The forex market is the largest and most liquid industry in the world. If it was allowed to operate freely, with no law to answer to, it’d be as chaotic and ruthless as the cinematic American Wild West. To maintain fairness, order and to protect all participants, all forex brokers need to be kept in check by the powers that be.
What regulation means
Regulation of the forex market means putting in place laws and regulations that ensure the safety of the market. This includes legal and financial directives. These directives are enforced by governing bodies who monitor the actions of the players in the Forex market. These bodies are known as regulators.
The main goal of these regulators is to protect investors from fraud. Therefore, before you work with a certain forex broker, you need to make sure that they are regulated by the relevant bodies.
How regulation works
As aforementioned, regulating bodies set rules that all forex brokers under their jurisdiction must follow. These rules are aimed at protecting investors and their capital. These regulators enforce this by conducting regular audits and reviews. They also inspect the financial and legal dealings of the brokers and monitor how they relate with their customers.
If any broker is found to be afoul of these regulations, the regulators have the power to dish out appropriate punishment. To this end, each regulator has laws and requirements pertaining to their area of jurisdiction. These requirements often differ from one area to another. However, there are some requirements that cut across all jurisdictions. Let’s look at them below.
License and registration
Every forex broker is required to be registered under the relevant regulator. Some brokers operate across multiple jurisdictions, which means they have to hold licenses from all relevant regulatory bodies. Only registered brokers are safe for investors to invest in.
Every once in a while, regulators inspect the books and the activities of brokers to ensure that they fulfill all financial and ethical standards. For example, brokers should be transparent with their investors about most of their dealings. If a broker is found to have withheld such information or found non-compliant with any other regulation, they are sanctioned or fined by the regulator.
It follows then that as an investor, regulation is vital to ensuring the safety of your funds. If your broker is regulated, their website should list the name of the relevant regulating body. If that is not the case, the broker’s head office address should tell you their relevant forex regulator. From there, you can check under the regulator if your broker is listed as a regulated forex broker.
If the broker does not appear under the regulator’s list, then they probably are unregulated. Such unregulated brokers should be avoided at all costs.
It is clear that there is no single centralized forex regulator. Instead, there are several governmental and independent bodies that oversee forex regulation in their countries or regions. Let’s take a look at the main ones around the world.
Who are these forex regulators?
Forex brokers usually start by seeking to license from their parent country’s regulatory body. Some countries have stricter regulations than others, but it is never an easy feat for a broker to get this regulated status. If a broker wishes to expand their operations to other countries, they have to obtain additional licenses from those other countries’ forex regulators.
Sometimes brokers obtain licenses from other jurisdictions even though they don’t operate in them. This allows them to market their services in those countries. Others find it prudent to obtain regulatory licenses from cross-border regulators, like the Markets in Financial Instruments Directive (MiFID), which oversees regulation in the EU region.
Below is a list of several regulators and their jurisdiction, as well as the maximum leverage they allow brokers under them to offer the citizens of their countries. Usually, this rate differs from that offered to non-citizens.
The regulator is the Australian Securities and Investment Commission (ASIC). They allow maximum leverage of 1:500. Australia is popular for forex traders due to the high maximum leverage, flexible regulatory environment, and abundance of ECN brokers. However, due to the long geographic distance from the rest of the world, most brokers shy away from seeking an ASIC license.
Regulatory bodies in Canada include the Investment Industry Regulatory Organization of Canada (IIROC), the British Columbia Securities Commission, and the Ontario Securities Commission. They allow maximum leverage of 1:50. Canada is not a popular offshore venue for Offshoreoffshoreforeign traders as its regulatory framework is strict, and there are very few brokers.
As aforementioned, the EU’s regulatory body is the MiFID. It allows maximum leverage of 1:30.
The regulators are Banque de France, Autorite des Marches Financiers and Autorite de Controle Prudentiel (ACP). They allow maximum leverage of 1:30. France is not popular for forex trading. Most local traders prefer offshore brokerage firms.
The UK’s regulatory body is the Financial Conduct Authority (FCA), which allows maximum leverage of 1:30. London is considered the world’s forex capital, mainly due to the strong regulatory framework and the extensive expertise of the country’s forex industry.
The main regulatory body is the Commodities and Futures Trading Commission (CFTC). They allow a 1:50 maximum leverage. The CFTC bans forex brokers from offering CFDs or any other leveraged trading in commodities. Most US traders have limited options save for traditional forex brokers. Offshore brokers do not like taking on US clients since the US imposes stringent worldwide reporting requirements.
In a nutshell
The forex market is the largest and most liquid marketplace in the world, which calls for regulation of all market participants. Regulation is aimed at promoting fairness and protecting investors. There is no single global regulatory body. Instead, there are governmental and other independent bodies that govern various jurisdictions. Before you invest your funds with a forex broker, you should make sure they are licensed and regulated by the relevant body.