For a contract for difference (CFD) broker serving South Africa, start with the client agreement: which legal entity issues the CFD and owes the client settlement? A firm that regularly issues over-the-counter (OTC) CFDs as principal in South Africa needs over-the-counter derivative provider (ODP) authorisation. A financial services provider (FSP) license with the relevant permissions covers advice or intermediary services. A group can need both permissions if it performs both roles.
Where the FSP Ends and the ODP Begins
The Financial Advisory and Intermediary Services Act (FAIS Act) governs advice and intermediary services. A broker that advises on CFDs or arranges trades for a separate issuer needs the appropriate FSP permissions. For a Category I model, check that the license covers derivative instruments and the services the entity provides. The client enters into the CFD with the issuer; the intermediary can have a separate agreement with the client for its own services.
Under the 2018 regulations made under the Financial Markets Act, the ODP regime covers firms that regularly act as principal in originating, issuing or selling OTC derivatives, or making a market in them. The Financial Sector Conduct Authority (FSCA) has taken enforcement action against a Category I FSP for acting as an ODP without authorisation.
Back-to-back hedging creates a separate contract with a hedge counterparty. It does not change the identity of the entity issuing the retail CFD. When assessing the model, review the client terms, settlement obligations and margin arrangements together.
| Factor | FSP acting as an intermediary | ODP acting as principal |
|---|---|---|
| Governing framework | Financial Advisory and Intermediary Services Act, 2002 | Financial Markets Act, 2012 and its 2018 regulations |
| Role | Provides advice or intermediary services within its license permissions | Issues OTC CFDs or makes a market in them as principal |
| CFD counterparty | A separate issuer whose ability to serve the client must be assessed | The ODP itself |
| Back-to-back hedge | The intermediary does not issue the client CFD in this model | Hedging does not change the ODP’s role in the client contract |
| People | Key individuals and representatives must meet the applicable fit and proper requirements | Fit and proper requirements apply to members of the controlling body and senior managers |
| Financial soundness | Requirements depend on the license category and activities | The ODP standard requires equity capital in South Africa of at least six months of operating expenses, alongside other prudential requirements |
| Operations | Compliance arrangements and controls appropriate to the services offered | Local business address and bank account, governance, risk and compliance controls, and trade reporting arrangements |
What ODP Authorisation Requires
FSCA Conduct Standard 1 of 2018 sets out the criteria for ODP authorisation. Its capital requirements apply to applicants and providers. The standard requires equity capital held in South Africa of at least six months of operating expenses, alongside requirements for liquidity, loss absorption and an orderly wind-down. The amount therefore depends on the applicant’s operating expenses and risk profile.
The application covers governance, fit and proper assessments, financial projections, risk management, internal controls and business continuity. Use the FSCA’s application index for the entity type: the supporting documents for bank and non-bank applicants differ. Plan for the required reporting to an eligible trade repository under the applicable reporting rules.
Separate operating costs from capital when building the budget. Staffing, technology and compliance are costs of running the business; equity capital held to meet the prudential requirement is a funding commitment. The amount needed depends on the operating model.
Which Permissions Fit Your Brokerage?
Intermediary model. Identify the issuer and specify what the South African FSP will do for the client. An introducing broker can arrange trades with an authorised South African ODP within the scope of its own permissions. If the proposed issuer is overseas, assess that issuer’s South African regulatory position separately, along with client onboarding, funding and exchange control. A Mauritius Investment Dealer license or a Seychelles license does not, by itself, authorise the issuer to serve South African clients. The licensing frameworks are discussed in Mauritius vs Seychelles vs South Africa.
Principal model. Where the South African entity will regularly issue OTC CFDs as principal, plan for ODP authorisation. Assess FAIS permissions separately if the entity or another group company will also provide regulated advice or intermediary services.
Offshore marketing. Review what the offshore entity and its local partners do in practice. Assess client solicitation, advice, trade arrangements and product issuance against the applicable South African requirements. An overseas license does not replace any permission required in South Africa.
Brokers considering an acquisition can review South African FSPs on Dealable24. Before proceeding, check the target’s license conditions, permitted products and services, and the regulatory steps triggered by the transaction. An FSP acquisition does not confer ODP authorisation.
FAQ
Can an FSP-licensed broker issue OTC CFDs as principal?
An FSP license alone does not authorise a broker to regularly issue OTC CFDs as principal in South Africa. The entity needs ODP authorisation for that activity.
Does back-to-back hedging remove the ODP requirement?
No. The hedge does not change who issues the client’s CFD. If the firm is carrying on ODP business, it needs the relevant authorisation even when it hedges its exposure.
Does an offshore CFD broker need South African authorisation?
Assess each entity’s activities. Providing regulated advice or intermediary services and carrying on ODP business trigger separate requirements. A local FSP’s license does not extend to the offshore issuer.
Who grants FSP and ODP permissions?
The FSCA grants FSP licenses under the FAIS Act and ODP authorisations under the Financial Markets Act. Check which permissions each group entity needs for its role.
What does the FSCA check in an ODP application?
The FSCA reviews the applicant’s financial resources, governance, fitness of key personnel, risk and compliance controls, business continuity and ability to meet reporting requirements. The applicable application index specifies the evidence the applicant must submit.
Equilex supports FSCA FSP licensing in South Africa and helps brokers assess which permissions their proposed model requires.
