CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.

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16 July 2020

Why is Forex Regulated?

We are all aware from the horror stories in the press of the financial scams that are active in the financial markets at large and more specifically in the Forex market. The attraction to these criminals is very obviously the amount of money that passes through these markets. The con artists seek to divert the 'invested' funds into their own pockets rather than into proper investments. To do this they pose as genuine trading companies and platforms by closely mimicking those companies’ websites and names.

The role of the Regulators is very multifaceted but to highlight a few important roles:

Licensing and supervision of brokers:
Both the regulators and the genuine companies are very keen to uphold the integrity of the marketplace and to ensure that all investors are dealt with honestly, fairly and within the safety of the regulatory framework. To ensure this the regulators set out strict rules about the processes and procedures that have to be adhered to by companies wishing to achieve authorisation to trade in the financial markets. 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.

Although the rules vary slightly from one regulator to the next there are some core principals applied by almost all:

  • 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 the regulatory bodies.
  • Enforcement of sanctions in case of market infractions. Where there are clear cases of fraudulent practices regulatory bodies are empowered by law to carry out a range of enforcement activity against errant brokers.

The setting and monitoring of regulations for financial promotions and other forms of communication between their clients or potential clients.

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.

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. As the forex market is decentralised one 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 local to 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

Invariably a licensed and authorised broker will be proud to display that they have achieved authorisation and will thus display it clearly on all their websites. Many regulators insist on this. If we were to take the FCA as an example they rule that any communication from a regulated broker must include the statement " broker XXX ltd is authorised and regulated by the Financial Conduct Authority with FCA Register Number 798776. The trader can then check this number against the FCA register to see the status of this broker.

The FCA and other regulators also produce blacklists of scam companies and barred brokers, so it is advisable to check these lists as well before opening an account with a new broker.

If, however a trader does find that they have made the error of signing with a non-regulated firm or if they think that a regulated broker has acted in an unprofessional manner they can seek redress through the regulatory authorities which in the UK are the Financial Ombudsman and the FCA.

So, in conclusion the markets are regulated to ensure a level playing field for all and in essence to protect the investors from risks to their funds that are unassociated with market risk. It also ensures that all authorised brokers maintain the highest standards of professionalism and integrity. All traders should satisfy themselves that the broker is licensed and authorised to trade in the country that they wish to before opening an account.

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