Foreign exchange is the largest and most liquid market in the world. With an average daily volume of $6.6 trillion in April of 2019, it dwarfs both worldwide equities and bond markets. However, the global Forex market operates with no central exchange, clearing house or regulatory body. Numerous governmental and independent bodies regulate Forex trading in different jurisdictions around the world. These entities serve as watchdogs to ensure fair and ethical business practices among brokers.
Regulation in the Forex Market
Forex brokers typically need to be registered and licensed in the country where their business is based. Leading regulators scrutinize firms with regular audits and require detailed record keeping and reporting. Capital requirements ensure that the broker can manage its customer’s position in the market and provides client protection in the event of the firm going bankrupt. Regulators also often require brokerages to keep client funds separate from the firm’s operating capital, to prevent embezzlement and misappropriation. Transparency is another area of focus. Some regulators now require brokers to publish the percentage of their clients that lose money, both on their websites and in advertising. Regulated brokers should clearly publish their license number on their website.
It’s important to understand that regulatory environments differ widely across various jurisdictions. Many brokers are registered in offshore tax havens such as Saint Vincent and the Grenadines or Belize, where regulatory demands are far less strict.
Jurisdictions in the Forex Market
Here are the major regulatory bodies that supervise forex trading around the world:
- United States: The National Futures Association (NFA), Commodity Futures Trading Commission (CFTC).
- United Kingdom: Financial Conduct Authority (FCA)
- Cyprus: Cyprus Securities and Exchange Commission (CySEC).
- Australia: The Australian Securities and Investments Commission (ASIC)
- Japan: The Financial Services Agency (FSA)
- Canada: The Investment Industry Regulatory Organization of Canada (IIROC)
- Cayman Islands: Cayman Islands Monetary Authority (CIMA)
- Hong Kong: The Securities and Futures Commission (SFC)
- Singapore: The Monetary Authority of Singapore (MAS).
- Germany: Federal Financial Supervisory Authority (BaFin)
- South Africa: Financial Sector Conduct Authority (FSCA)
- Switzerland: Swiss Financial Market Supervisory Authority (FINMA)
- Russia: Federal Financial Markets Service (FFMS)
Forex Regulation in the United States
Regulation in the United States is among the most stringent in the world. US citizens must only open accounts with Forex brokers regulated by the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA).
Regulatory oversight changed dramatically after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010. The legislation was introduced to address the 2008 financial crisis and resulted in a substantial increase in regulatory oversight. The NFA cut leverage offered on retail accounts to 1:50 and broker capital requirements were increased to a minimum of $20 million. While the current framework in the United States offers a high degree of transparency and tight regulation, it has also created a challenging environment for US Forex brokers to do business.
Forex Regulation in Europe
In Europe, each country has its own regulator to oversee their domestic markets, such as the FCA in the United Kingdom or CySEC in Cyprus. The European Central Bank (ECB), European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) also provide oversight on a regional level.
Markets in Financial Instruments Directive (MiFID)
Implemented in 2007, MiFID is a European Union law that provides harmonised regulation for investment services across the European Economic Area (EEA). Under Mifid, a license from one member state covers all 31 member States of the EEA. This means that a Forex broker regulated in one EEA country can also work with clients throughout the EEA. For example, a brokerage in Cyprus regulated by CySEC is able take on clients in the United Kingdom without needing a licence from the UK’s Financial Conduct Authority. MiFID also aimed to guarantee a high level of protection for investors and laid out organisational requirements for investment firms.
Introduction of MiFID II
At the beginning of 2018, MiFID II was introduced. The new legislative framework was designed to improve protections for investors and provide greater transparency. Significant changes brought about by MiFID II include the removal of trading bonuses, the introduction of professional trader classification and the reduction in leverage available to 1:30. Under MiFID II, brokers must provide more detailed reporting on trades and keep records of all communications with their clients. The risks of investing in Forex must also be clearly stated.
Forex Regulation In Australia
The Australian Securities & Investments Commission (ASIC) regulates forex trading in Australia. ASIC requires that Forex brokers have a minimum of 1 million Australian dollars in operating capital and a representative office in Australia. Brokers must also submit periodic audit reports and keep client funds in segregated accounts at leading Australian banks. At the time of this writing, ASIC allows Forex brokers to offer a maximum leverage of 1:500, marking a major difference between the leverage available in the US and in Europe.
The Bottom Line
The decentralized, global nature of the Forex market and array of jurisdictions make it essential to choose carefully which broker to work with. Scandinavian Capital Markets is an authorized broker, registered with the Swedish Financial Supervisory Authority (FSA). Sweden’s regulatory environment provides unique benefits within a stable and world class financial system. As pure ECN/STP broker, there is no conflict of interest at Scandinavian Capital Markets and the firm takes pride in the success of its clients. Client funds are securely deposited in segregated accounts in leading Scandinavian banks, including Swedbank, Nordea and SEB.