Regulation in Forex Trading – What You Should Know
Thursday, August 23, 2018, 6:00 PM | Leave Comment
Regulation in forex is a widely debated topic. Before choosing a broker, a forex trader should first understand the status of the broker regulation to avoid risky forex investments.
The forex market is a great tool that propels people to great financial success if all the risks are well assessed and appropriate trading approach employed.
Ben Myers, a trading expert from dailyinvestnews.com explains what is regulation in forex market. Forex beginners can check out dailyinvestnews.com as a great resource for forex trading strategies. The site also offers forex broker reviews based on the quality of execution and transparency.
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Regulation in the Forex Market
Forex market is huge and trades huge sums of money every day. It is common sense that such a typical financial market needs some form of regulation. Forex market regulation can be described as a financial regulation that aims to control the financial operations of the forex brokers to ensure they do not engage in fraud or manipulative activities.
Despite the efforts to regulate the forex market, it still remains greatly unregulated. There is no central clearing house and the financial transactions are decentralized across jurisdictions. There is no global body to oversee the regulation and different countries simply have to selectively apply their own regulation policies. This creates a loophole through which unregulated brokers can engage in price manipulation.
Regulated forex brokers are preferable for forex beginners and experienced traders as well because they are less likely to engage in fraudulent practices.
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What institutions regulate the forex market
Mostly, they are the financial regulators for banks and other financial institutions that also oversee the forex market brokers. However, the forex market still remains less regulated compared to banks or the stock market.
The forex regulation is a tedious process and often begins when a forex broker is issued with a local licensing.
The valid regulation is given after the assessment of the financial status of a brokerage firm, and the forex trading experience of the forex firm managers. Below are some of the regulators.
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Australia
Australian Securities and Investment Commission: This regulatory body provides information to the retail investors as well as forex brokers on the sale or advertisement terms for the CFDs products. The body outlines its powers in matters concerning regulating margin forex, the laws applicable to forex regulation and the principles of its operation.
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Canada
Ontario Securities Commission: The aim of this regulatory body is to protect investors and avail information available on the reliable and lawful investment activities. The OSC also regulates the securities and the futures market and regulates the fund managers dealing with futures, commodity or CFDs trading.
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United Kingdom
Financial Services Authority: The regulator functions as two separate bodies, The Financial Conduct Authority and The Prudential Regulation Authority. The FCA conducts regulation for financial services in UK with an aim of protecting consumers against exploitation.
It also aims at ensuring stability in financial sector and promote fair competition. The Prudential Regulation Authority conducts prudential regulation of investors including banks, insurers and others. The body supervises individual firms offering financial services.
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Regulated and Unregulated brokers
Regulated forex brokers are subject to routine auditing to ensure quality control in their business practices. These brokers are licensed and registered and have an obligation to follow certain standard rules specified by the Forex Regulatory body in their jurisdiction.
Pros
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There is a guarantee of quality control of their services to the customers usually due to regular auditing
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There is Safety of the clients’ money usually due to the requirement from their regulators to keep adequate funding for their forex transactions.
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There is a minimal likelihood of price manipulation
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Transparency of operations and financial transactions
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Client compensation in case of liquidation
Cons
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igher operational costs due to licensing fees and other relevant financial commitments to the regulatory bodies.
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Using unregulated brokers allows a forex trader to trade outside the brokers national jurisdiction and make profits from forex market away from home.
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These brokers offer a higher profit margins than their regulated counterparts
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They are more likely to charge less commission on their clients’ forex transactions due to absence of registration and other administrative fees.
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They are not regulated which means that the risk of manipulative practices and fraudulent activities to take advantage of their clients is high
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There is no assurance of quality control because they are not regulated
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Forex clients can potentially lose significant or all their investments in case of liquidation or forex fraud cases.
Unregulated brokers, on the other hand, have no formal licensing of any kind and are not registered by any forex regulatory body. These brokers have no obligation to follow quality standard procedures while rendering forex services.
Pros
Cons
Conclusion
Forex education is the first step of starting a successful forex trading career. Forex beginners should gather information on forex regulation to avoid falling prey to forex scammers.
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