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Forex traders must be careful when choosing a brokerage. Although this market is the largest and most liquid in the world, it lacks regulation. In some countries, fraud is rampant. Before opening an account, make sure the broker is officially authorized by a reputable entity.
Today, there are hundreds of brokers, and the Forex market in pandemic is more attractive than ever. Traders need to be vigilant. Laxity of regulation makes fraud likely. Responsible brokers are subject to stringent supervision, while others operate illegally. Sadly, Forex scam is common in many parts of the world.
The difficulty stems from the nature of this over-the-counter market. There is no physical centre or clearinghouse. Therefore, separate regulatory entities act as watchdogs in their respective markets only. They issue licences to companies which meet their standards and have sufficient capital to provide brokerage services.
The Need for Scrutiny
For an industry like Forex, regulation is essential. Every day, this market sees volumes that reach 4 trillion US dollars. Until the 1990s, it welcomed only institutional players like major banks, hedge funds, and corporate giants. Today, it is also accessible to individuals who can install digital terminals and work as retail traders.
These participants gain access through intermediaries — Forex brokerage firms. The rights and funds of these clients must be protected. This explains the need for tough regulatory frameworks around the globe.
The task of regulating the industry is assigned to local financial organizations, as there is no single entity. As a result, even in the European Union, each member state has a specific set of standards. Given the far-reaching consequences of abuse in the financial sector, this situation is baffling.
Most Important Regulatory Bodies
Some regulators are more widely recognized than others, and their authorization is viewed as a sign of reliability for a broker. Traders are often advised to choose providers with a licence from the Cyprus Securities and Exchange Commission (CySEC) or the Financial Conduct Authority (FCA).
Read about Forex regulation in the World
To date, the EU has just one set of universal rules. The Markets in Financial Instruments Directive, or MiFID, was introduced in 2007 and revised a decade later. The latest version (MiFID II) became effective in January 2018. Today, the status of being EU regulated means that the broker complies with this second set of rules.
The Directive allows brokerages based in one member state to operate on the territories of other European Economic Area (EEA) countries. Still, this does not mean all European countries have identical rules. In some places, regulations are more stringent or lax than in others.
Therefore, protection provided under MiFID is limited. It covers some aspects of the Forex business. For example, it obliges brokers to provide a certain size of compensation in the event of bankruptcy. If a company goes under, it has to return the deposited funds to its investors.
There are also minimum requirements determining how much capital the broker has to have. Finally, MiFID obliges companies to separate their clients’ deposits from corporate funds. This is a measure against commingling, or mixing and misuse of clients’ money.
Cyprus is an attractive location for Forex brokers. Here, the regulator is the Cyprus Securities and Exchange Commission (CySEC). The appeal is explained by lower corporate tax (10%), which is also the lowest in the European Union. Besides, the financial sector in Cyprus is large and robust. As a member of both the EEA and the EU, the country provides a minimum standard of protection to operators domiciled in it. They are also allowed to conduct business internationally.
Forex in the UK
In the United Kingdom, Forex trading is regulated by the Financial Conduct Authority (FCA). Until 2013, this organization was known as the Financial Services Authority (FSA). Brokers based in other countries may be registered with FCA UK but comply with their local regulations.
A special status is “EEA Authorized”. This is assigned to companies which are authorized in another European Economic Area (EEA) but are allowed by the FCA to render services to UK citizens across the borders. They must comply with MiFID which regulates Forex in the UK.
Common question traders ask is ‘is Forex trading tax-free in the UK’? You may be surprised to know that it is! This is because trading is defined as spread betting. It is viewed as wagering on the direction of currency rates. Due to the high volatility of this vast market, local regulators do not impose any tax. This is a major advantage for regulated Forex brokers in the UK.
Best Time to Trade Forex in the UK
Due to the pandemic, today may be the best time to trade Forex in the UK. The country offers comfortable conditions for retail traders. Since 2018, brokers have had to comply with MiFID II, and the FCA monitors them closely. If you are wondering how to do Forex trading in the UK, begin with this glossary of common Forex terms. The latest crisis presents exciting trading opportunities. As some currencies fall, others rise. If you find yourself on the right side of the equation, profit is yours.
Forex in the United States
On the other side of the Atlantic, regulations are rigorous. Special attention is paid to leveraged transactions in retail Forex. These are overseen by The Commodity Futures Trading Commission (CFTC) which acts under the Commodity Exchange Act (CEA). Only regulated brokers may be counterparties of transactions with retail traders. Besides, all brokerages must have official registration, and they are obliged to comply with financial standards enforced by the National Futures Association (NFA).
Brokers providing Forex services in the United States have to be completely transparent. The requirements include public release of different data like the profitability of the traders, the number of active accounts, etc. Overall, the stringency of regulation means that few foreign brokerages are allowed to operate in the country.
Forex in Other Countries
The Belize islands are a tax haven for Forex operators. However, brokers that operate in the region comply with rigid accountability demands. Traders have basic protection, and the industry is regulated by the International Financial Services Commission (ISFC).
Turkey has stringent standards enforced by the Capital Markets Board (CMB). Few brokers are allowed into the country, and leverage for the most popular currency pairs is limited to 50:1.
In Australia, the industry is regulated by the ASIC (The Australian Securities and Investment Commission). An Australian Financial Services licence is mandatory for brokers, and the approval criteria are rigorous.
Russia and other parts of CIS have no regulatory framework for some OTC services, including spot Forex and CFDs. The Russian Association of Financial Markets (RAFFM), is a self-regulatory entity that merely provides reassurance to clients of unregulated firms.
In Indonesia, brokers are monitored by the Bank of Indonesia. The central bank imposes stringent standards, including high taxes and fines for unethical brokers. This makes retail Forex in Indonesia attractive.
Conclusion
The Forex regulatory landscape differs across countries. Dishonest brokers do not bother to acquire an official licence. First, lawful operations entail additional expenses that some companies want to avoid. Secondly, the process of regulation is burdensome and lengthy. Therefore, traders must choose their brokers carefully.
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