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04.11.2018 Feature Article

Regulating Forex Trading

Regulating Forex Trading
LISTEN NOV 4, 2018

The selling of foreign currencies to the public must be regulated properly to check black market activities in forex trading. The activities of the forex traders have impacts on the rate at which foreign currencies is sold and bought. The exchange rate is the rate or the price at which the currency of a different is bought or sold in the forex market or the foreign exchange market. Foreign currencies are sold by banks and well-established forex bureaus to facilitate the activities of importers and exporters or businessmen and women in general. Besides these groups, there are other people engaged in the selling of money of other countries whose businesses are not regulated at all.

These groups often cause black market situations where if they are privy with information about the quantity of the foreign currencies in market, intentionally hide theirs to artificially create a shortage. This shortage, short in supply of currencies, increases the exchange rates. Their main motives are to increase their profitability through a margin of arbitrage. Once the officially established institutions such as banks and forex bureaus cannot meet the demands of the business public, these individuals supplement the activities of the former institutions. A directive by the Central Bank to electronically capture transactions with receipts of forex trading will be difficult. The black market which comprises of those who are in businesses that are not registered is not captured at all. This market is not within the control of the Central Bank.

There are at least three (3) ways of managing the exchange rates of countries. These include floating, managed floating and pegging or the crawling peg. The floating method of managing the exchange rate which is determined by demand and supply is often used to control exchange rates world-wide. A careful study of the economy of Ghana’s way of managing the exchange rate will urge for a call to institute the managed floating. The managed floating may be best suited for our situation as there are several arbitrageurs and speculators in the system. The money sellers are everywhere searching for opportunities to make profits. The managed floating is where the Central Bank, here the Bank of Ghana, intervenes in the market by making purchases and sales of forex in order to keep the exchange rate within a band. The BoG sells to the various banks and other authorised dealers. The BoG and the authorised dealers play supreme roles in the forex market. The BoG as a supplier of forex is a significant player in the Ghanaian forex market. The forex market needs customers that will demand and suppliers as well. And so the licensing and registration of bureaus are appropriate for the exchange of foreign currencies.

The Central Bank of Ghana is setting out measures to regulate and control the supply and demand of foreign currencies in the forex market. Such measures as outlined need appendages to have a holistic cleaning in the exchange of foreign currencies.

The demand for details of customers and dealers such as national IDs may just be one of the several options available for such cleaning. The identity of the buyers need to be established in order to prevent many financial crimes from happening. To practically achieve such an end, the BoG needs to, from time to time, determine the quantity of forex to be sold to the authorised dealers. These dealers have profit motives and as such can create an arbitrage situation to benefit from it. They have far deep information about when demand for foreign currencies peak and when they fall. And so, they can create a speculative motive and hoard the forex sold to them. There is therefore the need to create and demand details about the dealings of such authorised dealers including banks to realistically determine the forex in the market. Such a move will help prevent excess forex in the public domain. This will plug any arbitrage opportunity in the financial system. This is a very taxing task but needs to be done. The foreign currencies holders and those in the black market will make the work of the Central Bank difficult.

Equally important is the clearing and tracking of the forex in the hands of non-registered dealers. These groups hold quite a sizeable amount of forex in their stocks. The BoG needs to devise ways of clearing the excess forex in the hands of these non-registered dealers through purchases from time to time. The non-registered dealers make profit from the bid-offer spread or the differences in the buying and selling of forex. These individuals are mostly speculators and their businesses thrive on the profit they make from the arbitrage margin or spread. They have the power to create a black market situation to increase the prices of foreign currencies.

In Ghana and many other African countries, the Central Banks rely on capital inflows to control forex rates. Exports that will help earn more foreign income are low. The treasury managers depend on reserves of the state to solve such impasse. This creates arbitrage opportunity for the non-registered individual dealing members. Their activities, if possible should be mainstreamed and included in the whole financial system or sector. This may demand legislations by acts and instruments. Their activities should be considered illegitimate. This will be difficult as they are dispersed in many parts of Ghana. Their continue stay in business will uninterruptedly create a black market situation. The process to revolutionize the nature of forex trading must consider several factors.

Emmanuel Kwabena Wucharey.

Emmanuel Kwabena Wucharey
Emmanuel Kwabena Wucharey, © 2018

The author has 68 publications published on Modern Ghana.Column: EmmanuelKwabenaWucharey

Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not neccessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."

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