Foreign exchange, or Forex (FX), reigns supreme in the financial realm, in terms of daily turnover. Trading in FX markets reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier.
Aside from its overwhelming size and numerous trading vehicles, it’s not a well-regulated market given its decentralised nature. Opportunity, therefore, exists for unscrupulous activity (some would say scam), whether it be Forex brokers, or companies marketing secret trading formulas. It can be difficult to discern good from the bad.
Forex regulation is important in the Forex market – regulatory bodies licence and supervise financial institutions. It’s vital to recognise your Forex broker’s regulatory status; it determines the level of security.
Big names, in regards to regulatory bodies, are the Financial Conduct Authority (FCA) in the UK, Australian Securities and Investment Commission (ASIC) out of Australia, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in the United States.
The FCA, for example, is the conduct regulator for 56,000 financial services firms and financial markets in the UK and the prudential regulator for over 24,000 of those firms. Their aim is to ensure the UK has an effective, innovative and trusted financial services sector which meets the needs of its users – from individuals to multinational corporations. The ASIC’s role, among other things, similarly facilitates and improves the performance of the financial system and entities in it. They also promote confident and informed participation by investors and consumers in the financial system.
Although not well known, most countries do provide regulatory bodies to monitor financial wrongdoing. Cyprus Securities and Exchange Commission (CYSEC), for example, is reasonably familiar among Forex traders, the financial regulatory agency of Cyprus.
FP Markets is fully licensed and regulated by the Australian Securities and Investment Commission, Australia’s corporate regulator, and financial watchdog.
Regulation, as you can see, is a vitally important consideration. It’s worth investing the time to investigate your chosen Forex brokerage in order to ensure it supports this.
While financial regulation offers a mark of credibility, there are Forex brokers who forego regulation, opting to establish themselves in an offshore jurisdiction where the provision of Forex trading services is not regulated.
Establishing and maintaining a regulatory license is a costly venture. Void of this expense, unregulated brokers decrease cost. According to the FCA, annual fees depend on the type of regulated activities the firm carries out, the extent of the firm’s activities, and how much it costs to regulate these types of activities.
Why then, would traders opt for an unregulated broker over one that’s supervised?
Higher leverage is a common reason. Traders are lured by exaggerated gains, often negating the potential for outsized losses. There are also brokers who lure traders in with promises of high and even guaranteed profits.
Although unregulated brokers are common, they are by no means illegal. The main thing you stand to lose is your access to recourse. While regulated brokers are not guaranteed to treat you well, they are open to legal scrutiny if they break rules. A regulated Forex broker must, at the very least, follow regulations.
Aside from the regulatory component, which by far is the most significant, traders are urged to consider the following when choosing a Forex broker, be it regulated or unregulated:
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