Legal limbo

No one knows who's supposed to regulate currency trading.

So what is currency, anyway? Is it a contract, a security or a commodity? These are speculative questions, but practical ones, especially considering currency trading seems to be unregulated right now. Common definitions of what a currency is place it outside of existing regulations–and that has implications for both retail investors and the foreign-exchange trading industry.

Many Canadians who were interested in FX trading have taken the initiative and opened up trading accounts in the United States. But considering the Ontario Securities Commission once charged the U.S. division of TD Waterhouse $800,000 for having Canadians on its books in violation of foreign trading restrictions, some wonder if the practice isn't a bit dodgy.

There doesn't seem to be reason to worry, however, since currency trading doesn't fall under any particular regulator's mandate. Foreign-exchange “trades” are really just currency conversions from one denomination to another, so they're not considered securities. This means that while the Ontario Securities Commission is responsible for enforcing the rules around stock trading, it doesn't regulate straight currency trading. Currency trades also fall outside the mandate of the office of the Superintendent of Financial Institutions. “No one knows where this is regulated right now,” says Bob Wong, manager of online foreign exchange for Refco Canada.

Regulators are aware of the situation and have issued investor alerts. Eric Pelletier, a spokesman for the OSC, warns Canadians they need to be careful if they have an account in the United States. “You won't have protection under Canadian law if something goes wrong in that relationship,” he says. But that means the legal limbo could be a good selling point for Canadian brokers who have set up FX trading operations in Canada. “We have a physical presence here and are fully licensed, and we also have Canadian Investor Protection Fund coverage,” says Edward Kholodenko, CEO of Questrade. “We think that will appeal to many Canadians.”