Forex Broker Regulation

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Regulation is one of the most important factors to consider when choosing a forex broker. One way to reduce the likelihood of broker forex fraud and scam, is to look for a regulated broker to put your money with. There are a number of different forex regulations out there. What is forex broker regulation what is the benefit of choosing the proper regulated broker?

Forex Broker Regulation

WHAT IS FOREX BROKER REGULATION?
Forex market is decentralized and operates with no central exchange or clearing house. Due to its decentralised and global nature, foreign exchange market has been more prone to scam and fraud. Forex market is less regulated than other financial markets, like stock market.

However some countries do regulate forex brokers through governmental and independent supervisory bodies, for example the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) in the US, Australian Securities and Investments Commission (ASIC) in Australia and the Financial Conduct Authority (FCA) in the UK.

However, the regulatory standards can vary greatly under different regulatory countries. Brokers are often registered and licensed by more than one regulator. Most brokers will list which regulators they are regulated with the registration numbers on the website. You can verify this number by looking at the website of the related regulators. Several forex broker regulatory bodies in developed countries listed in table below.

Country Regulation
United States National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
United Kingdom Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
Australia Australian Securities and Investment Commission (ASIC)
Switzerland Swiss Federal Banking Commission (SFBC)
Germany Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
France Autorité des Marchés Financiers (AMF)
Canada Autorité des Marchés Financiers (AMF)
Japan Financial Services Authority (FSA)



BENEFIT OF PROPER FOREX REGULATION

The objective of forex broker regulation is to ensure fair and ethical business behaviour. Proper forex regulation has many befefits:

  1. Helps ensure that your forex broker is adequately capitalized in the event of trading losses
  2. Keeps your funds in secure and segregated accounts
  3. Maintains fair dealing practices to so that your trades will be executed at fair market prices.
  4. Reduces the possibility of forex broker fraud and scams


FOREX BROKER REGULATION IN US
United States has very strict standards subject to forex trading. US regulated forex brokers are not allowed to offer more than 50:1 leverage on major currency pairs or more than 20:1 leverage on minor currency pairs. Regulation also prevents US brokers from accepting deposits via credit cards, a very common practice in other countries. Brokers are overseen by the NFA and CFTC. The CFTC determines the rules regulating the commodity brokerage industry. The CFTC also has the authority to close any unregulated entity in the retail forex industry. The NFA is another regulatory body that enforces adherence to certain capital requirements. Both agencies actively pursue legal action against brokers who solicit US clients without being properly registered. Regulatory capital requirements for US forex brokers were increased to $20 million in response to the global financial crisis. This led many global forex brokers to shut down US operations.


FOREX BROKER REGULATION IN JAPAN
Japan’s Financial Services Authority (FSA) also has a reputation as a strict regulator on par with the US. The FSA actively take actions against unlicensed firms who solicit Japanese traders. They also limit maximum leverage on forex trading to 25:1.


FOREX BROKER REGULATION IN UK
Forex brokers are regulated by the Financial Services Authority (FSA) in the United Kingdom. FSA rules require that client deposits be segregated from the funds and accounts of the brokerage firm. In other words, in case of bankruptcy due to fraud, or mismanagement, the customers funds are safe.


FOREX BROKER REGULATION IN AUSTRALIA
The Australian Securities and Investment Commission (ASIC) regulates forex trading in Australia. All legitimate brokers providing retail forex services must be registered with this body which enforces capital requirements. Australian law requires that any foreign exchange broker acquire an Australian Financial Services License, or be licensed with the Reserve Bank of Australia.


FOREX BROKER REGULATION IN EU
In the EU, there is no central regulatory body which supervises the activities of retail brokers on EU area. Forex brokers are regulated by the authorities of the nations in which they are operating. Standards vary from nation to nation. Most Europe-based broker will offer at least 200:1 leverage. EU based forex brokers usually accept deposits via credit cards. Since 2004, brokers licensed and regulated in one country have the ability to serve customers in other EU countries without obtaining additional licenses. Small forex broker usually regulated to countries with broker friendly regulation, such as Cyprus and Malta. With lower cos to register, Cyprus based brokers are able to offer their customers more competitive trading terms (e.g. spreads, leverage) than other European brokers. However, there are some trade offs with less protection. For example, UK regulated forex broker covers investor compensation up to GBP 85,000 while Cyprus regulated forex boker only covers investor compensation fund up to EUR 20,000.

 

FOREX BROKER REGULATION IN OTHER COUNTRIES
Small forex brokers also requlated in countries that tend to have weak regulation with very low capital and requirements, for example British Virgin Islands, Belize, Seychelles and St. Vincent.

 

WHAT FOREX BROKER REGULATION TO CHOOSE?
We strongly advise that you select a broker requlated in developed countries, to benefit from extra protections.