Chapter 2 What You Need to Know about Forex Regulation？
Why Regulation is so Important?
Most countries regulate Forex trading to ensure that traders have some protection against fraudsters scamming you of your hard-earned money.
The penalties for operating outside the rules set out by the governing bodies are heavy, and a broker can have their licenses removed if they have one. Essentially the regulation requires the broker to operate within a particular set of guidelines and to have enough capital to be able to cover the contracts that they are trading on your behalf. These regulations exist to protect your money.
The Financial Governing Bodies
Across the world, there are many financial governing bodies that regulate the Foreign Exchange market. In some countries like Indonesia, they are regulated by the central bank. In other countries, it is the responsibility of various security commissions.
Some of the most reputable licensing bodies are FCA(Financial Conduct Authority), ASIC (Australian Securities and Investments Commission), NFA(Nantional Futures Association), FMA(New Zealand Financial Market Authority) and CySEC (Cyprus Securities and Exchange Commission).
Perhaps the toughest of them all is the US. There are many licenses that US brokers must obtain - FCM (Futures Commission Merchants) and RFED (Retail Foreign Exchange Dealer), both of whom are licensed by CFTC (Commodity Futures Trading Commission) and they must become members of the NFA (National Futures Association).
How Regulators Monitor Brokers?
The CFTC is one of the best examples of a regulatory body that monitor brokers. They have a consistently updated scam watch list to warn traders of fraudulent brokers that are operating scams. Should they find any instances of malpractice they will impose significant fines and sanctions.
If you believe that a broker is operating outside of their trading terms, then you can report them to the relevant licensing bodies. As a licensed member, each broker or signal provider will be subject to regular audits and reviews to make sure they comply and conform to industry standards.
There are also capital requirements that all brokers are subject to. This requires them to have in reserve enough money to cover the trading contracts and to return any customer funds when they ever face bankruptcy. This alone should give you the confidence that your money is safe.
Choosing a Licensed Firm
If you know what you are looking for, it is not so difficult to choose a licensed firm to trade with. First and foremost, consider the country you are trading in and what the regulatory requirements are for that country. If you are trading in the US, UK, Australia, Germany or Cyprus, for example, you can be more confident than if you are selecting a firm in countries where trading is not regulated.
If you don't trust a home-grown broker, consider investing with a broker that is registered overseas. Next look to the footer of the website for the licensing details. Now anyone can put the licensing logo on their website so check out their registration first if you have any suspicions. Also, carry out a little online research, you can contact the relevant licensing body to check their regulation status.
