Forex regulation is a structure or a system of financial laws within which the Forex market and its participants can operate and conduct business. These regulations and provisions are set into place to ensure that the Forex brokers are in fact dealing with their customers within the confined parameters of the laws so that the traders’ transactions, funds, as well as their overall trading experience are on the safe side to the degree that it is possible and can be managed.
As it was brought to your attention earlier, the Forex market is huge, and decentralization is an important factor that goes along with it, in fact, it is one of the better qualities that separates this market from the rest. This is also the reason why the forex network lacks an internationally unified entity to monitor it from all aspects solely. Therefore, to compensate for this gaping hole in the system, certain countries established their own regulatory authorities such as CySEC in Cyprus, ASIC in Australia, and FCA in the UK to regulate the financial markets and its participants. These governmental supervisory entities work side by side one another to bring about a united regulatory system on an international level.
Forex regulation is all about protecting the clients’ interests. So, if these regulated Forex brokers neglect to recognize the laws, they will have to face the penalties, sanctions, or in severe cases the cancellation of their licenses administered by the responsible regulators of those regions.
1. Ensuring Fair and Ethical Business Behavior
As the speculative trading in the retail market grows, it attracts more of the general public that is keen on becoming successful in the trading world immediately. These individuals are like gold mines to the shyster Forex brokers who intend to rip them off. Forex brokers (market makers) that provide liquidity for retail traders take the opposite positions in relation to that of their clients’. Forex regulation ensures that these brokers do not manipulate their clients’ trading conditions or tilt the market against them deliberately. Forex regulations dictate that every party involved in the Forex trading must operate under the strict guidelines and rules to maintain fair and ethical business behavior.
2. Secure from Financial Fraud
In a market whose daily turnover is billions of dollars, you have to be on the lookout for all kinds of scams and financial frauds that may seem appealing and only aim to pull you in and rob you of your money. There are irresponsible brokers who practice in irregularities, scams, exorbitant charges, hidden fees, high-risk exposure offered through leverage, etc. which should be avoided at all costs. These are brokers that are unauthorized, unregulated and have no appropriate licenses.
Today, with the advancement in technology, traders can trade online using electronic devices and access the market in a much faster and easier way. This could also be problematic because in the World Wide Web anyone who has the means to set up a website can present themselves as legit brokers and if you are not perceptive enough to spot them, they will take your money and disappear with a trace. Forex regulations protect investors from financial frauds like this by ensuring that only qualified parties can participate in the Forex market. The regulated forex brokers go through periodic audits and investigation in terms of their company solvency, their background, and the quality of their employees (from top to bottom). In this way, no illegal activity will be tolerated, and clients can rest assured that their money is safe and sound.
Before jumping into the Forex market, you need to choose your broker carefully and examine them from all angles. You cannot overlook the importance of trading with a regulated forex broker because it guarantees the safety of your trading activities as well as your investments.
In the below section we have brushed up on some of the advantages of trading with regulated Forex brokers:
1. Secured from Financial Scams and Frauds
Trading with regulated brokers eliminates the possibility of being swindled out of your money. Regulated brokers could not step outside the parameters of the FX regulations for two main reasons, firstly they're constantly monitored by the regulators through investigations, audits, etc. and secondly if in any case they break the law or act unscrupulously towards their clients, they will be penalized and held accountable accordingly.
2. Client Fund Protection
Regulated Forex brokers are bound by the regulations to protect their clients’ funds up to a certain amount which varies depending on authorities in question. For example, CySEC registered forex brokers are also a member of the CySEC Investor Compensation Fund (IFC), now this organization demands its members, i.e., ICF members, to repay their customers up to € 20,000 if the company went under and the clients suffered financially because of it. If the clients’ complaint about the company in question is legitimate, they will be compensated for their loss. Another example would be the FCA regulated Forex brokers who are a member of the Financial Services Compensation Scheme (FSCS); these brokers are also obliged to pay a refund to their customers if they fail to provide the protection they have promised. The amount of reimbursement payable by the FSCS members goes as high as £85,000 (and up to £170,000 for joint accounts). If the clients who have chosen to trade with these brokers suffer financial losses as a result of the broker’s negligence or simply their incompetence, they can file a complaint through the proper channels and get compensated for their troubles.
3. Safer Financial Accounts
As it was previously mentioned, regulated Forex brokers are to keep their own financial assets separate from those of their investors’. However, that is not the same with unregulated Forex brokers since they’re under no obligation to protect your funds and they can manipulate your money without suffering the consequences.
Regulated Forex brokers are professional companies licensed by various financial supervisory entities and are allowed to operate as a registered member within the jurisdiction of such authorities. Forex brokers that are under strict supervision and regulation of these authorities ought to obey their commands or else face penalties or sanctions.
Examples of the rules that regulated Forex brokers need to obey are as follows:
1. Segregated Financial Accounts
Regulated brokers must keep their inventors’ investments in segregated accounts and separate from their own financial assets. This policy is set into place to make sure that they will not abuse their investors’ money under any circumstances. And also if the broker company went bankrupt, the broker’s creditors are not allowed to access the investors’ funds to settle the broker’s debts.
2. Early Warning
The Forex regulations and provisions demand that the registered brokers should warn their potential clients in advance regarding the high level of risk associated with forex trading. In this way, the clients will be on alert and know full well that there is always the possibility of losing their investments by engaging in trading activities in a market as volatile and risky as this.
3. Solvency and Capital Requirement
One of the most important qualities that is a must for any regulated forex broker is their ability to stay solvent and have enough capital to settle their own debts without tapping into their clients’ funds.
4. Regular Audits and Investigations
After being regulated, forex brokers need to submit periodic reports of their overall operations to the relevant authorities to prove their compliance with the forex regulations, and on top of that, they must be audited and investigated on a regular basis to verify their capital adequacy ratio.
5. Leverage Ratio Limits
Forex trading is known for its high leverage compared to other financial markets; however, there is a certain limit up to which the regulated and registered forex brokers can offer leverage to their clients. The amount of leverage in forex trading is more flexible and can be offered somewhere between 50 to 500 times, and at times, depending on the regulators it could go even higher.