JP Markets, which markets itself as a global forex powerhouse, has been placed under final winding up as a result of a successful liquidation application brought by the Financial Sector Conduct Authority (FSCA).
The FSCA brought the application in terms of section 38B of the Financial Advisory and Intermediary Services Act (FAIS Act) and section 96 of the Financial Markets Act (FMA), with the order being granted on 7 September 2020. Section 38B of the FAIS Act provides that the registrar is empowered to apply to the court for the sequestration or liquidation of a financial services provider, irrespective of whether the provider is solvent, if it is in the interests of the clients of the provider. In terms of section 96 of the FMA, after an investigation has been conducted and the FSCA is in a position to decide whether to approach the court for a liquidation order, it may apply to the court under section 81 of the Companies Act for the winding-up of the respondent as if the FSCA was a creditor of the respondent.
The FSCA’s main contention was that JP Markets is an unlicensed over-the-counter (OTC) derivative provider. An OTC derivative is an unlisted privately negotiated derivative instrument and excludes foreign exchange spot contracts and physically settled commodity derivatives. The Regulations to the FMA define an OTC derivative provider (ODP) as a person who as a regular feature of its business, and transacting as principal originates, issues, sells or makes a market in OTC derivatives. The Regulations were published in February 2018 and existing providers of OTC derivatives were given until 14 June 2019 to apply to be licensed. JP Markets only lodged its application for a license on 21 August 2020, a mere four days before the liquidation application was heard.
The court held that the failure of the respondent to have timeously applied for an ODP licence, its persistence in conducting that business without applying for a licence when it was required to do so, and the obfuscation in its dealings with the FSCA, strongly militated in favour of granting a liquidation order. The court held that the winding up of JP Markets is preferable to not granting the order and leaving its 300 000 clients to their own devices in seeking relief against the respondent. The winding up achieves the objects of the FMA.
JP Markets argued that the fact that other unlicensed ODP’s had not been pursued by the FSCA constituted a basis for why the FSCA should not be able to pursue remedies against it. The court rejected this assertion and held that the FSCA as regulator must make a start, and the fact that the respondent is the subject of that start cannot weigh in favour of refusing a winding-up order.
The court did not make a finding on whether the contracts-for-difference (CFDs) derivative transactions concluded by JP Markets were void. It recognised however that the possibility of such contacts being void is an important factor to take into account in determining whether it would be reasonably necessary to wind-up JP Markets. The court stated that the established insolvency framework is more suited to addressing this issue and a duly appointed liquidator could consider whether the transactions are void. To the extent that there are clients that wish to advance the position that the CFDs transactions entered into by them are void and that they have a claim as a result, they can pursue those claims in terms of the Insolvency Act.
The court stated that it does not intend setting a precedent that whenever a service provider is unlicensed it is to be placed in liquidation, and that each case must be considered on its own merits. However, it also stated that to the extent that a liquidation order may advance the regulation of the relevant industry, this is a factor to be taken into account when deciding whether to grant a liquidation order.
The FSCA has indicated that it will be working with the liquidators to ensure that the clients of JP Markets recover as much of their funds as possible. It has also given notice of its intention to debar the CEO of JP Markets, from the industry, and is preparing to hand the matter over to the National Prosecuting Authority for further investigation and possible criminal prosecution.
This matter has highlighted the need for any participants on the OTC derivative market to consider whether they require authorisation as an ODP. Simply being authorised as a financial services provider under the FAIS Act is no longer sufficient when originating, buying, selling or making a market in OTC derivatives.