Forex Traders: Are You Governed by Regulations?

08/28/2014 9:00 am EST

Focus: FOREX

In this article, Sean Lee at FXEmpire.com discusses the stringent regulations that all forex traders as well as brokers must learn and adhere to…even before attempting to make a trade.

As a forex trader, it’s not merely sufficient for you to learn only about the basics of trading. One of the crucial aspects of your learning should be the regulations governing the market. Forex is a market where a huge amount of money changes hands every day. There are a string of stringent regulations in place to guarantee that things do not get out of control. They are meant to keep both the traders and brokers on their toes.

Forex regulations: What traders should understand.

Investors or traders, who have just started trying their hands at online trading should try and understand that it’s not only the brokers who are supposed to follow certain rules. Since forex is an international market, there are different laws existing in different countries. So, traders must understand which laws govern the market in their country.

There fundamentally are two types of transactions conducted in this hugely popular market—speculative and commercial.

The speculative transactions are often found surpassing the commercial ones and have clearly been a part of greater trading volumes over a period of time. Today, the volume of forex trading has increased three times of what it was during the year 1995 (worth 1.2 trillion dollars). Today, an average of $4 trillion is traded every day here. As its name suggests, the speculative market is solely driven by the motive of generating profits from currency moves.

A commercial transaction on the other hand is based on a primary economic activity. It might involve loans to foreign entities or payments for imports.

There has been an unprecedented growth of forex trading among retail traders. As such, it has become imperative for the introduction of several regulations (which were almost non-existent earlier). Commodity Futures Trading Commission (or CFTC) is one of the leading regulating bodies which exercise due jurisdiction over leveraged forex operations dealing with retail clients in the United States. As per the Commodity Exchange Act, only regulated bodies can act as counterparties with retail clients. On the other hand, all online dealers of forex should be able to scale stringent financial yardsticks stated by the National Futures Association (or the NFA).

What should you be aware of, while trading online?

Besides being aware of the norms regulating forex, you should also be careful about the fact that you are conducting crucial transactions online. There is no dearth of online financial scams. The fast advent of the Internet has made it easier for us to conduct and execute crucial financial decisions starting from trading to making substantial purchases online. You might as well be online 24/7…well, almost. However, being tech savvy cannot be the sole guarantor of your ability to spot scams before signing up with a forex trading broker. You should be able to choose your forex broker wisely as that would lay the foundation for your success here. Ascertain whether the broker you are settling for is duly regulated or not.

By Sean Lee, blogger and web content editor at FXEmpire.com

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