Understanding Forex Regulation

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Forex is an acronym that stands for Foreign exchange. It involves the exchange of one currency for another for purposes of trade or tourism. Trading of foreign currencies occurs in the forex market. This is one of the largest decentralized markets in the world. A decentralized market is like a virtual market where participants communicate and perform transactions using digital devices. 

Because forex is decentralized, it is not as easy to regulate like a bank, stocks or other more traditional securities. For this reason, the forex industry has been known for the higher number of scammers and fraudulent brokers. For many people, forex is a scam. This is because of the bad reputation the FX scammers bring. Different countries have put in place rules and regulations that govern forex brokers. These assure participants that their investments are safe. 

You must understand how Forex trading is regulated in your country. You should know what licenses to look for. It would be best if you understood how to spot a fraudulent broker and how to distinguish them from a legitimate broker that is regulated and best meets your trading needs. Some countries have regulatory bodies that oversee the licensing and regulation of forex companies. The regulatory authority can either be the central bank or a separate institution that has been given that mandate. Other countries have banned forex completely. 

What A Regulatory Body Will Do For Forex 

1. It will issue licenses that allow forex countries to operate in their country 
2. It will audit a forex company’s financial statements to look for malpractice. 
3. It will set rules and regulations that must be followed by forex companies 
4. It may establish trading practices to be followed by forex traders 
5. It will enforce necessary capital requirements to protect the traders 
6. It will receive complaints from traders and investigate fraudulent companies 
7. It may punish fraudulent companies by issuing hefty fines or taking away their licenses to combat malpractice 

Some countries have stringent regulations that govern forex companies, while others have very relaxed rules. Sometimes a broker will choose a particular country simply because they are tax havens. Generally, it is better to select an onshore broker than an offshore broker. In this case, an onshore broker refers to a broker operating and regulated in your country. However, some traders opt for offshore brokers if they feel their onshore brokers are not sufficiently regulated. 

Below is a list of some of the best forex regulatory institutions around the world: 

1. Australian Securities And Investment Commission (ASIC) – 

The ASIC licence is very lucrative for traders and brokers because of their high affinity toward technological innovations and their good reforms. Besides having a minimum capital reserve, ASIC licensed brokers should also have physical offices in Australia. One key difference between ASIC and other brokers is that they don’t limit leverage or restrict trading practices. Instead, they have placed a strong emphasis on investor education and even have a portal that imparts information to traders for free. 

2. United States National Futures Association (NFA)

This is an independent regulatory body in the United States. The USA has the most stringent regulations for forex market players. According to the Commodities Exchange Act, firms must register with the Commodities and Futures Trading Commission (CFTC) if they want to provide forex products to customers. The NFA issues trading licenses, enforces capital requirements and ensures sound trading practices. Some trading practices applied include instituting leverage limits and the First-In-First-Out rule. 

3. The Swiss Financial Market Supervisory Authority (FINMA) – 

This regulatory firm regulates more than forex derivatives providers. It requires all forex providers to register themselves as banks, and consequently, they have a higher minimum operating capital. They have a strict audit compliance regime. Because the licensing process is so expensive and tough, only large and reputable institutions qualify 

This financial regulatory body operates in Cyprus. Forex brokers like it because Cyprus has one of the lowest tax jurisdiction in the European Union. Besides this, the standards a broker must abide by to get licensed by them are strict. They regulate trading by issuing leverage limits on risky instruments and requiring brokers to have an Investor Compensation Fund. 

5. UK Financial Conduct Authority (FCA) – 

This financial regulatory body operates in the United Kingdom. They provide and enforce the legal framework for financial service providers. This is one of the most coveted market licenses. 

Forex Focus

A good broker is licensed by one of the above regulatory bodies. An excellent broker is regulated by more than one of them. Registering with an accredited regulatory body assures clients that their interests are protected. When selecting a broker, don’t just trust the license logo. Go to the regulatory body that issues the license and confirm that the broker is licensed. Beware of offers that seem too good to be true. You can also spot fraudulent forex brokers by searching them and the word scam. If a broker has a few too many complaints lodged against them, stay away.

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