An Introduction to Forex Regulation and Legislation

An Introduction to Forex Regulation and Legislation

Forex

With the increase in daily growth on the forex market comes with an increase in number of brokers. Since the forex market is decentralized it can has become a breeding ground for the operations of some brokers who seek to rob you of your hard earned money under the disguise of trading. In order to prevent this from happening in the first place, different agencies have been established to police brokers so they do not do as they please with our hard earned money. Despite the best efforts of these agencies, there are still some brokers dealing in bad faith out there.

If you are already trading with a firm or you are about to start trading, one of the most important things to check out for is how well regulated the firm is. In other words, how safe will your money be if you invest with them? If you want to know what to look for to determine if a brokerage firm is licensed, then continue reading.

Is forex trading legal?

The forex market is the biggest market in the world with $5.3 trillion being traded on it on daily basis. There is absolutely nothing incriminating about trading on the forex market. As a matter of fact, the only thing you will be guilty of is making money. But it is also important to know and abide by what the law in your country states concerning online forex trading in. Some countries do not permit forex trading while other countries like the USA have such rigid forex market regulations that it scares foreign brokers away. Hopefully these countries will soon make some amendments to their constitutions to allow the good tides of forex trading to reach it citizens. So if your country does not fall into any of these category, then you are unstoppable. Forex trading is legally accessible to you.

Who governs the financial market brokers?

Every country is responsible for governing the activities of the brokerage firms in it. Some countries have relatively stricter regulations on their brokers. US brokers for example must obtain many licenses before they are allowed to operate. Amongst them is the NFA (National Futures Associations) license. RFED (Retail Foreign Exchange Dealer) and FCM (Futures Commissions Merchants) are both licensed by CFTC (commodity Futures Commission).

One of the most popular licensing agency is CySEC (Cyprus Securities Exchange Commission) based in Cyprus. Another reputable agency is MiFID (Markets in Financial Instruments Directive) which is an EU body. These two are responsible for licensing and regulation of many European brokers. Another agency is ASIC (Australian Securities and Investments Commission) based in Australia.

How do these agencies enact regulatory oversight ?

CFTC for example have a scam list of brokers that they consistently update to warn traders of these scam trading firms. If any broker is found dealing in any form of malpractice they will impose huge fines and sanctions on them. They sometimes take the license away depending on the severity of the malpractice. CFTC also performs regular checkup and reviews on its brokers to make sure your money is not being put into wrong use.

As part of the licensing agreement, brokers are required to reserve money in the bank to cover trading contracts and to return funds to customers in case the firms’ faces bankruptcy. All these are done to protect clients from losing their hard earned money. If all brokers were to submit themselves to these regulations there would not be a problem but some don’t because they want to pay lower taxes. Some firms simply do not have enough capital to start the company and as such can’t afford to reserve huge sums in the bank as part the licensing requirements.

Selecting a broker

Now that you know of the regulatory bodies of brokerage firms, choosing a firm is the easiest part. First of all consider what you are looking in a firm. Some firms have relatively higher minimal amounts for creating accounts. So consider all these options before making a decision. Then check the country you are in and what regulatory bodies are responsible for the brokers. After all these have been checked and you are confident in the broker then you go ahead and trade.

Conclusion

In as much as getting educated on the right way to trade, it is of equal importance that the brokerage firm you are investing with is regulated. Otherwise all your efforts in trading will go to waste. Be warned because many have been victims of such fraudulent companies. So be extra careful who you invest your money with. As soon as you sense any suspicions stop trading with them immediately. For more information – read our full beginner’s guide to forex regulation.