CFTC Regulated Forex Brokers
The Commodities & Futures Trading Commission (CFTC) is one of the highly respected independent regulatory organizations that have a critically acclaimed regulatory framework for ensuring a fair and transparent marketplace for commodities, futures, and options trading. The CFTC works as an independent regulatory organization of the US for financial companies dealing with futures contract and SWAPs, including commodities and Forex trading. However, due to the overly strict trading restrictions enforced by the CFTC, a majority of retail traders from all over the world shy away from opening an account at a US-based brokerage. Therefore, as a trader, should you or should you not trade with CFTC regulated Brokers?
Advantages of CFTC Regulated Brokers
CFTC Forex brokers do enjoy several benefits from a trader’s perspective, as investors can virtually guarantee the safety of their funds and can remain safe from any broker scams or financial abuse. CFTC regulated FX brokers are required to adhere to a strict code of conduct by following a highly consistent and efficient framework of rules that are enforced by both the CFTC as well as the NFA. Here are the main advantages of trading with CFTC regulated Forex companies:
Minimum Capital Requirements: CFTC brokers should hold at least $20 million in operating capital, and the minimum amount increases according to an increase in the number of traders and their trading capital. CFTC imposes high minimum capital requirements for a wide variety of reasons, chief among which are to maintain their clients’ positions in extremely volatile market conditions and to meet withdrawal requests without fail.
Routine Auditing: CFTC and the NFA require Forex brokers to provide routine audit reports and financial statements that should clearly represent the actual financial holdings of the company. All client funds should be held in top tier banks and should be kept in segregated accounts without mixing it with the company’s financials.
Ethical Brokerage Practices: All FX brokers regulated by the CFTC follow the best practices in trading and adhere to fair competition rules. Clients always receive what is being advertised, and no broker is allowed to gain unfair advantages by misrepresenting any facts. All brokers are also required to hire trained and skilled staff so that all clients get the best response from the company to alleviate their concerns and make informed decisions.
No Conflict Of Interest: CFTC Brokers should not indulge in any financial malpractices that may harm a trader’s position in the market. Instances such as tampering with the platform, opening positions against the clients, or manipulating the price attract severe penalties and permanent ban on licenses. Therefore, traders are protected against most common types of scams and malpractices usually adopted by dishonest brokers.
Limitations Of CFTC Regulated Forex Brokers On Traders
After the large scale failure of regulatory organizations during the financial crisis of 2007-08, the US regulatory agencies went on a reformatory drive that aimed to reduce the instances of financial abuse and malpractices in the US capital markets. The Forex market was the major investment avenues affected by the CFTC’s new regulatory guidelines that brought on several restrictions to trading and how brokers were allowed to participate in the US retail trading market. Here are some of the significant limitations enforced by the CFTC on its regulated Forex brokers:
- No Hedging Rule: Forex traders are barred from entering a hedged position on a single currency pair, which prevents traders from going long or short on a currency pair at any price point. The CFTC has instructed all complying Forex brokers to incorporate the no hedging rule into their trading platforms, which thwarts traders’ intent on bypassing the loophole through any alternate strategy.
The probable reason provided by the CFTC on the no hedging rule is to prevent traders from incurring various costs of trading as there is visibly no point in opening a long and short on a single currency pair. The CFTC fails to understand the significance of holding on to long-term positions while hedging the markets for scalping or short-term profits. Ultimately, under the CFTC rules, all US traders are forbidden from using any hedging strategies.
- FIFO Rule: FIFO (First In First Out) is a rule that deters a trader from opening multiple positions on a currency pair or adding on to positions under different orders. Under the FIFO rule, traders are prevented from entering and exiting positions according to their preferences, as the CFTC has issued a guideline that states that all positions should be closed in the order that they are opened. Therefore, instead of creating a program on the trading platform to prevent traders from closing orders according to their choice, brokers scale up positions according to their client’s orders.
For instance, if a trader opens a buy order on a currency pair at an initial strike price, and opens another order at a different strike price, the platform merges the two orders together and holds the position at the average of the two prices. Therefore, all client orders are subsequently added on to the existing trade, thereby preventing the trader from opening two or more positions on a single currency pair. Some brokers also follow the FIFO rule by preventing traders from opening multiple positions and closing them at their discretion.
- Maximum Leverage of 1:50: The primary attraction of Forex trading is the unprecedented amount of leverage offered to retail traders. Even though high leverage is inherently risky towards maintaining a safe trading career, retail traders still use leverage to enter the markets and enjoy the volatility of the markets. The CFTC realized the potential pitfalls of high leverage and had clamped down on all brokers that offered anything larger than 1:50.
Trading on margin is risky and traditional financial markets offered only a maximum of 1:20 leverage for assets. Forex, on the other hand, offers far more liquidity in the markets and traders have the unique advantage of trading with leverage as high as 1:3000. Unfortunately, the CFTC no longer supports such a high leverage, and if brokers are expected to operate in the US, they should bring down the maximum leverage to 1:50.
US traders are only allowed to deposit money and trade with Forex brokers regulated by the CFTC. If any trader is found to be found in violation of the rule, he/she might find themselves at the wrong side of the law that can attract penalties and even legal trouble. On top of the legal ramifications of trading with overseas brokers, US traders will also be unable to recover their trading capital in the event of broker scams, bankruptcy, or any other financial irregularities.
International Forex traders are highly apprehensive about trading with US-based Forex brokers, but for US citizens, there isn’t any other option. Of course, expats can indeed trade the Forex markets through overseas brokers, but there are a few restrictions when it comes to sending money to the US. Therefore, it is always a good idea for US traders to consult with experts before choosing an overseas broker, while international traders have plenty of options when it comes to selecting a high-quality Forex broker with no limitations on Forex trading.