If you are a margin foreign exchange (FX) or Contracts for Difference (CFDs) provider operating in Australia, you will be intimately familiar with the Meta Trader 4 (MT4) trading platform.
If you do, do you know whether your MT4 platform has the plug-in software known as the Virtual Dealer? You may not – and if you do, you may not know the full extent of its capabilities.
Margin FX and CFD providers which operate the MT4 platform must incorporate strict controls to limit, monitor and record access to the MT4 software and, in particular, the Virtual Dealer.
Virtual Dealer is software which, amongst other things, can introduce a delay in the execution of trades. That delay can be set from 1 to 10 seconds. Potentially, an introduced delay could disadvantage clients where the market moved against clients during the period of delay - especially in periods of volatility.
ASIC recently cancelled the AFS licence of Enfinium Pty Ltd following an investigation which examined a number of areas, including the operation of the Virtual Dealer plug-in. ASIC found that over a three year period, the settings on the Virtual Dealer had been changed 271 times but no records of those changes had been kept.
ASIC was unable to determine whether any clients of Enfinium Pty Ltd had sustained any negative impact as a result of any trade execution delay introduced by the Virtual Dealer. However, ASIC observed that where the Virtual Dealer plug-in is utilised by margin foreign exchange providers, robust risk management systems must be in place.
This firm acted for another CFD provider utilising the MT4 platform in an investigation by ASIC which also looked at the operation of the Virtual Dealer. That client has retained its AFS licence and no adverse action has been taken by ASIC against it. As a result of the investigation, our client now has stringent controls and record-keeping concerning the operation of the Virtual Dealer.
As a result of our work in this area, it is clear to us that, often, management of FX brokers and CFD providers do not:
- understand what the Virtual Dealer is or how it operates;
- know who in the company (if anyone) had accessed and/or altered the settings of the Virtual Dealer;
- maintain any records of access to the Virtual Dealer;
- have any guidelines relating to the use and setting for the Virtual Dealer
- conduct training in the use of the Virtual Dealer;
- identify the risks associated with the Virtual Dealer in its risk register.
As a result of the investigation, our client and this firm now have a detailed knowledge of the Virtual Dealer, its operation and the risks which might be associated with it.
We recommend that if you operate an MT4 platform, you immediately ascertain whether you have the Virtual Dealer plug-in and, if so:
- understand how it operates;
- have proper guidelines as to its operation;
- ensure that there is an appropriate reason for any change of its settings;
- have a tight system of authorisation for access to it;
- have specified trained staff to access and operate it;
- maintain records of all access to it and any modification of its settings;
- record access to it in your risk register.
Naturally, these recommendations also apply if your CFD business operates any other software of which manipulation is possible or which might adversely impact clients, and if you use a platform other than the MT4.
This issue is part of a larger global crackdown by regulators concerned with unfair practices, including what the industry calls "asymmetrical slippage". For example, FXCM was fined USD $8.2m by the US CFTC and GBP £4m by the UK's FCA for behaviour that was "unfair" to the client in connection with slippage.
AFSL holders in Australia also have the obligation under s912A of the Corporations Act 2001 to "do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
