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08 February 2008
Under applicable Swiss law, the activities of foreign exchange (forex) dealers are not regulated. One reason for this is that currency trading is, in principle, not considered as securities dealing. Another reason is that currency dealers which receive funds transfers from their clients are not deemed to be accepting monetary deposits within the meaning of Article 1(2) of the Banking Act, a provision that reserves the right to accept deposits solely for banks. The Banking Ordinance (Article 3a(3)(c)) lays down an exception, according to which creditor balances on customer accounts of currency dealers are not held to be deposits. The same kind of exception applies to creditor balances on customer accounts for precious metals and securities dealers.
The Swiss Federal Banking Commission (SFBC) has specified the cases in which it will hold that currency dealers fulfil the conditions of Article 3a(3)(c) of the Banking Ordinance using a relatively strict interpretation. Firstly, traders must be using the customer accounts solely in order to execute the customer's orders immediately, as otherwise they would be accepting deposits from the public. Secondly, if the balance in the customer's account is being maintained, this account must be entirely hedged by means of the currency dealer's own currency account so as to secure the risks incurred by the customer.
The SFBC has noticed in recent years that currency dealers, whose numbers have greatly increased, do not respect these requirements. Abuses are evidenced by the growing number of complaints from small investors that have suffered significant losses. In the last three years alone, the SFBC has recorded that more than 20 companies accepted deposits from the public without a licence to do so and it has consequently taken counteractive measures, going as far as liquidation in some cases.
Unlike the clients of a precious metals or securities dealer, clients of a currency dealer do not, after the relevant transaction, become the owner of something that can be withdrawn from the bankruptcy estate of an indebted dealer on the basis of the client's legal privilege of ownership. The currency dealer's customer is left with only a cash claim against the dealer and will be entitled to just a dividend if the dealer goes bankrupt. The weakness of this position is unacceptable to the SFBC in a system where there is no duty for currency dealers to have adequate capital to support their business operations.
The position of currency dealers is also unequal by comparison to that of banks, to the extent that currency dealers often:
By performing these activities legally reserved to banks, currency dealers are de facto practising unfair competition towards them.
To obtain and keep their licences, banks must satisfy continuous legal obligations, such as the duty to maintain an adequate ratio between their resources and total liabilities. They must comply at all times with the minimum core capital requirements that are adequate to support their business operations and the risks to which they are exposed; banks must also maintain the fully paid-up minimum capital required (Sfr10 million). Furthermore, their internal organization must be adequate for their business, including the creation and definition of duties of separate bodies for supervision, management and control. The SFBC wants to prevent currency dealers from carrying out banking activities without upholding all these essential guarantees, in order to ensure equal treatment for all financial providers undertaking the same activities.
The SFBC proposes to delete the term 'currency dealers' from Article 3a(3)(c) of the Banking Ordinance. Swiss law will therefore cease to provide that funds deposited with currency dealers do not constitute deposits. In accordance with Article 1(2) of the Banking Act, currency dealers - like other non-banks - will no longer have the right to hold deposit accounts on behalf of their customers. Theoretically, they will be able to continue their activities provided that they do not accept any deposits from customers.
The SFBC has chosen not to pursue the option of subjecting currency dealers to a securities dealers licence requirement and imposing corresponding supervision and organizational requirements upon them. With this option, currency dealers would have continued to benefit from the exception of Article 3a(3)(c) of the Banking Ordinance, as do securities dealers. The SFBC excludes this option for unconvincing reasons, such as the fact that it would excessively broaden the concept of 'securities'.
It is anticipated that the draft amendment will take effect on April 1 2008. Currency dealers will have to react quickly to the upcoming change in their legal status. Dealers can do so in four ways:
Active currency dealers that will be subject to the Banking Act from the date of effect will have three months to make themselves known to the SFBC (ie, until July 1 2008). They will then have one year from the date of effect (ie, until March 31 2009) to comply with the requirements of the Banking Act and file for a banking licence.
For further information on this topic please contact Christophe Rapin at Pestalozzi Lachenal Patry's Geneva office by telephone (+41 22 737 1000) or by fax (+41 22 737 1001) or by email (email@example.com). Alternatively, contact Marc de Araujo at Pestalozzi Lachenal Patry's Brussels office by telephone (+32 2 646 60 10) or by fax (+32 2 646 60 10) or by email (firstname.lastname@example.org).
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Marc De Araujo