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By definition, the foreign exchange market is the largest, most liquid market on the globe. It is precisely its size and liquidity which draws people towards the forex market and determine them to start trading.

But, with a market that is open 24 hours a day, 5 days a week, all over the globe, people can’t help to raise questions about the regulations that apply to the forex market. 

forex market regulationsWhile there is no government body that enforces forex market regulations, there are some independent regulatory bodies that oversee the market, to prevent it from being exposed to fraud and other illicit activities. Each regulatory body is responsible for supervising the activity conducted on the market, in their jurisdiction. 

Who are the regulatory bodies?

For a market so liquid, it would be impossible to establish a single regulatory body that could supervise all the activity. This is why multiple independent or governmental bodies around the world have taken the job of regulating various sectors of the globe, to ensure that both brokers and traders can conduct their activity as secure as possible. Some of the most important regulators are:

  • The Financial Conduct Authority (FCA): UK’s regulatory body, dealing with retail and wholesale financial service companies.
  • The Markets in Financial Instruments Directive (MiFID): a directive of the EU, who regulates the financial markets in all 31 member states.
  • The Cyprus Securities and Exchange Commission (CySEC): regulates the financial activity in Cyprus and complies to the MiFID. 
  • The Federal Financial Supervisory Authority (BaFIN): established in 2002, BaFIN is the regulatory body in Germany. 
  • The Autorité des Marchés Financiers (AMF): France’s stock market and financial service firms’ regulator. 
  • The Commodity Futures Trading Comission (CFTC): regulates the futures and options markets in the entire United States
  • The National Futures Association (NFA): a regulatory body that acts independently, regulating on-exchange trade futures, retail off-exchange forex and OTC derivatives for the United States.
  • The Australian Securities and Investments Commission (ASIC): the independent body that regulates the financial markets in Australia.
  • The Financial Services Agency (FSA): it was formed in 2000 and deals with regulating all the financial services sector in Japan.
  • The Financial Services Board (FSB): regulates all of South Africa’s non-banking financial services sector and was established in 1990. 

What are their objectives?

The goals and objectives of the regulatory bodies are all revolving around the same core principles. For once, they work to set and maintain certain standards of the financial industry, to ensure the stability of the market. Another one of their duties is to provide licensing for brokers, so that they can prove the legitimacy of their business to traders. Regulatory authorities also have to ensure that all participants, including brokers and traders, are protected from illegal activity. 

Since there are multiple regulatory bodies all over the globe, some of the restrictions may vary, depending on the situation happening in that particular area. In the UK, for example, there were multiple complaints from traders who registered some significant losses due to the increasing use of leverage and margin trading. This is why some restrictions have been implied by the European Securities and Markets Authority, especially since the UK is considered to be the most important sales desk in the world. These restrictions include:

  • Limiting leverage for retail investors to 30:1 for major pairs, 20:1 for non-majors and 2:1 for crypto. 
  • Applying a 50% margin close out rule per account basis.
  • Protection for negative balance.

In the United States, the second most important sales desk, the situation is a bit different. The level of leverage was limited to 1:50 for major pairs and 1:20 for all other pairs. 

Why is regulation important?

Just like any other market, without the slightest regulations, there will be too much room left for scams and neither forex brokers, nor traders could safely perform their activity. Fair trading practices and morally correct behavior of brokers are the main goals of any forex regulatory body. This is why brokers must meet certain standards set by the regulators in the jurisdiction they belong to. Apart from that, brokers also need to meet certain capital requirements, which are very strict, to ensure traders can withdraw money or get refunded in the eventuality of the broker reaching bankruptcy. It is advised to only engage with forex brokers overseen by authorities, to protect your investment and ensure you don’t fall victim to any form of scam. 

Brokers that follow forex market regulations are not hard to find. All you have to do is look for the seal of approval from one or more of the regulatory bodies around the world. Experienced traders recommend you look for brokers that are approved by more than one regulatory body, to ensure you enjoy complete protection on every area of the market. 

How to protect yourself from illicit activity

Unfortunately, scams happening around the forex market are not just isolated incidents. A simple search on Google with the words “forex scams” turns a high number of results, from all over the world. If you want to make sure you are dealing with a reputable broker, make sure to keep in mind some rules:

  • Always do your research and read reviews of the broker you are planning on doing business with. Since the forex market has become so popular nowadays, there are multiple forums and platforms which discuss various brokers and their legitimacy
  • Don’t skip the fine print documents that are provided to you when opening an account. Read them all and make sure you understand each and every word. Some brokers may rely on the people’s reluctance to read the terms and conditions, and include contingencies that may prevent you from withdrawing money in certain situations. If you agree with their terms, they can use that against you late on, if you file a complaint. 
  • Never start with a large amount of capital. Even if you have done your research and are content with the broker you found, start with a smaller account at first, trade for over a month and attempt to withdraw funds. This way, you can test for problems and limit the amount of money you lose in case something goes bad.