The Forex trading industry has grown by leaps and bounds during the past decade, and the FX market witnesses a tremendous rise in the number of retail traders. With an increasing rise in the number of retail traders, the amount of Forex brokers is also on the rise, which in turn increases instances of broker scams and frauds. Potential frauds and financial malpractices originate out of areas that have a low level of regulation, and tax havens are known to be the primary culprits in churning out a majority of scam brokers in the industry.
The US, on the other hand, has amended significant policies to their existing framework that are designed to curb the rise of Forex scams. After the global financial crisis of 2007-08, the US policy makers decided to revamp their entire regulatory structure to make Forex trading more streamlined and bring the regulation of Forex brokers under a solidified regulatory agency. The NFA, National Futures Association, acts as an independent self-regulatory authority that oversees the regulation and supervision of all Forex brokers in the US. NFA is the sole authority responsible for regulating the derivatives markets and products such as ETFs, OTCs, and currencies.
According to the latest ruling from the US, only NFA Forex brokers are allowed to carry out their services in the US and all non-regulated companies are banned from entertaining US citizens. NFA regulated brokers are also required to be a member of the CFTC and are supposed to adhere to all operational guidelines put forward by the CFTC from time to time. Therefore, although NFA regulated Forex brokers are known to inhibit the freedom of traders, brokers from the US have to conform to high standards of regulation that ensures a drastic reduction in broker scams and financial malpractices.
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The Rules Followed By NFA For Forex Brokers Regulation
NFA is an autonomous and not-for-profit organization based out of Chicago, IL that operates entirely on funds generated from membership fees. NFA does not use taxpayer money for its operations, and therefore, is free from any conflict of interest with the traders. NFA has a highly stringent regulatory framework that determines whether an FX brokerage company is eligible to carry out its business in the US. The US Congress had passed legislation in 2000, 2008, and 2010 that has mandated all financial companies, including Forex brokers, SWAP dealers, hedge fund managers, signals service providers, and other allied financial entities to be regulated by the NFA to cater to the US retail trading market.
The NFA has several rules that govern how Forex brokers are required to operate in the markets. First of all, Forex brokers are required by law to ensure the integrity of the financial markets by following safe and transparent market practices. The NFA allows fair competition between brokers, but all advertising and promotional materials are required to represent real facts without any form of misrepresentation that may mislead the traders.
All NFA regulated brokers should hold at least $20 million in operating capital, which is significantly higher than most of the other regulatory agencies in the world. High operating capital is essential for brokers to ensure better liquidity for their traders and to meet all client transactions without facing any severe financial pressures. Sometimes, a lack of operating capital can lead to broker bankruptcy due to unexpected market volatility, which will prevent brokers from maintaining their clients’ positions.
As usual, Forex brokers regulated by the NFA should hold funds in segregated accounts and should provide weekly financial statements to the NFA to ensure that all financials are in order. The weekly financial statements reflect the amount of cash flow, client account balances, and a detailed list of the brokers spending as well as earnings over the course of the week. Although the weekly statements help keep the brokers in line, the NFA also requires Forex brokers to submit yearly audit reports, which are then published on the official NFA website. Therefore, traders from the US can perform a comprehensive research about any NFA regulated broker without worrying about the authenticity of the company.
NFA has made it mandatory for Forex brokers to hire trained and knowledgeable staff. NFA is the only regulatory organization in the world that proactively insists on ensuring that all brokers have a highly dedicated staff for meeting client requirements. Therefore, even the customer support staff should have a fair amount of knowledge about the services on offer and should be able to address their clients’ concerns in an informed manner.
What Happens If NFA Regulated Forex Brokers Misbehave?
NFA has a detailed process in place to deal with broker scams and financial irregularities. NFA actively seeks out companies that are alleged to be involved in financial malpractices, and will always take consumer complaints seriously. NFA is highly popular in the industry for dishing out heavy penalties and sanctions against broker scams as well as Forex brokers that have a history of manipulating their clients. Financial abuse is a grave danger to the modern retail trading market, which has forced the NFA to intervene by investigating all consumer complaints without fail.
Why Do International Traders Shy Away From NFA Forex Brokers?
NFA brokers are subject to the regulations enforced by the CFTC on Forex trading. CFTC has come up with rules such as the FIFO, no hedging, and a maximum leverage of 1:50, which are highly detrimental to the overall freedom of trading. Although NFA regulated brokers are considered to highly reliable, traders find it easier and more comfortable to trade with other brokers regulated by other agencies due to the amount of trading freedom that they offer.
US brokers also have higher capital requirements which deter small retail traders from opening accounts with a little investment capital. Along with less leverage, it becomes impossible for small traders to enjoy any consistent profits over the long run.
How To Check The Authenticity Of NFA Regulated Brokers?
NFA regulated FX brokers are assigned a unique license number that traders can cross-refer with the official NFA database. Also, all brokers operating in the US should be a member of the CFTC as well, therefore, if a Forex broker is absent from either database, then the company is not allowed to cater to US traders.
The NFA also provides an excellent online resource for traders that provide in-depth information on broker scams, NFA penalties, banned companies, and other essential facts about the US financial markets. As far as the safety and security of traders are concerned, NFA offers the best in the business regarding broker regulation, which is guaranteed to safeguard the rights and interests of the investors.
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