10.Forex Regulation And Protection
So, you want to get into currency trading?
Before you open a Forex trading account and fund it with your initial deposit, check the regulatory status of your broker to find out if it is licensed, authorised, and regulated by local regulators.
When trading the Forex Exchange market, traders can have access to high leverage, and they trade on margin.
Yet, margin carries a high level of risk, and may not be suitable for all investors – be sure it works with your investment objectives level before investing with real money.
In any case, you need to work with a trustworthy Forex broker. A broker that follow rules and regulations imposed by markets authorities.
Usually, these brokers display on their websites by whom they’re regulated, and a risk warning that should be standardised within all European countries according to new ESMA rules.
Who regulates the Forex market?
The Forex market is a very volatile, leveraged, and overall unregulated market. There isn’t a real international organisation that monitors currency trading.
Due to this unregulated nature, Forex scams with dishonest offerings of financial services, financial instruments, and investment advice are rife.
These companies will typically promise high returns as well as guaranteed profits with low risk, either with a relatively small initial capital, or via their managed accounts.
Even though there is no global agency overseeing the global Foreign Exchange market, there are national authorities protecting retail Forex investors locally against large losses or damages, such as:
- Autorité des Marchés Financiers (AMF) in France
- Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany
- Comisión Nacional de Mercado de Valores (CNMV) in Spain
- Financial Conduct Authority (FCA) in the U.K
- European Securities and Markets Authority (ESMA) for the European Union
- U.S. Securities and Exchange Commission (SEC) in the U.S.A
- Australian Securities & Investments Commission (ASIC) in Australia
In 2015, the Foreign Exchange Working Group (FXWG) was created to work on global principles of good practises for the FX market, which led to the May 2017 publication of a global code of conduct for wholesale foreign exchange markets.
The Bank of England belongs to the 16 member institutions that signed up to FX Global Code and helped to work on a further harmonised Forex industry, and better global protection of retails consumers trading the Forex market.
Forex regulation in the UK and Europe
According to the BIS Triennial Central Bank Survey 2016, London is the most important sale desk in the world. The United Kingdom gathered 36.9% of the global OTC Foreign Exchange turnover between April 2013 and April 2016.
In the U.K., there are 2 main financial regulatory bodies:
- The Financial Conduct Authority (FCA), which describes itself as “the conduct regulator for 58,000 financial services firms and financial markets in the U.K.”, helping to protect consumers
- And the Prudential Regulation Authority (PRA), which belongs to the Bank of England (BoE), and works at ensuring the health and safety of the 1,700 financial firms that it is responsible for
These two primary institutions also work with different bodies, such as:
- The Financial Ombudsman Service
- The Money Advice Service
- The Payment System Regulator
- The Serious Fraud Office
- And the Financial Services Compensation Scheme among others
Due to the increasing use of leverage and margin trading and huge losses by some traders, ESMA decided to intervene mainly to prohibit binary options and restrict the use of Contracts for Difference (CFDs), including rolling spot Forex and financial spread bets.
The restrictions include:
- Limiting the leverage used by retail investors to 30:1 for major currency pairs, 20:1 for non major currency pairs, and 2:1 for cryptocurrencies
- Automatically applying a 50% margin close out rule on a per account basis
- Offering a negative balance protection
- And prohibiting all monetary/non-monetary benefits offered
FCA Forex regulation may change if the British regulator decides to follow ESMA’s product intervention actions.
So far, however, the FCA has only declared that it “expects to consult on whether to apply these measures on a permanent basis to UK firms providing CFDs, and binary options to retail clients.”
But let’s not forget that the UK is a member state of the European Union until at least March 30th, 2019, which means that the product interventions taken by ESMA are applicable for UK firms. These firms must therefore comply with ESMA’s measures.
Forex regulation in the USA
After the United Kingdom, the United States is the 2nd most important sales desk, with 19.5% of the global OTC Foreign Exchange turnover between April 2013 and April 2016.
There are 2 main obligatory regulating organisations for Forex brokers in the USA:
- The National Futures Association (NFA), whose main goals are to protect investors from scams and fraud, to preserve the integrity of the derivatives markets, and to ensure that its members respect their regulatory responsibilities,
- And the Commodity Futures Trading Commission (CFTC), who works at avoiding systemic risk, and helping traders to determine if the Forex firms they want to use are reliable.
In 2010, the CFTC issued regulations, which limited the level of leverage allowed for retail consumers to:
- 1:50 for major currency pairs
- And 1:20 for all other pairs
There is also the Foreign Exchange Committee (FXC), sponsored by the Federal Reserve Bank of New York. They have been working on guidance to Foreign currency trading since 1978.
Forex regulations and control
Leverage can work for you if you use it in conjunction with tight risk management rules through a trading platform belonging to a broker that evolves within a regulatory framework.
Always check the regulated status of the broker you want to use first.
There are usually capital requirements the broker should comply with. For instance, brokers are required to keep client’s money separate from the company’s operating capital.
The best option would be that the broker you choose is regulated in more than one country, because it would mean that it must comply with further oversight and accountability rules.
CHAPTER QUICK LINKS
- 2.Why is Forex Popular?
- 3.Why Forex is (or isn’t) for You
- 4.How Does Forex Work?
- 5.Popular Traded Currencies
- 6.History of Forex Market
- 7.FX cash, CFD or Spread Bet?
- 8.How Margin Trading Works
- 9.Best Time of Day to Trade
- 11.Forex Trading Examples
- 12.Making a Living Trading Forex
- 13.Mind, Money, Method
- 14.Forex Risk Management Strategies
- 15.Winning Forex Strategies
- 16.Technical vs. Fundamental Analysis
- 17.New Forex Trader Mistakes
- 18.Dangers of Forex Trading
- 19.Next steps