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The Biggest Downside to the Lack of Forex Regulation for Most Brokers

02/11/2016 9:00 am EST

Focus: FOREX

Despite its huge size, regulation in the forex market is scarce and there is no single global body to police it 24/7, so Cina Coren of shares her take on the importance of regulation in forex.

The Foreign Exchange (FX) market is the largest, most liquid market in the world, with around US $5.3 billion traded daily. Day trading is quite common among currency traders but most investors depend on setting up trading accounts and executing their trades via forex brokers.

There are hundreds of forex brokers and new ones are constantly opening their doors to the public. This makes it difficult for traders to choose the best brokerage and leaves them at the mercy of the broker when it comes to honesty and transparency. Despite its huge size, regulation in the forex market is scarce and there is no single global body to police it 24/7.

There are no accurate statistics, but the number of forex and binary options brokers that work under a regulatory authority is minimal (5% is usually cited) and that leaves many firms able to take advantage of their clients and to engage in abusive behavior without any consequences.

Non-regulation Risk

For retail FX traders, the biggest downside to the lack of forex regulation for most brokers is that of illegal activity or outright fraud as well as runaway losses in a market increasingly dominated by speculative activity and large institutions.

Following a spate of currency-related swindles during the period between 2001 and 2008, the CFTC created a special task force to deal with the problem and stiff forex regulations were introduced several years later to protect retail FX traders.

Under the Commodity Exchange Act (CEA), the CFTC assumed jurisdiction over leveraged forex transactions offered to retail clients in the United States. The Act permits only regulated entities to act as counterparties for forex transactions with retail customers in the States and it requires that all online forex dealers be registered and meet the strict financial standards enforced by the National Futures Association (NFA).

On the institutional level, banks, which are responsible for 95% of daily FX trading, are heavily regulated. The US Federal Reserve and the US Treasury Department are highly attentive to regulation in the forex industry and monitor brokers carefully for evidence of manipulation.

Forex Regulation—Why?

Why is regulation in forex so important? The objective of regulation is to ensure fair and ethical business behavior. Under current regulatory contracts, all foreign exchange brokers, investment banks, and signal sellers are required to operate in strict compliance with the rules and standards laid down by the forex regulators or their activities can be deemed unlawful. These bodies must be registered and licensed in the country where their operations are based, which ensures quality control standards are met. Their brokerage houses are subject to periodic audits, reviews, and evaluations which force them to maintain the industry standards. In addition, regulated forex brokers must keep a sufficient amount of funds to be able to execute and complete foreign exchange contracts concluded by their clients and also to return clients’ funds intact in case of bankruptcy.

Should a regulatory agency find a broker infringing on its guidelines, it can use a wide range of enforcement powers—criminal, civil, and regulatory—to protect consumers and to take action against firms or individuals that do not meet acceptable standards. To read the entire article click here…

By Cina Coren, Contributor,

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