The Financial Sector Conduct Authority (FSCA) filed an urgent application with the High Court which resulted in the liquidation of JP Markets (Pty) Limited in September 2020. The FSCA’s main contention was that JP Markets is an unlicensed over-the-counter (OTC) derivative provider. The FSCA relied on section 38B of the FAIS Act which allows the FSCA to launch liquidation proceedings if it considers that the interests of the clients of a financial services provider (FSP) or of members of the public so require. This is the first time that the statutory power in section 38B of the FAIS Act has been used by the FSCA.
JP Markets was authorised as a Category 1 FSP for advice and the rendering of non-discretionary intermediary services in respect of derivative instruments and deposits under the FAIS Act but was not authorised as an OTC derivative provider in terms of the Financial Markets Act.
The judgment states that there is a fundamental difference between an FSP licence, where the licence holder renders financial services (whether advisory or intermediary) without any personal exposure to market movements, and an OTC derivative provider licence, where the licence holder has extensive exposure to market movements because it acts as a principal in originating, issuing or selling of the OTCs. An FSP licence does not permit a person as an OTC derivative provider to originate, issue or sell OTCs, which are instead regulated by the Financial Markets Act and Regulations. These Regulations were published in February 2018 and existing providers of OTC derivatives were given until 14 June 2019 to apply to be licensed. JP Markets only lodged its application for a license four days before the liquidation application was heard.
The FSCA has also prepared to hand over the matter to the National Prosecuting Authority (NPA) for further investigation and possible criminal prosecution. On liquidation, the licence of JP Markets was automatically withdrawn, and the FSCA gave notice of its intention to debar Mr. Paulsen, the CEO of JP Markets, from the industry. The FSCA has taken these steps because of the substantial risk to the public in instances where entities and individuals act as issuers of derivative products (product providers) without having the adequate financial reserves, risk management system and knowledge, and as an on-going effort to remove FSPs who are prepared to act outside the law from the financial industry.
This judgment highlights the need for those involved in the OTC derivative market to consider whether they are appropriately authorised.
The FSCA has created a regulatory and a legislative framework for the supervision of entities who wish to operate in the Over the Counter Derivative Providers (ODP) market, as an issuer or product provider.
The FSCA reminds the industry that:
- All ODPs need to be licensed by the FSCA.
- Forex derivative trading is a high-risk investment only suitable for investors with the required knowledge, skills, and experience. The public should carefully consider whether trading in such financial instruments are suitable for them.
- As forex derivative platforms are a very popular space for scammers and fraudsters to ply their trade, additional care should be taken when dealing with any platform. One level of assurance is checking to see whether the provider is registered with the FSCA as an FSP or ODP.
Click on the links below to read the following: