Foreign Currency Exchange Market or simply Forex is one of the largest capital markets in the world, with a daily turnover of over 5 trillion U.S. dollars. Unlike commodity exchange and stocks, the Forex market has no physical location and trades take place 24 hours a day from Monday to Friday.
Despite the massive volume of trades in the FX market, it remains unregulated, with no international agency or organization to oversee and control the trading activity that spans the globe.
This lack of regulation and oversight of the Forex market make it prone to a number of forex frauds and scams by the intermediaries which are the brokers and banks.
Active Forex Regulatory Bodies
While an international organization to oversee the FX market doesn’t yet exist, many some countries across the world have formed government regulatory bodies and independent bodies whose function is to oversee the operation of things in the Fx and other financial markets. These bodies supervise the FX market to ensure that the participants abide by the rules and local regulations.
Functions of Regulatory Bodies
The functions of regulators in FX market include
1. Licensing and supervision of brokers. Regulatory bodies set up standards and stringent rules that the participants of FX must comply with. They also license brokers and banks who abide by these rules and keep the standards.
2. Ensuring brokerage companies comply with money segregation
Segregation of traders’ funds simply means keeping traders’ funds in a separate bank account from the broker’s operational accounts of the broker. This ensures that traders’ funds aren’t mixed with the broker’s capital which can lead to withdrawal issues.
3. Ensuring that the brokers comply with reporting standards
Regulatory bodies require FX brokerage companies to submit periodic reports of their financial activities as well as certain data of their traders for monitoring and scrutiny. They also do periodic auditing and review to ensure that the brokers comply with the set standards.
4. Dealing with Fraud
Where there are market infractions or cases of fraudulent practices by the broker, FX regulators are empowered by law to prosecute and penalize the errant brokers.
The Top Forex Market Regulators in the World
There are numerous Forex regulatory bodies in the world. Most of these are based in countries such as the US, UK, and Australia, where most of the top forex brokerage companies are located. In reality, it’s not possible for every country to have forex brokers. Since the forex market is decentralized, you will see some traders in countries which don’t have brokers, signing up for accounts with offshore brokers who are willing to do business with them. These investors, located in countries which are geographically separated from the brokerages they deal with, rely on the regulation of their brokers to keep them safe. Here is a list of the top forex regulatory bodies in the world;
1. Commodities Futures Trade Commission
The United States has the largest and most liquid financial market in the world, and Forex trading is just one component of it. The country has the most stringent rules and regulations in the FX market. The over-leveraged U.S. Forex trading activities are overseen and controlled by the CFTC ( US Commodity Futures Trading Commission). Created in the year 1974, this agency functions to safeguard all the futures and commodities investors in the country.
CFTC also protects forex traders because futures also include currency trading.
The organization has experienced many transformations since its creation in order to enhance trading processes and develop a fair playing ground for all participants in the market.
2. NFA (National Futures Association)
The National Futures Association is the second top agency that oversees forex brokerage companies in the US. Created in 1982, the NFA is a large self-enforcement that functions to regulate the futures market in the US. The organization is a self-financed regulator that operates independently and does not depend on the citizens’ tax. The NFA activities are monitored by the CFTC which a government organization in charge of the US futures and Commodities industry.
Like the CFTC, the National Futures Association oversees the forex brokers to ensure they comply with financial standards. Recently, the National Futures Association cut down the maximum leverage for FX trading from as high as 1000:1 down to 50:1 and only open to eligible market participants. There’s no company in the US that can operate in the futures market without registering with the NFA.
3. Financial Conduct Authority (FCA) or The Financial Services Authority (FSA) of the UK
The UK is the best region in the world that is known to be friendly to FX brokerages while at the same time ensuring their clients’ funds are safe. For this reason, brokers from other countries with no local regulatory agency seek to be licensed by from FCA due to the favorable environment.
Besides the unified regulations that must be complied with by all member countries of the European Union, most member nations have also set up local regulatory bodies with their own rules and regulations. The UK, for example, adopts innovative practices to oversee their local Forex industry. The UK’s FCA is mandated with the responsibility of supervising, regulating, scrutinizing and enforcing rules and regulations that guide the capital market, which includes the Forex market. The UK uses a cost-benefit strategy to form its Forex regulations that are not over-restrictive like those of the US.
4. Cyprus Securities and Exchange Commission (CySEC)
Cyprus is also one of the top destinations for FX brokerage companies in the big Middle East financial markets. The agency serves as a gateway into Europe by making it easy for FX brokers to get their regulatory license.
CySEC is the financial regulatory agency of Cyprus that functions under the umbrella of the MiFID regulations of the European Union. It has attracted plenty of foreign forex brokers who want to take advantage of the favorable environment in the region. It’s also easy to obtain a license with
CySEC compared to other European countries.
Forex trading is a lucrative business that makes it a fertile ground for fraudsters and conmen. As such, every trader must ensure they work with a regulated broker who abides by the strict rules and standards set by regulatory bodies.