Forex trading is legal in the United States, although there are certain inconsistencies as compared to trading on other continents, explains Konstantin Rabin of Top Brokers.

In comparison to other nations, the United States has a variety of laws and regulations. So, yes, you can lawfully trade forex in the United States. When researching whether or not you should trade forex in the United States, you may have come across numerous contradictory messages on various blogs and forums about the legal status of selling forex in the United States, as these legal reforms are the most significant distinctions between the US forex trading industry and the forex trading markets around the world.

When you are first starting out and preparing to explore the US trading industry, it may seem to be a little more difficult and demanding, but as we clarify in greater depth, you can find that it is generally smoother and simpler than you may expect, subject to remembering the legal changes. A good thing to remember about investing in the US forex market is that it is and will be almost as simple as trading everywhere else in the world if you have the right advice.

In fact, forex trade is legal in any country that accepts the currency (bank exchange offices, currency accounts, etc). However, forex trading is mostly used for serious purposes by individuals, whether for business, foreign acquisitions, or import and export—the list is infinite. Forex trading is legitimate in all countries that accept the currency, which is why the forex market is the world's biggest financial market, with a daily turnover of $6.6 trillion, according to the Central Bank of FX and OTC. For such a massive scale, it's no surprise that the forex market outperforms the bond market.

Regulations for Forex Brokers

Over-the-counter markets have a steady flow of foreign currency exchanges (forex). The limitless space makes for easy entry. Despite territorial barriers, an Australian trader can deal in euros and Japanese yen (EUR/JPY) through a U.S.-based broker.

The retail forex market expects to see an increase in speculative trade. As a result, financial irregularities, scams, exorbitant costs, secret payments, and high-risk exposure delivered by high-leverage levels or other bad practices can be perpetrated by intermediaries (banks or brokers). Trading through the internet and smartphone apps allows for smoother procedures, but they often introduce the possibility of unrecognized places closing suddenly and absconding with investors' funds. Such activities are prohibited by regulations. Individual investors are covered by regulations, which ensure equal activities and defend clients' interests. The regulatory approval status of the broker and its governing authority are the most relevant factors to consider when choosing a forex broker.

How Do Authorities in the United States Regulate Forex Brokerage Accounts?

The National Futures Association (NFA) is the leading independent supplier of effective and creative regulatory initiatives that protect the derivatives markets' credibility (including forex). Based on the information in TopBrokers.com, the below are the practices that fall under the purview of the NFA:

  1. Provide required licenses to qualifying forex traders to perform forex trading business after conducting due diligence.
  2. Ensure that the requisite capital needs are met.
  3. Fraud is to be avoided.
  4. Ensure that all sales and associated commercial operations are subject to comprehensive record-keeping and monitoring standards.

Regulations in the United States: Main Provisions:

  1. "Individuals with assets of less than $10 million and most small companies" are classified as customers, emphasizing that these rules are designed to protect small investors. Standard regulated forex trading accounts may not protect high-net-worth individuals.
  2. On the major currencies, available leverage is limited to 50:1 (or a deposit threshold of just 2% of the notional value of a forex transaction) in order to protect uneducated investors from taking unheard-of risks. The British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the euro, the Australian dollar, the New Zealand dollar, the Swedish krona, and the Norwegian krone are the major currencies.
  3. On minor currencies, available collateral is limited to 20:1 (or 5% of the notional transaction value).
  4. The notional transaction value plus the option premium earned should be held as a security deposit for short forex options.
  5. The entire option premium is required as insurance for long forex options.
  6. The first-in-first-out (FIFO) rule prohibits traders from having several positions in the same forex commodity at the same time. This means that every open exchange position (buy/sell) in one currency pair is squared off with the opposite position (sell/buy) in the same currency pair. This also means that hedging is not an option when buying forex.
  7. Money owed to customers by the forex broker can only be deposited in one or more eligible institutions in the United States or money-center countries.

How Do Regulations in the United States Differ?

Before opening a trading account, make sure to check the ownership, status, and position of each forex trading company, website, or app. Many websites advertise low brokerage fees and high leverage (allowing more trading exposure with less capital), with some reporting leverage ratios as high as 1000:1. Almost all sites, however, are hosted and run outside of the United States and may not be licensed by the host country's relevant authority. And those that are allowed to operate on a municipal level may not have laws that extend to citizens of the United States. Depending on the region, regulations on provided collateral, mandatory deposits, reporting conditions, and investor rights will differ.

Financial laws are intricate, and they often alter as economies evolve. They try to find a balance as well. Very little regulation can result in inadequate investor security, while too much regulation can reduce global competition and slow economic growth.

By Konstantin Rabin, editor at TopBrokers.com - an informational site about Forex brokers.