Global Forex Regulations and Authorities

Sunday 01-04-2012

The world of Forex trading is a world where a lot of money changes hands, which makes sense seeing as it is a market of currency trading. To make sure that things don’t get out of hand, the Forex market has a lot of very strict regulations and policies that keep traders and financial bodies in check. These Forex regulations are maintained and monitored by various official international bodies whose job it is to make sure that FX providers stick to them in anything they do.   However, seeing as the internet is a vast informational space that is difficult to monitor and control, there will always be Forex brokers and service providers who disregard these regulations and get away with dealing in way contrary to the official policies of the regulatory bodies.   The forex market is well regulated; there have been many recent changes in jurisdictions all over the world indicating a clear tendency to introduce strict and sometimes even excessive regulation of the forex industry. Like stock or commodity markets, trading occurs on well regulated exchanges such as the London Stock Exchange, or the New York Stock Exchange, foreign exchange transactions take place over the through the foreign exchange markets around the globe between willing buyers and sellers.   The regulation of forex firms within the online forex industry is a welcomed and long expected step in order to bring stability, fairness, and transparency to international forex markets.   Most forex brokers are licensed by one of the many agencies, either in their home location or where they maintain offices. It is important to look at a broker’s online site, in the About Us section and find out who they are licensed by. (Or elsewhere on their site)     National Regulatory Authorities Each country has its own national body for regulating its financial service industry. These are the bodies that decide on Forex regulations; you must therefore make sure that your broker is licensed in the country from which they operate. This ensures that they are obliged to operate in accordance to that country’s trading regulations. (See chart below to find links to the various countries regulatory agencies) Forex Regulation in the United States In the US, retail forex brokers are regulated by both the Commodity Futures Trading Commission (CFTC) and the National Futures Authority (NFA). Firms are therefore required to register as a Futures Commission Merchant (FCM) with the CFTC and to register as a member of the NFA as a Forex Dealer Member (FDM).  The CFTC is given power pursuant to the Commodity Exchange Act (CEA) to require registration of firms participating in the sale of forex futures to retail customers, and to shut down any unregulated entity which is engaging in forex activities with retail customers.  In addition, the CFTC also has the authority to take action against registered FCMs for violating certain anti-fraud and anti-manipulation provisions of the CEA in connection with forex transactions with retail customers.  However, the CFTC has no power to adopt specific rules to regulate forex transactions with retail customers.  This is where the NFA comes in. The NFA – the National Futures Association The NFA is a self-regulatory organization for the US futures industry. Its purpose is to safeguard market integrity and protect investors by implementing Forex regulations. Membership in NFA is mandatory for any futures or FX broker operating in the US. It is an independent regulatory body with no ties to any specific marketplace.   The CFTC – the Commodity Futures Trading Committee Created by congress, the Commodity Futures Trading Commission (CFTC) was formed in 1974 as an independent agency with the mandate to issue Forex regulations for financial markets in the United States. The CFTC’s regulations assure the economic utility of the markets by encouraging their competitiveness and efficiency, and protecting market participants against and abusive Forex trading practices. Forex Regulation in Australia Foreign Exchange (forex) trading in Australia is regulated by the Australian Securities and Investment Commission (ASIC).  ASIC requires that all companies providing foreign exchange services to retail customers must be able to show that hold an Australian Financial Services License, or are licensed by the Reserve Bank of Australia, or are an agent of a licensee of the Reserve Bank of Australia. Recent changes to the regulatory environment as a result of the increase in popularity in Australia of retail foreign exchange trading has seen the regulation of foreign exchange brokers brought under the Financial Services Reform Act (FSR), administered by ASIC. Forex Regulation in Switzerland  Swiss regulation of forex brokers and the protection of retail forex traders in Switzerland are largely non-existent.  Yet, Switzerland is one of the world’s largest banking centers in the world, and there are many Swiss based forex brokers, but it is this fact that, ironically, has led many retail forex traders to believe that, by opening an account with a Swiss forex broker, that their broker will be subject to a higher level of regulation than had they opened an account with a US based forex broker. Currently, Swiss forex brokers have the option to operate under the regulatory regime of the government banking regulator, the Swiss Federal Banking Commission (SFBC), or to adhere to the regime of one of a number of private regulatory bodies. There are a number of these self regulatory organizations in Switzerland (such as Organisme d’autoregulation fonde par le GSCGI, Polyreg and Association Romande des intermediares financiers).  However, these private bodies provide very little in the way of forex regulation for the retail forex trader.  Their only duty is to ensure that the appropriate anti money laundering regulations are enforced, and their regulations are not designed with investor protection in mind. The Swiss Federal Banking Commission has recently announced that it will intervene, and bring all retail forex brokers within the banking law, which imposes a similar framework of regulation for retail forex brokers as currently operated by the National Futures Authority in the US.  However, until these new regulations are in place, many Swiss forex brokers will remain largely unregulated, and retail forex traders remain unprotected.   Forex Regulation in the United Kingdom  Regulation of forex brokers in the UK is undertaken by the Financial Services Authority (FSA).  A unique feature of the regulation of UK based forex brokers is that all forex accounts opened by a UK forex broker are required to be segregated.  This means, in practice, that in the case of bankruptcy of the forex broker, the forex trader’s funds would be secured. The FSA – The Financial Services Authority This is a UK based independent body given statutory powers by the Financial Services and Markets Act 2000. The FSA regulates the financial services industry in the UK, which is made possible by the FSA’s regulation making, investigatory and enforcement powers. The FSA is obliged to have regard to the Principles of Good Regulation.   The Basic Requirements

  • A forex broker/ dealer / service provider must be licensed in the country in which their operations are based. This is a very important regulation to look out for, since if the broker you are looking into isn’t licensed, they are operating against the law.
  • Being approved by the national regulatory institutions ensures that the broker must maintain strict quality control standards and that your business with the broker is safe, fair and honest.
  • By regulation, licensed brokers are subject to periodical audits, reviews and evaluations which enforce their need to comply to industry standards.
  • Forex brokers must maintain a sufficient amount of funds to meet their customers’ needs. This FX regulation ensures that the broker is able to execute and complete Forex contracts made with their clients.
  • FFX brokers are in no way allowed to misrepresent their services or to solicit customers to trade without a fair representation of the risks involved. Be wary of brokers who promise profits in the financial exchange market, since by regulation they are not in any position to do so. No broker can guarantee profits in the FX market.
  • A Forex broker is obliged to honor each and every contract (position) opened by a client. Failure to complete the Forex contract with a client will lead to the revoking of the broker’s license.

Global Regulatory Agencies

More Regulations and Control Recent changes imposed by the NFA have been aimed at keeping out of the market those firms which are weakly capitalized, and to provide more funds security for forex traders.  Thus, as of 21 December 2007, the NFA increased the capital requirement to US$5million.  In addition the NFA has boosted regulatory requirements regarding FDMs responsibilities in the areas of credit and risk management controls, recordkeeping and integrity of forex trading systems.   Some of the leading and reputable forex brokers are actually taking the imitative and pressing the NFA and other authorities to take a harder line against scam forex brokers and to increase the regulatory burden on firms involved in the retail forex business.  Clearly, when a fraudulent forex broker goes out of business, and scams innocent traders out of their funds, this has a negative effect on the whole forex industry, and therefore reputable firms have a vested interest in keeping these scam forex brokers out of the market.