The Role of Regulation in Online Forex Trading
The forex exchange (FX) market is the world’s largest financial market. On average, $5.3 billion is traded every day on this market, therefore, its importance in the global economy cannot be ignored. And for this reason, regulatory bodies exist to help with forex regulation.
As a trader, what factors do you consider before opening an account with a best forex broker? Well, swap rates and spreads are essential but so is regulation. Some brokerages offer high spreads, but if they are not under a regulatory body, you could end up losing your hard earned cash.
According to Trusted Forex Broker – Forex regulation helps keep regulated broker firms accountable and protect investors from rogue brokerages. Below, we look at some regulatory agencies, their work, and the territories on which they provide oversight.
Which are the top regulators?
Here are some of the best regulators in the foreign exchange market
ASIC (Australian Securities and Investment Commission)- This regulatory body has been in operation since 2006. ASIC regulates customer credit, financial services, and forex market in Australia. This regulatory body is well-known for its stringent guidelines. For example, every brokerage needs to have an AFS (Australian Financial services) license, and every new trader has to undertake a test before opening an account with any ASIC-regulated broker.
FCA (Financial Conduct Authority) – FCA offers forex regulation in the UK through enhancing market integrity, protecting consumers, and promoting competition. FCA also provides Financial Services Compensation Schemes (FSCS). This service assures any trader, with an account under an FCA regulated firm, 50k back if the firm goes under. Note; it takes up to one year to get your 50k, but it is better than losing all your investment.
NFA (National Futures Association) and CFTC (Commodities Futures Trading Commission) – If you live in the US, then pick an online forex brokerage that is under any of these two regulatory bodies. These agencies have been created from the same legislation. These regulators require all online foreign traders to register and meet all the set requirements.
One of their requirement is every broker should make all their finances transparent; from money in their accounts to their profits. This single guideline locks out rogue brokers from registering in the US. If an online forex trading firm rejects your application because you are a US citizen, then that is a red flag. Avoid such foreign exchange brokers.
AMF – These forex regulation bodies help protect traders in France. If you are in any of these territories, ensure the safety of your investment by trading with firms only under these regulator.
Other countries have their governing bodies. These include
Turkey – the CMB (Capital Markets Board) is the country’s main regulation authority. It has strict guidelines and allows only a small number of brokerages to work in Turkey.
Russia – RAFFM (Russian Association of Financial Markets) is a self-regulatory agency that protects Russian traders from unregulated brokers. However, this body is small. But, the government is working to provide a solution to this problem shortly.
Israel – ISA (Israeli Securities Exchange) is the agency tasked with the responsibility of providing transparency and protecting Israeli forex traders from online forex trading fraud. This agency has introduced new regulations that have brought the county’s regulation to the same level as regulations in other countries.
The above regulators guarantee security for your investment. However, there are some regulatory bodies you should be cautious about.
Regulators to be cautious about
No regulating authority- unregulated brokers are the scum of the forex trading market. The number of new traders flocking to open accounts with them is astonishing. These brokers prey on one’s greed by offering numerous free things and unimaginable profit margins. However, because unregulated, they do not follow any rules. Today you can make huge profits with them, but tomorrow they will disappear with all your funds.
Work with a brokerage that is under any of the above named regulatory agencies.
IFSC (International Financial Services Commission)- This Belize regulator does not have stringent guidelines thus making it easy for rogue brokers to acquire licenses. IFSC offers minimal protection to traders, and only acts after brokers have fleeced their traders.
CySec (Cyprus)- CySec is under MiFID, a European Union regulatory agency, that guarantees traders compensation in case a brokerage becomes bankrupt. However, countries such as Cyprus have weak regulations, and one can access licenses easily, including fraudulent brokers. This means that your investment won’t be 100% secure when you trade with a broker under CySec regulations.
Yes, swaps and spreads are essential. However forex regulation should be at the top of your checklist. Before opening your online forex trading account, make sure a brokerage firm is under any of the above regulatory bodies.