdictions follow suit?
The regulation changes by the SC show a commitment to the forex and CFD industry within the country, and will further legitimize the nation as a serious but friendly jurisdiction for trading.
However, it will be interesting to see what larger implications this regulation will have on the FX industry - will other offshore jurisdictions follow suit, will The Bahamas lose its status as one of the best offshore jurisdictions, or will it work in favor of the country?
