The State Administration of Foreign Exchange (SAFE) recently found 600 websites guilty of illegally providing foreign exchange (FX) margin trading services. As a result, SAFE:
- took down 572 websites;
- removed FX margin trading content from 18 websites; and
- referred three websites to the police for further criminal investigation.
Definition of 'FX margin trading'
'FX margin trading' generally refers to the investment of funds as a margin deposit, the amount of which can be expanded at a certain leverage ratio and subsequently invested in an FX trading market. The leveraging nature of FX margin trading provides investors with the freedom to control a large portion of the market while using less capital to trade.
The high yields associated with such high-risk investments have led many countries to introduce strict regulations, particularly in view of the increasing number of websites that offer FX margin trading services. Some of these websites have been launched offshore, with operators claiming that they:
- have obtained the relevant financial business licences from foreign authorities; and
- are providing Chinese residents with cross-border financial services via the Internet.
Other institutions may masquerade as consulting companies or training institutions that actually provide FX trading services.
In China, entities must obtain the relevant licences from the competent financial regulatory authorities before engaging in any financial activities. Regulations regarding FX margin trading date back to 1994, when the China Securities Regulation Commission (CSRC), SAFE, the State Administration for Industry and Commerce (SAIC) and the Ministry of Public Security (MPS) issued a joint notice stating that it is illegal for:
- institutions to conduct FX margin trading business without registering with the SAIC and obtaining authorisation to do so from both the CSRC and SAFE; and
- clients (either institutions or individuals) to commission institutions to conduct FX margin trading illegally, regardless of whether they use foreign currency or renminbi yuan.
Subsequently, in 2008 the Banking Regulatory Commission (CBRC) issued a notice providing that banking financial institutions cannot conduct, directly or indirectly, any FX margin trading business unless regulations are issued stipulating otherwise.
In 2017, in response to the increasing number of illegal websites engaging in non-permit financial products leveraged trading, the National Internet Finance Association made the following stipulations on its website:
- No internet platforms (including cross-border platforms) have been authorised to engage in FX leveraged trading by the financial regulatory authorities. Any platform that does so has thus been established illegally.
- Any party that operates or takes part in FX leveraged trading is acting illegally and will not be protected by Chinese law.
In 2018 the People's Bank of China (PBOC), the MPS and SAFE once again jointly indicated that no institutions have been permitted by the PBOC, the CBRC, the CSRC, SAFE or their respective branches to conduct FX margin trading business in China.
In China, the legal attitude towards FX margin trading services is clear:
- no legal institutions can conduct FX margin trading business; and
- those who break the law in order to engage in such business may incur the following penalties.
Administrative penalties Under the Administrative Regulations on Foreign Exchange (revised in 2008), it is illegal to trade FX (directly or indirectly), resell FX or illegally act as an intermediary for FX trading without authorisation when the amount of FX involved is large. Organisations or individuals which do so may:
- be issued a warning;
- have their illegal proceeds confiscated; or
- receive a fine.
Criminal penalties Under the Interpretation of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Criminal Cases of Fraudulent Purchase of Foreign Exchange and Illegal Foreign Exchange Trading, where FX trading occurs in an institution other than a designated FX bank or the China Foreign Exchange Trade System (or sub-centres thereof) and disturbs the order of the financial markets, the party carrying out the trading may be convicted for undertaking illegal business operations.
For further information on this topic please contact Wu Jiejiang at Jingtian & Gongcheng by telephone (+86 10 5809 1000) or email ([email protected]). The Jingtian & Gongcheng website can be accessed at www.jingtian.com.
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