It is difficult to stress the importance of Forex regulation enough, trading with a properly regulated brokerage affords a trader significant peace of mind. Brokerages operating from jurisdictions which lack any real regulatory oversight are able to get away with very questionable behavior. In addition to this many unregulated brokerages don’t undertake basic measures to protect client funds. Regulation typically requires brokerages to keep client funds separated from the firms operating funds, this prevents rogue firms from embezzling client money or using client funds to pay operating costs. It is strongly recommended that traders only operate with firms that are regulated in a reputable jurisdiction. Residents from certain countries may limited in regards to which brokerages they can deposit with dependent on the legal situation in your jurisdiction. Foreign exchange regulation can be difficult to get to grips with as the regulatory environment differs significantly from jurisdiction to jurisdiction. Here we lay out the current regulatory framework in a number of regions:
The European Union and the European Economic Area
While there is no centralized European regulator, the Markets In Financial Instruments Directive 2004/39/EC (better known as MiFID) sets out legal framework for the regulation of financial instruments across EU and European Economic Area states. The legislation is seen as important as it harmonizes the regulation of financial instruments across Europe, important for establishing a single market in financial instruments.
The MiFID legislation has several key aspects that traders should be aware of:
- Passporting: The MiFID legislation allows for firms based and regulated in any European Economic Area jurisdiction. Once the firm has achieved regulation it is able to use MiFID to offer its services to customers in other EU states, while regulation being the responsibility of the firms ‘home state’. This is what allows brokerages regulated in Cyprus (by CySEC) to offer services to those based in the UK, without having to be regulated by the UK’s FCA.
- Categorisation of Clients: Firms are required to categorise clients as either professional clients or retail clients. Those categorised as retail clients are offered increased protection under MiFID.
- Best Execution: MiFID requires that firms take reasonable steps to ensure the best execution for their clients.
- MiFID Minimum requirements: MiFID sets out a number of minimum regulatory requirements. For instance brokerages based in the European Union have to meet a minimum capital requirement of 730,000 Euros. While retail customers must be protected by an investor insurance scheme that protects deposits in case of default up to a minimum of 20,000 Euros.
While MiFID harmonizes the regulation of financial instruments across the European Union, regulation does vary across different European jurisdictions. For example a firm regulated in Malta will have to meet the minimum capital requirement of 730,000 Euros, as set out in MiFID. However other MiFID regulators require firms to be capitalized in excess of the 730,000 Euro minimum. While a number of significant discrepancies exist, the EU’s MiFID legislation ensures a minimum standard of financial regulation across the European Economic Area.
View Our Best Regulated CySEC Forex Brokers
Or Read Our European Forex Regulation Article
United States of America
The US regulatory framework is deemed as one of the world’s strictest. US residents and citizens are only permitted to operate with CTFC and NFA regulated Foreign exchange brokerages. Firms and individuals, who do not possess the relevant NFA and CTFC regulation, are not allowed to solicit or approach US citizens. This is why many websites (this site included) feature a warning to US visitors, alerting them of the fact that the sites content is not directed towards US residents. Regulatory oversight has increased dramatically since the introduction of the 2008 Dodd-Frank Act. US Brokerages are on the receiving end of significant restrictions. Brokerages can only offer a maximum of 10:1 leverage and services are only available to those who are deemed to be eligible market participants. US regulators also place a great deal of importance on transparency and thus US Forex brokerages are required to publicly release a range of data, including the number of accounts with the firm and the profitability of the firm’s clients.
While the US regulatory framework has created a highly regulated and transparent market place, it has also led to some brokerages to quit the US market. This means residents of the United States are more restricted when it comes to choosing a brokerage to operate with.
The Russian Federation has a booming Foreign exchange market, but is bereft of any regulation governing retail Foreign exchange trading. This has led to the Russian marketplace to become a bit of a wild-west, with a number of Russian and foreign clients to feel frustrated in their dealings with some of the countries less reputable brokerages. The lack of governmental regulation has led brokerages to form trade associations which attempt to set out standards by which their members must conform. While some of these associations have built a strong positive reputation, they lack the legal clout that comes with a proper regulatory framework. Thankfully progress is being made with the State Duma about to commence a reading of a first bill which would introduce a regulatory framework for the regulation of retail Foreign exchange.
Since 2006, the regulation of retail Foreign exchange has been in the hands of ASIC (The Australian Securities and Investment Commission). Brokerages operating in Australia must hold an Australian Financial Services licence. The Australian regulator sets out a number of criteria for firms wanting to acquire an AFS licence. The requirements are pretty stringent and it is generally agreed that ASIC does a good job at protecting Australian clients.
Various Offshore Territories
You will find a number of brokerages based in offshore locations; popular offshore locations include the Cayman Islands, British Virgin Islands, Mauritius and the Seychelles. While some of these jurisdictions do in fact provide a framework for the regulation of retail Foreign exchange, these jurisdictions offer little in the way of serious financial regulation.
- Forex in Belize – Regulation
- Forex in the British Virgin Islands – Regulation
- Forex in Russia – Regulation
- Forex in Israel – Regulation
- Forex in New Zealand – Regulation
As regulation varies significantly jurisdiction to jurisdiction, it is impossible to fully discuss all regulatory regimes. If your country doesn’t appear on the above list, it is important to research the state of regulation in your jurisdiction. Proper financial regulation affords traders with extra peace of mind and it is recommended that individuals only do business with brokerages regulated in reputable jurisdictions.