Introduction: Why Regulate Forex?
It is important to regulate forex because the amount of money which passes through the market everyday makes it very attractive for all sorts of scammers and white collar criminals to pervade the marketplace. Many of these criminals have found that the easiest way to con would-be traders and active traders is by forming brokerage companies, taking in money from traders and finding ways to run off with it. They run their scam operations by faking their regulatory status, cloning websites of genuine brokers and even going to great lengths to use the entire trading process against their clients.
In order to ensure that only those qualified to do forex brokerage business are actually the ones allowed to take in money from clients, forex regulators have instituted various means of ensuring that clients are not robbed in plain sight by any fly-by-night operators.
The job of forex regulators can be listed as follows:
- Licensing and supervision of brokers. The process of licensing is stringent and usually involves ensuring that only people with certain industry qualifications are allowed to hold top positions in these forex brokerages.
- Ensuring brokers comply with segregation of traders’ funds. Segregation is a practice where funds belonging to traders are kept in a bank account which is separate from the operational accounts of the broker.
- Ensuring compliance with reporting standards. Forex brokers are required to submit periodic reports of their activities as well as certain trade data of their clients for scrutiny and monitoring by forex regulatory bodies.
- Enforcement of sanctions in case of market infractions. Where there are clear cases of fraudulent practices, forex regulatory bodies are empowered by law to carry out a range of enforcement activity against errant brokers.
The essence of regulation in the forex markets is to preserve the sanctity of the markets and boost investor confidence by ensuring a level playing field for all participants. The need for forex regulation is reinforced by the fact that the brokers that provide liquidity for retail traders, take opposite positions to the trades of their clients. In such instances, forex regulators must ensure that the traders are not deliberately subjected to conditions that will tilt the market against them.
So what is forex regulation? Forex regulation is therefore all about consumer protection. Regulated forex brokers are less likely to cheat their clients and where such infractions happen, regulators are empowered by the laws of their respective jurisdictions to apply appropriate sanctions.
The Most Important Forex Market Regulators
The most important forex market regulators cover the jurisdictions where most of the world’s forex brokerage businesses are located. In reality, it is not possible to have forex brokers in every country. The forex market is decentralized and therefore you will see some traders in countries not served by forex brokers, opening accounts with offshore brokerages willing to do business with them. These traders, located in areas which are geographically separated from the brokers they deal with, therefore rely on forex regulation of these brokers to keep them safe.
These regulators are as follows:
- ASIC – Australian Securities and Investments Commission
- BaFIN – The Bundesanstalt für Finanzdienstleistungsaufsicht (Germany)
- CFTC – Commodities and Futures Trading Commission (United States)
- CySec – Cyprus Securities and Exchange Commission
- FCA – Financial Conduct Authority (United Kingdom)
- FFMS – Federal Financial Markets Service
- FINMA – Swiss Financial Market Supervisory Authority
- FMA – Financial Market Authority (Austria)
- FSA – Financial Services Agency
- FSB – Financial Services Board (South Africa)
- Financial Services Commission – BVI
- Financial Services Commission (FSC) – Mauritius
- IFSC – International Financial Services Commission
- FSP NZ – New Zealand Financial Service Provider
- ISA – Israel Securities Authority
- MFSA – Malta Financial Services Authority
- SEBI – Securities and Exchange Board of India
- VFSC – Vanuatu Financial Services Commission
- UAE – Abu Dhabi Central Bank
From this list, you can see that some of the forex regulators we have today are made up of independent government-formed agencies, and in some cases, the responsibility of regulation is taken up by the central bank of the host country.
How to Check for Regulated Forex Brokers
New traders wishing to open their first forex accounts are usually the most vulnerable to fall prey to scam brokers. These days, many unlicensed brokers are seeking for ways to get their hands on new traders’ money. They have devised ingenious ways to lure their victims to their traps. That is why it is imperative for new traders to know how to check if the offer for a forex account is coming from a regulated forex broker.
The following are ways to check for regulated forex brokers.
- Many forex regulators now insist that the forex brokers state their license number clearly on their website. This must be done conspicuously and not on some obscure section of the website where it may likely be missed. For instance, ASIC regulated forex brokers are classified as Australian Financial Services companies and must carry an AFSL number (Australian Financial Services License no).
- The websites of some forex regulators have internal search engines which assist the user to search for a forex broker’s status. A trader can type in the name of the forex brokerage and of that broker is regulated and licensed, the details of the broker as well as its standing will be displayed. In terms of standing, a broker may have an active license, or its operational license could have been suspended or withdrawn.
- Some forex regulators give periodic warnings about the activities of scam brokers.
- There are forex regulatory bodies that also keep an updated broker blacklist. This blacklist contains names of brokers that have had their licenses suspended or withdrawn, or have cases against them that have been proven beyond doubt.
How Can Traders Make Use of Forex Regulatory Bodies to Secure their Forex Investments?
Unfortunately, many retail forex traders do not make the websites of the forex regulatory bodies their first port of call when they want to start forex trading. They only check on the regulators when something has gone wrong along the way. So it is not just about how to trade forex; it is about securing your investment before you even get into the market. The broker is the entity that keeps traders’ funds in trust as they trade the market. So traders need to know who they are dealing with before they open accounts and deposit money with them.
In case the trader did not do the required check on the broker beforehand and feels that he or she has been shortchanged by the forex broker, there are ways to seek redress.
- An official complaint should be filed with the regulatory body which covers the jurisdiction where the broker is located.
- If the forex broker is regulated and licensed by a forex regulatory body, an investigation will be carried out. If the broker is found liable, an enforcement action will be carried out.
- Forex regulatory bodies carry out different kinds of enforcement action. In 2014, CFTC slammed FXCM with a total of $14 million in fines and restitutory charges for unwholesome market practices against their clients, some of which included stop hunting and price manipulations. As at 2017, FXCM has been shut down and permanently banned from operating in the United States after the company was found guilty of the same charges. So it is possible for traders to get their stolen monies back.
- Some regulatory bodies have been known to work with prosecutors to send personnel of errant brokerages to prison.
Forex Regulatory Bodies: Conclusion
In conclusion, it can be deduced that the only way to ensure market sanctity at all levels is by the activities of forex regulatory bodies. The process of initial licensing is meant to ensure that criminals do not slip through the cracks in the first place to offer “brokerage services” to the consumers. For those who make it through the initial screening process, continuous monitoring and evaluation of performance using a series of tools for this purpose is carried out to ensure that the forex brokers maintain the highest standard of ethical operations.
Forex regulation serves to provide a level playing field for all participants. Many of today’s retail traders are trading with forex brokers located in countries far away from their own. The only means of protection these traders have is the forex regulatory bodies. That is why it is imperative that traders perform the initial due diligence checks on the forex brokers they want to use by confirming their status with any of the regulators that have been listed above.
A new trend which is emerging in forex cheating by brokers is to claim regulation in a country. Usually, these scam brokerages open an office in a country and claim to be licensed and regulated in that country. Traders should not fall for this. They should always follow the processes listed above to confirm the status of the broker namely:
- Use the search engines on the website of the forex regulatory body to scan for the information and status of the broker.
- Contact the regulatory body directly inquiring about the status of the broker.
- Check for the license number on the website of the forex broker and crosscheck this information with the forex regulatory body.
These things should be done before depositing money with any forex broker. It could literally save you thousands of your precious trading dollars.
Other important Forex Regulators by Country
- The Netherlands
- British Virgin Islands
- Czech Republic
- New Zealand
- Hong Kong