If you are interested in forex trading, you probably already know that the forex market is the largest, most liquid financial market out there. And because it is such a large market, it provides a lot of opportunities for traders to grow their wealth.
The forex market is open 24 hours a day, five and a half days a week, which allows traders to enter and exit trades at their own discretion. But with a market so large, liquid and active, how can traders ensure their assets are protected?
Its size and liquidity make it impossible for a single government authority to supervise the forex market, but this does not mean the market is unregulated. This is why a number of regulatory bodies in various parts of the world have made it their mission to oversee the market and prevent traders from being exposed to illicit activities.
Each of these regulatory bodies is responsible for overseeing the activities happening on the forex market in their jurisdiction.
If you find this a bit confusing, worry not. We are here to explain to you why market regulation is essential and who are the regulatory bodies that ensure the safety of traders and brokers.
Why are market regulations necessary?
Except for the crypto market, which obeys to some different rules, all other financial markets are regulated. Without regulation, brokers and traders would be exposed to scams or fraud, making it difficult for them to protect their assets.
It would be a dream to live in a world where everyone’s moral compass works perfectly. Still, until then, it is the job of these regulatory bodies to ensure fair trading practices and correct behaviors of brokers. This is why, in order for a broker to be regulated by any of these organizations, they need to meet certain standards. Some of these standards are globally applicable, while others differ from jurisdiction to jurisdiction.
Amongst these standards are some rigorous capital requirements that brokers need to provide, to make sure that, in the eventuality of the broker going bankrupt, traders can safely withdraw money or be refunded.
The main forex regulatory bodies
The most important market regulators have the responsibility to cover the jurisdictions where most of the forex trading activity happens. Because the forex market is decentralized, you will discover that not all countries have local brokers, which means traders from those areas need to open accounts with offshore brokers.
Before you open a forex account, it is essential to verify if the broker is regulated by one of the main regulatory bodies on the globe. The best way to do so is to go on their website and search for the seal of approval provided by one or more of the available regulatory bodies.
The most important forex market regulators are:
- The Financial Conduct Authority (FCA): the main regulatory body in the U.K., which covers retail and wholesale financial companies. The FCA is part of the European Economic Area, allowing brokers to operate in any part of the E.U. without the need to set up additional offices in these countries.
- The Markets in Financial Instruments Directive (MiFID): they are responsible for regulating financial markets in all E.U. member states.
- The Federal Financial Supervisory Authority (BaFIN): Germany’s main regulatory body.
- The Australian Securities and Investments Commission (ASIC): an independent institution that covers all Australian financial markets. AU brokers regulated by the ASIC regulatory body are known to provide traders with high leverage and trading freedom.
- The Commodity Futures Trading Commission (CFTC) and The National Futures Association (NFA): they are both U.S. regulatory bodies. The CFTC regulates the futures and options markets, while the NFA covers OTC derivatives, retail off-exchange forex and on-exchange trade futures.
- The Financial Services Agency (FSA): supervises and regulates all the financial services sector in Japan. There is another FSA that oversees financial market regulations in Denmark as well, so pay close attention.
- The Financial Services Board (FSB): regulates all of South Africa’s non-banking financial services sector, including forex.
What are the main goals of these regulatory bodies?
Despite being located in various parts of the world, all of these regulatory bodies follow the same main principles – to ensure both traders and brokers are protected from illegal activity. One of their main goals is to issue and maintain specific standards that all of those involved in the financial industry need to respect. This ensures the stability and integrity of the markets.
Regulatory bodies are also charged with the responsibility to provide licensing for brokers in their jurisdiction. These licenses ensure the legitimacy and trustworthiness of the brokers.
Even though their main principles are the same, restrictions may vary from country to country, so make sure to check these standards before opening your account.
How can traders protect their activity?
Without these regulatory bodies overseeing forex transactions, traders would be left unprotected in front of scammers and illicit activities. However, these regulatory bodies alone are not enough to ensure the protection of your assets. As a trader, you need to ensure you are only doing business with a regulated forex broker.
No matter how tempting it may be to start trading big from the beginning, it is recommended to always start with a small account. This will give you the time to test the broker and ensure your assets are protected.
When choosing a broker, do your research, read online reviews and keep an eye on forums for discussions about certain brokers. News circulates fast in the forex world, so if there is an issue with a broker, you are surely going to find information about it online.
Before opening an account, make sure to read every piece of document that is presented to you by the broker. We all know what can happen if you skip the fine print or don’t read their terms of agreement. If you move on and agree with their terms before making sure you fully understand them, you risk not being able to file a complaint if something goes wrong.