What is Forex market regulation?
Forex market regulation is a form of financial regulation that focuses on the Forex market, supervising financial firms and brokers and ensuring the protection of traders. The regulation of the foreign exchange market has long been a major issue in the financial industry. With the Forex market being decentralised and with no central exchange, foreign exchange scams have recently found room to thrive – an unfortunate consequence that has shed even more light on the need for the proper and adequate application of forex laws, rules and regulations. In this article we will look at the basics of foreign exchange rules and regulations and explain why they are important for you as a trader.
Who is responsible for regulating Forex brokers?
The Forex market is an international market and is massive in size, with estimates putting the average trade volume at 5$ trillion a day. As a result, there is no single body that supervises it. Rather, the regulation of the foreign exchange market is carried out by regulators that are either governmental or independent institutions acting as watchdogs, responsible for their respective markets. Regulators authorise and oversee Forex brokers, monitor their operations and ensure that they comply with all foreign exchange rules and regulations. More specifically, regulatory bodies set out restrictions, requirements and guidelines, with which Forex brokers must abide by in order to acquire and retain their licence to operate.
Some of the most notable and respected regulators include the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom, the Federal Financial Supervisory Authority (BaFIN) in Germany, the Cyprus Securities and Exchange Commission (CySEC), and the Australian Securities and Investment Commission (ASIC) in Australia. These watchdogs are among several regulatory bodies that are known to enforce strict requirements in their ongoing efforts to maintain the integrity of the foreign exchange market and prevent schemes of Forex fraud.
If you have looked at different brokers, you may have noticed that some are licensed to operate by lesser-known regulatory authorities, which are often based in exotic locations. Usually, though not always, such regulators have a reputation for being more lenient, exercising less control over Forex brokers than their aforementioned counterparts. Though this does not mean that Forex brokers licensed by such regulatory bodies are not trustworthy or legit, it does sometimes suggest that traders with accounts with such brokers may enjoy less protection.
Why is Forex market regulation important?
The regulation of the foreign exchange market is key to the smooth operation of the industry, as well as to the safeguarding of traders. The main objective of any regulatory body is to promote and ensure the adoption of fair trading practices and ethical behaviour by Forex brokers. To do so, brokers are required to comply by regulations set forth by the local regulators, meet certain criteria and standards, while often being subjected to evaluations, audits and reviews in order to keep their licence to operate. Notably, brokers must also meet strict capital requirements so as to ensure that they can execute their clients’ orders, process withdrawals and refund traders in case of bankruptcy.
Just how important the regulation of the foreign exchange market is can be seen once we look at the objectives of the various regulatory bodies:
- Market confidence and stability: Regulators are responsible for setting and maintaining the standards of the financial industry.
- Regulation and authorisation of brokers: Regulatory authorities grant the necessary authorisation and licencing to brokers in order for the latter to offer their services to traders.
- Client protection: Regulators must ensure that the participants in the financial markets, including traders, are appropriately safeguarded.
- Prevention of crime or fraud: Both financial crimes and forex frauds are common on an international scale. It is therefore the job of the different regulatory authorities ensure that the various operations of Forex brokers are legit, and to detect and eliminate illegal activities.
Forex market regulation is therefore of utmost significance since, for Forex traders, what matters most is the protection of their deposited funds and potential profits. If a Forex broker is not regulated by an appropriate institution, there is then no guarantee that client funds are either secure or protected.
List of Major Regulatory Bodies
Some of the most prominent regulators include:
- The Financial Conduct Authority (FCA), United Kingdom. Previously known as the Financial Services Authority (FSA), the FCA is the regulatory body of the UK and regulates retail and wholesale financial services firms.
- The Cyprus Securities and Exchange Commission (CySEC), Cyprus. The CySEC is the financial regulator of Cyprus which, as a member state of the European Union, is required to comply with the European MiFID.
- The Markets in Financial Instruments Directive (MiFID), European Union. The MiFID is a directive of the European Union that is applicable to all 31 member states and is intended to harmonise the protection for all investors in the financial markets.
- The Commodity Futures Trading Commission (CFTC), United States. The CFTC acts as the regulatory authority for the futures and option markets in the United States.
- The National Futures Association (NFA), United States. The NFA is an independent regulatory body in the United States, responsible for supervising on-exchange traded futures, OTC derivatives (swaps) and retail off-exchange forex.
- The Federal Financial Supervisory Authority (BaFIN), Germany. The BaFIN was created in 2002 and is the German financial regulator.
- The Autorité des Marchés Financiers (AMF), France. The AMF is the French regulator, supervising the stock market and financial services firms.
- The Australian Securities and Investments Commission (ASIC), Australia. An independent government body, the ASIC serves as the regulatory authority of the financial markets in Australia.
- The Financial Services Agency (FSA), Japan. The FSA was formed in 2000 and is responsible for regulating the financial services sector in Japan.
- The Financial Services Board (FSB), South Africa. The FSB came into action in 1990 and regulates the South African non-banking financial services sector.