Uncovering the Risks of Unauthorized Forex Trading Platforms

Mint Explainer: Uncovering the Risks of Unauthorized Forex Trading Platforms

The RBI Governor Shaktikanta Das recently expressed concerns about unauthorized forex trading platforms used by corporates and traders to mitigate foreign currency risks.
These platforms, resembling casino games, make enticing promises of high returns. As a result, the RBI has urged banks to remain vigilant and identify the 75 unauthorized entities involved in forex transactions.
In this Mint explainer, we delve into the reasons behind this warning to shed light on the risks associated with illegal forex trading platforms.

Forex trading platforms facilitate foreign exchange transactions, serving as a vital tool for corporates and traders to manage their foreign currency risks.
These platforms cater to over-the-counter (OTC) spot or derivatives transactions authorized by the RBI. Additionally, the RBI endorses exchange-traded currency derivatives on platforms like the BSE, NSE, and the Metropolitan Stock Exchange of India.
Transactions occur via electronic trading platforms such as CCIL’s FX CLEAR, Reuters, Bloomberg, or through authorized brokers.

Forex trading in India is subject to strict regulations. It is permitted only through registered Indian forex brokers on RBI-authorized platforms or recognized stock exchanges.
The central bank restricts forex trading to four currency pairs: dollar-rupee, euro-rupee, British pound-rupee, and Japanese yen-rupee. These pairs feature the Indian rupee (INR) as the base currency.
Trading in any other currency pair is deemed illegal and can lead to penalties under the Foreign Exchange Management Act (FEMA). Indian citizens are prohibited from trading foreign currencies overseas, both directly and indirectly.

In November of the previous year, the RBI issued an alert list comprising 75 entities unauthorized to engage in forex trading or operate forex platforms.
Examples of these unauthorized entities include OctaFX, Alpari, AnyFX, Ava Trade, Binomo, Exness, Expert, Option, FBS, FinFxPro, Forex.com, Forex4money, Foxorex, FTMO, FVP Trade, FXPrimus, FXStreet, FXCm, FxNice, and HotFores.
The issue intensified during the pandemic when these platforms started providing a financial derivatives product called contracts for differences (CFD). CFDs involve cash settlements based on the difference between trade opening and closing prices.
The RBI noticed deceptive advertisements offering forex trading services on over-the-top platforms and gaming apps, relying on casino-like features to allure users with high returns.

Over the past two years, the RBI has issued multiple advisories to caution against unauthorized entities operating in the forex trading space.
Recently, the RBI released an alert list that identifies the 75 entities involved in unauthorized forex transactions. However, regulatory limitations prevent the RBI from directly shutting down these platforms, as they are registered in countries where they are legally operating.
Collaborating with banks and the government, the RBI is actively working on implementing stricter measures to prevent the misuse of banking channels.
The Enforcement Directorate has taken action in attaching the assets of certain firms, like OctaFX, to enforce accountability and deter illegal activities.

The RBI’s warning against illegal forex trading platforms underscores the importance of awareness and regulatory compliance.
Traders and corporates must exercise caution and ensure they engage with authorized platforms and brokers for their forex transactions.
By remaining vigilant and informed, market participants can contribute to maintaining the integrity and security of the forex trading landscape.

Unauthorized forex trading platforms can expose traders and corporates to significant risks and potential losses.
The RBI strictly regulates forex trading, allowing it only through registered Indian forex brokers and authorized platforms.
Trading is limited to four currency pairs, and any involvement in other pairs is considered illegal and can lead to penalties.
The RBI has identified 75 unauthorized entities involved in forex transactions and is working on implementing stricter measures.
Traders must exercise caution and ensure they engage with legitimate platforms to safeguard their investments.