THE Securities and Futures Commission (SFC) unveiled sweeping rules yesterday to drive out fringe retail dealers from the scandal-plagued, leveraged foreign-exchange market. Dealers will be given until the end of September to prove to the commission that they are fit and proper and have adequate financial resources to continue offering their services. SFC executive director Michael Wu said: ''The thrust of the regulatory framework is to provide a level of investor protection in the leveraged forex trading industry commensurate with the protection available to investors in the securities and futures markets.'' The main difficulty for the commission in drafting the rules has been to strike a balance between investor protection and industry practice, for a sector where it has no available data on the size of the retail market or the amounts involved. Mr Wu insisted that the system had been designed to protect trading procedures but detect and punish unscrupulous practices. He said: ''The industry has been plagued from abuse, judging from the number of complaints we have received. The range of abuses include fly-by-night companies, churning of client's accounts, abusing discretionary authority and outright fraud. ''These problems are unlike those arising from other financial products. They are not traded on a regular exchange, so there is no comparable system for regulation; there is no audit trail; and no central risk taker - such as a clearing house. ''The tendency is for under-capitalised firms to take positions against clients, some of whom sign discretionary authority to the trader itself, resulting in a conflict of interest which is horrendous.'' Daily turnover in the leveraged, foreign-exchange market is more than US$3 billion, but dealers are not subject to any form of statutory regulation. The central plank of the reforms will be stringent minimum capital and liquidity requirements to ensure that licensed traders have adequate resources to cover the risks involved in the highly volatile foreign-exchange markets. A licensed trader will have to maintain issued and paid-up capital of at least HK$30 million and liquid capital - liquid assets less ranking liabilities - of not less than $25 million. Intermediaries who act merely as introducing brokers may apply for a lower share capital requirement of $5 million and a liquid capital requirement of $3 million. The aggregate gross position for all foreign currencies of a licensed trader must not be higher than 60 times its liquid capital. A licensed trader must also increase ranking liabilities by five per cent of any excess of the total net foreign currency positions above $20 million. In addition, they will have to submit returns to the commission within five trading days after month-end and immediately report if liquid capital falls below certain limits. Dealers will have to quote two-way prices, all orders will have to be recorded, time-stamped and retained for at least seven years, telephone conversations involving business will have to be recorded on a centralised recording system and all complaints must be recorded and followed up. A company applying for a licence must be a limited company incorporated in Hong Kong whose sole business is leveraged foreign exchange dealing. Individuals applying must be ''fit and proper''. An independent arbitration panel will also be established to resolve any disputes arising between dealers and investors. However, the rules have retreated from the original proposal that would have made all directors and officers of a firm criminally liable for offences committed by any other officer or trader of the firm. Mr Wu said: ''We did not want to impose a regulatory system that imposes a certain method of contracting business. The methodology of trading is untouched, but it seeks to protect against some of the problems.'' Large financial houses operating wholesale and with average transactions of more than $7.8 million are exempt. Application forms will be available on August 15 and can be submitted from September 1. Rejected applicants will have 14 days to wind down their businesses or face prosecution as unauthorised dealers, which can result in fines and imprisonment. The commission usually takes between 10 to 12 weeks to process an application. Mr Wu said: ''We will not have to wait until we have processed the entire batch. At the end of a 30-day period, the commission will publish a list of traders who have applied for a licence to inform the public of those who are allowed to carry on their operations under transitional arrangements. ''The implication of the transitional provisions for investors is that they may have to close out their positions with a forex trader because the trader is required to cease business, either due to the fact that he did not apply to become licensed within the prescribed period or because his application has been rejected by the commission.'' He urged investors to exercise extreme care to ensure that they were not caught by dealers attempting to make a quick profit before the new system was introduced.