One issue has emerged as a stumbling block in the relations between the Capital Markets Authority (CMA) and parts of the financial industry in recent months. The concerned sub-sector of the financial industry is a group of companies specializing in digital currency trade, also known as forex platforms or, fx companies.
The Lebanese problem with currency trading is based on a new regulation limiting CMA-regulated traders from opening small accounts of $1,000 and on requirements for minimum margins to be boosted from two or five percent to 20 percent, thus reducing leverage possibilities from 20 or 50 times to five times the amount held in an investor’s account with the fx company.
These two regulatory hurdles from the CMA have caused outrage among fx companies in Beirut, which claimed that a requirement for a 20 percent margin would drive their customers away and ruin their business. Letters of complaint were written to the shareholders in fx companies, street protests outside the CMA headquarters were discussed and claims of cold-blooded business murder were leveled at the CMA and its financial control unit, which set the end of September as the deadline by which fx companies would have to comply or run into danger of losing their licenses.
According to Executive’s investigations of the mood among financial institutions, however, the outrage was concentrated among the directly affected companies.
Microeconomic and macroeconomic considerations
Currency trading, while a financial markets activity, represented a small segment of this market in Lebanon. Exactly how small is a matter of debate since this segment of the financial industry consists of companies that do not have to publish annual reports. But judging from their office locations in pricey downtown Beirut areas, local currency platforms have not done badly. One private account manager affiliated with Trust Capital told Executive that the firm has increased its revenue for each year, year on year, since opening for business in 2010. However, he said he could not disclose the compound annual growth rate (CAGR) of the business achieved since the company’s founding.
On the other hand, the macroeconomic role of fx trading as component of the Lebanese market has been described as not at all significant. BlomInvest head Fadi Osserian said that according to his recollection of meetings with the central bank governor about the subject of margin requirements, Governor Riad Salameh was adamant in insisting on the protection of financial markets investors as a priority.
“We are finding an alternative for these companies and investors to work under [a system] that is controlled by us”
CMA officials depicted claims as excessive that 500 families were dependent on work in the fx companies, and argued that even if several hundred people were working in this industry, one should consider first how many families would be saved from losing their money in speculative trading thanks to the strict regulation.
It is a matter of one’s overall viewpoint if one considers companies such as forex platforms as negligible contributors to the economy and as vital as an appendix for financial markets, or regards them as necessary for the functioning and development of financial markets and is concerned that the risk of driving these companies out of business or into moving into foreign jurisdictions would damage the prospects of building a vibrant capital markets environment in Beirut.
No fundamental CMA prohibition of forex
According to the CMA’s Firas Safieddine, however, it is not the CMA’s intention at all to stifle forex trading in Lebanon. “When we [started operating as the CMA], we realized that these forex service providers were allowing investors to go [into trading the fx markets] with $1,000 accounts. That is very little in currency trading; you might as well go to the casino. We said, it is not allowed to have accounts with $1,000, you can open an account with a minimum of $10,000. To make it clear; I am not saying that the whole forex section is a casino. We classify, however, that opening $1,000 accounts for 1000 clients, is a casino,” he explained.
According to him, even if the amount might not be very high, it would signify a high systemic risk if 1000 clients were to appeal to the CMA, each saying they lost their $1,000 because of the trading platform having experienced a collapse. Safieddine said that the sudden policy change by the Swiss National Bank (SNB) in early 2015 was an event that triggered large currency fluctuations and led to a platform’s breakdown in Lebanon. Thus the SNB’s entirely unexpected lifting of the exchange rate cap resulted in market shocks, which created losses for currency traders around the world, including Lebanon, whereby the CMA’s reckoning some private clients had engaged in positions that caused them to run up huge exposures which until today require the CMA to mediate between investors and the financial operators.
He reiterated that the CMA would not seek to eradicate forex activity from the Lebanese market. “We just said that we are going to temporarily lock in on the risks behind the forex and we are finding an alternative for these companies and investors to work under [a system] that is controlled by us,” he said, referring to the Electronic Trading Platform (ETP) that is supposed to be introduced after the transformation of the Beirut Stock Exchange. Such a statement reveals what was known but so far unproved: the CMA is seeking to monopolise the fx market.
The requirement for 20 percent margins could be eased and restored to the single digits once the ETP is in place and platforms are supervised by Lebanese authorities instead of operating by proxy, thus guaranteeing that accounts have to be topped up or shut down automatically if they drop below a minimum.
There is a global specter of volatility and even trade wars among countries or currency wars engulfing some of the most actively traded currencies
Forex companies appear to have dialed down the intensity of their protests against the 20 percent margin requirement, at least for the moment. While there were reports of some layoffs at fx companies in September, traders said off the record that these dismissals were the result of regular employee performance reviews, not because of issues related to regulation. The fx industry does not yet speak with a consolidated voice through an association or syndicate, said the private account manager working in affiliation with Trust Capital, by his claims the largest forex specialist operator in Lebanon.
The impression created for this reporter by forex companies speaking off the record or communicating via an independent associate instead of senior management was that the companies are seeking to tread with care and play for time by emphasizing their national commitment. “The margin requirements might not fit Lebanese traders but we have no doubt that it will be for the good of this business. We will treat these requirements as a positive and we will conduct ourselves according to the requirements until further notice,” the account manager said.
He conceded that the CMA’s increased margin and account size requirements were reflected in client departures but said these were so far manageable at rates of “under 20 percent” of customers being lost and proclaimed that while some forex companies shifted offices to Cyprus, “we believe in Lebanon and will stay in Lebanon as long as we can make our balance sheets [break even]. We will obey the CMA regulations until further notice.”
The global perspective
When one reviews the situation of currency trading in Lebanon from the angle of the global economic perspectives in the fourth quarter of 2016, it seems not to be paranoid behavior for an economy like Lebanon to be wary of all trading platforms for currencies that the Lebanese might get involved in but that the national authorities do not have under control. Times are volatile and filled with uncertainties, as the recent experience with the Swiss franc proves. The franc is very actively traded, much more than the size of the Swiss economy would explain. And as far as currency shocks in 2016, one can add to the Swiss moment the – albeit in contingency planning better prepared – experience of the pound sterling’s sudden weakening in response to the pro-Brexit vote this year.
These lessons from the recent past are reinforcing concerns over Black Swans, or wholly unpredicted future events, and efforts to turn these into “Gray Swans,” or extreme events that are also not predictable but which we somewhat can take into account. The expectation of such events is nurtured by general fears – highlighted once again this autumn at the annual meeting of the International Monetary Fund – about radical uncertainty relating to the markets.
One such fear is that general volatility, which was worryingly high in the first quarter of 2016, will rise again toward the end of the year and possibly beyond. Another fear is about waning commitments of leading economies to globalization and integration; a fear fueled by worries over upcoming political elections and a possible increase of isolationist/populist behavior by the United States and centrifugal political forces strengthening in the EU and even in Euro-land.
Monetary easing will be more difficult to keep doing as central banks run lower on options, and thus there is a global specter of volatility and even trade wars among countries or currency wars engulfing some of the most actively traded currencies. Also, there is the fearful potential of flash crashes, short-term inexplicable trade events connected to algorithmic trading that can bring wild swings to the currency markets, as was the case with the sudden drop by the pound sterling in thin trading on the morning of October 7. Considering all these factors, the instinct of seeking control over currency trading in Lebanon seems quite reasonable.
As currency traders themselves admit, large currency positions in the hundreds of millions of dollars are maintained by local investors and those can be quick to turn to ruin in unpredictable and volatile environments, something which currency markets are by definition in “normal” times – and even more so nowadays.