Forex trading is legal in South Africa. The Financial Sector Conduct Authority (FSCA) regulates the forex and CFD market and online retail trading brokers are allowed to operate in South Africa as members of the regulatory authority. South Africans are also allowed to trade forex through online platforms based overseas, even if the brokers are not regulated by the FSCA.
What is not allowed is a person may not buy foreign currencies through an online retail broker. The only place you are allowed to buy and sell foreign currency is through a licensed bank or licensed foreign exchange company. Strict rules and regulations govern foreign exchange control in South Africa.
In this in-depth guide you’ll learn:
And lots more…
Let’s dive right in…
Currently, there are no laws imposed on the retail forex trading market by the South African government. However, it is strictly regulated by the Financial Sector Conduct Authority (FSCA) and traders are governed by laws set by the South African Reserve Bank (SARB) in terms of the outflow of cash from the country.
The key issue pertaining to the legality of foreign exchange trading is it is illegal to purchase foreign currencies from a firm or individual operating without the proper authorization and it is illegal to speculate against the Rand.
The current limit on outgoing cash flow from South Africa is R10 million per person. As long as you abide by international monetary exchange controls and declare income earned from forex trading on your tax returns, you are free to trade forex through various online retail trading platforms.
A vital purpose of the foreign exchange controls regarding outgoing cash flow is to prevent money laundering. The forex market is the largest and most actively traded market in the world, with some 6 trillion US Dollars traded daily. The enormous growth in forex trading in the past decade has created massive opportunities for financial criminals to exploit the over-the-counter trading system.
The regulation of the forex trading market in South Africa is left to the FSCA. It is their role to inform, educate and support forex traders and brokers on fair trading practices.
The Financial Sector Conduct Authority (FSCA) is the watchdog of the South African financial industry. It was previously known as the FSB, which was the first financial regulator established in South Africa.
It was proposed in 1991 that an independent body was needed to oversee, supervise and regulate all non-banking financial entities. This included insurers, financial service providers, capital markets, retirement funds, credit agents, collective investment schemes and forex brokers.
FSB became FSCA in 2018 and was mandated with the following responsibilities:
➡️️ provide quality financial education to investors, particularly on the promotion of fair treatment
➡️️ provide investors with information on non-banking financial entities that are granted a FSCA license to operate in South Africa
➡️️ maintain financial stability and protect investors in South Africa; thereby dealing with any violations committed by non-banking entities
➡️️ oversee the development of the financial market in South Africa to ensure efficiency and fair practices
In October 2020, the FSCA clarified the rules of forex trading in South Africa to clear up some confusion that existed after comments made by the Minister of Finance, Tito Mboweni. The Regulator stated “it is legal for individuals in South Africa to engage in forex trading as long as this is done through an authorised dealer and the trader is using forex derivatives issued by a licensed entity”.
The Regulator further stated that “it is illegal in terms of Reserve Bank exchange control regulations for South African residents to speculate against the Rand, whether inside or outside South Africa or to engage in purchases of forex directly without the assistance of an authorised dealer”.
The FSCA approves of forex derivatives issued by a licensed entity. All online forex trading in South Africa is derivative trading so let’s look at what it entails.
Derivatives are financial instruments that get their value from the underlying assets or securities. These range from stocks, bonds, indices and currencies to commodities like natural gas, oil, gold, silver, coffee and cotton. In the case of forex trading, derivatives are currencies.
The value of a forex derivative is obtained from the fluctuation in prices of currency pairs. Forex derivatives are used regularly in two ways: for hedging foreign exchange risk and for speculating on currency price movements.
The difference between hedgers and speculators is hedgers are the owners of the underlying asset, while speculators hold derivative positions with or without owning the underlying assets. The majority of forex traders are speculators who do not own the underlying asset, in this case the currency pairs.
The FSCA is set to approve a new licensing scheme for retail derivative providers which is called the ODP license. ODP stands for Over the Counter Derivative Provider.
The new regime is under review and still in the application phase. It has been positively received by members of the local forex industry who see it as a “real chance to clean up the industry”. The ODP license will ensure legitimate derivative providers are able to conduct business responsibly and fairly in an environment that is notoriously plagued by illicit operators and scammers.
To secure the ODP license, brokers will be required to conduct due diligence on their clients before they can trade high-risk products. The license will introduce:
➡️️ stricter capital adequacy requirements
➡️️ force all forex brokers to have a physical presence in the country
➡️️ provide continuous access to all transaction data to the FSCA
With regards to the latter point, the FSCA will have access to all transaction details which includes the underlying asset, instrument type and leveraged used as well as the traders or investors name and country of residence.
The aim of the ODP license is to ensure that derivative brokers treat all clients fairly and do not get involved in illegal activity or conduct any business that is contrary to the FSCA rules.
As of 2010, South Africans can send money out the country to offshore accounts up to a specific limit. The current limit is R10 million per person over their lifetime.
In addition to the government’s prescribed offshore cash allowance, South African traders may also apply for a ‘single discretionary allowance’. This allowance has a maximum limit of R1 million.
It’s important to note that any cash taken offshore (up to a limit of R10 million) needs to cleared with SARS and it involves a lot of paperwork, including filing Tax Clearance Certificates. The single discretionary allowance only has to be pre-approved by a licensed bank.
For this reason, most forex traders take advantage of the single discretionary allowance to fund their offshore forex accounts. Traders are required to state exactly how they plan to use the money.
Before signing up to trade forex on an online trading platform, it’s highly recommend you check that they are members of a formal regulatory body. In South Africa, the FSCA regulates forex brokers. Regulated forex brokers provide traders with an extra layer of protection.
Trillions are traded every day on the forex market and the large volumes attract illicit entities who will try to scam you. It’s safer and more responsible to trade forex in South Africa through a reputable forex broker who is a registered member of FSCA. The same applies to international forex trading sites where it is wise to use only regulated forex brokers.
In brief, here’s why a regulated forex broker is the safest option if you are trading forex in South Africa:
➡️️ regulated brokers are required to keep client funds segregated from their own operating funds; they are audited regularly to ensure clients funds are not misappropriated
➡️️ if your forex broker commits fraud or goes bankrupt, you have a regulatory authority you can contact who’ll help you get your funds back
➡️️ all FSCA-regulated brokers will soon need to apply and operate with an ODP license which is designed to further protect forex traders in South Africa
Remember, FSCA is responsible for providing legal assistance to anyone who falls victim to a financial scam in South Africa. If you use a FSCA-regulated forex broker, the watchdog will take the necessary actions to fine or revoke the broker’s license. If you use a forex broker that is not a licensed member of the FSCA, the watchdog can do nothing more than issue a warning to the broker.
Don’t just take the forex brokers’ word for it when they say they are FSCA-regulated. Prior to handing any money over to the broker, check this claim is legitimate. The forex broker should be able to provide you with their FSCA license number and you can check its validity on the official FSCA website under the category OTC Derivative Provider.
Two things to double-check when confirming whether a forex broker is legitimate and FSCA-regulated in South Africa include:
➡️️ Do they appear on FSCA’s List of Regulated Entities and Persons?
➡️️ When was the license was issued and is it still of good standing i.e. has the forex broker’s membership lapsed or has it been revoked by FSCA?
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. Forex trading involves a high degree of leverage which increases the risk associated with forex trading.