Fundamental Understanding of Forex Regulation Bodies: Things You Should Know

Fundamental Understanding of Forex Regulation Bodies: Things You Should Know image

Forex is undoubtedly number one when it comes to market liquidity and size world over. The Bank of International Settlements (BIS) estimates that traders in the forex market exchange as much as $5.3 trillion globally, every day. That makes the foreign exchange a fertile ground for scammers out to make quick money from unsuspecting investors.


While most traders participate in day trading, others rely on trading accounts which enable them to execute trades with the help of forex brokers. All over the world, thousands of forex brokers keep springing up each day. For traders, choosing the right brokerage firm is a tough call. Thus, traders have to trust that the broker they are working with is transparent and honest.


Despite the huge need, there just aren’t enough forex regulation bodies to watch over the market. For that reason, most forex brokers go unpoliced. If anything, only about 5 percent of forex brokers operate under any regulatory framework. Thus, many of the forex brokers shamelessly take advantage of their clients. For their abusive behavior, these firms get off scot-free all the time.


What Is Forex Regulation?

Forex regulation is the supervision of the overall markets and brokers by watchdogs and regulatory bodies. The work of forex regulation bodies is to protect consumers by enforcing several rules and regulations.


By and large, forex regulation bodies operate within specific jurisdictions and may not watch over brokers from elsewhere. For forex brokers, regulation means getting an operating license within a given jurisdiction. As such, the broker is required to adhere to the operative rules and regulations. These include regulations governing minimum capital, margin requirements, and pattern-day trading.


Non-regulation is fraught with all kinds of risks. Brokers who operate outside regulatory frameworks often engage in illegal activities and can be outrightly fraudulent. Apart from lacking an operating license, they are under no known rules and regulations.


Need For Forex Regulation Bodies

To reiterate, forex regulation bodies are meant to protect traders from fraud and possible losses. As such, every regulated broker is required to warn traders about the risks involved before they sign up for their services. Also, brokers are required to submit audited accounts as testimony that they aren’t engaged in trades manipulation and fraudulent activities.


The regulation of forex markets also helps to limit the maximum leverages a broker can offer its clients. This helps traders to avoid borrowing excessive capital from the brokers. Importantly, the regulation requires brokers to keep clients’ funds in separate accounts from those of the firm. By so doing, brokers will always be in a position to honor withdrawal requests.


Another obvious advantage of regulation is that it is in a position to compensate their clients when the business collapses. Given as the forex market is highly liquid, it is prone to money laundering. By requiring proper registration, regulation bodies help prevent such crimes as money laundering.


While regulation of forex brokers affords protection to traders, it also has some advantages for the brokers. First, regulated brokers have a good reputation when operating under a reputable regulation body. By setting leverage limits, regulation bodies make the future of the forex markets more predictable. The established checks and balances not only safeguard consumers but also help brokers to concentrate on providing high-quality services to their clients.


Fundamental Understanding of Forex Regulation Bodies: Things You Should Know!

One of the things you should know is that there is no single regulatory body to provide oversight in the worldwide forex market. Thus, every jurisdiction does everything possible to create a local regulatory body. As such, there are several regulatory bodies, depending on where you are in the world. They include the following:

  1. US National Futures Association (NFA). The NFA is the body that’s tasked with regulating all day trading activities in the U.S.A. Apart from protecting consumers, it safeguards the markets’ integrity.
  2. US Commodity Futures Trading Commission (CFTC). Even though not a US government agency, this organization is tasked with overseeing the activities of all forex brokers in the country. It also prosecutes companies that defraud their clients.
  3. UK’s Financial Conduct Authority (FCA). This is the main forex regulation body across Europe. It is very effective when it comes to regulating the activities of forex brokers especially when it comes to imposing leverage limits.
  4. Australian Securities and Investment Commission (ASIC). Its jurisdiction is obviously the Australian forex market. It oversees market activities and sets leverage limits within which all forex brokers must operate.
  5. The Federal Financial Supervisory Authority (BaFIN). This is the body tasked with regulating the financial markets in Germany.
  6. Markets in Financial Instruments Directive (MiFID). If the world ever got an overall forex regulation body, it could just be MiFID. It regulates forex brokers across Europe and the rest of the world even though the membership isn’t widespread.
  7. Cypress Securities Exchange Commission (CySEC). This Cyprus-based regulation body operates under the same regulations as the MiFID. No wonder, some of the CySEC-licensed brokers come from abroad. Its popularity stems from the somewhat relaxed regulations compared to the rest of Europe.
  8. Monetary Authority of Singapore (MAS). This Singapore-based regulatory body is tasked with regulating the forex and commodities markets in the Asian country.
  9. The Securities and Futures Commission (SFC). SFC is a Hong Kong-based regulation body tasked with overseeing electronic forex trading in the country.


Apart from forex markets being largely localized, Spot FX, the agency that enables the exchange of one currency for another by fixing prices on the spot isn’t regulated. The irony is that Spot FX handles over 95 percent of forex trades carried out across the world. What the forex regulation body is concerned with is overseeing the operations of the smaller forex broker. That’s why every trader needs to have a thorough knowledge of the regulatory status of the local forex market to avoid possible fraud.



It is clear that forex regulation bodies play a very important role when it comes to protecting traders. They also play a role in putting out a good reputation for the forex brokers. Even though their work may seem restrictive, it is necessary for the smooth operation of the forex markets. However, limiting yourself to working with regulated forex brokers may mean having to make do with mediocre services. that’s why you need to do serious due diligence.

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