Why are forex regulations important?

2 min

Forex is generally perceived as a risky industry, due to the lack of regulations of some brokers. Compliance with regulation allows confidence and offers forex brokers a framework to operate according to trading ethics. Licenses mean that brokers have gone through a control process and their legitimacy has been confirmed. Thus, they are more secure in holding your money and offering you access to investments and financial markets. Licenses help brokers form and maintain meaningful partnerships with payment institutions.

Brokers need regulation to appear reliable in the eyes of their clients and business partners. Some banks and payment service providers avoid doing business with forex brokers and payment companies, which do so with caution. Brokers reduce risk by carefully choosing the jurisdiction under which they operate.

Duties of Forex regulatory bodies

Here is the list of most important duties of every forex regulators body

  1. Licensing and supervision of Forex brokers,
  2. Ensuring compliance with periodic reports regarding their activities as well as trade data
  3. Putting in place appropriate sanctions in case of market infringements and fraudulent practices

Forex’s most important aspect of regulations is to keep the market’s sanctity. Also, their purpose is to increase the investors’ confidence by enabling a level playing field for all counterparts. The need for legislation and regulation is strengthened by the fact that the broker that brings liquidity for individual traders takes the opposite side to their clients’ trades.

In such a situation, regulatory bodies must ensure that the traders aren’t subject to conditions which could tilt the market against their interests. So Forex regulations are all about the protection of customers. Regulated Forex brokers are less likely to scam their customers. They are less prone to use various cheating techniques to manipulate with their clients’ money. Or when such adversities happen, regulators are in a position to implement appropriate sanctions.

The most important Forex regulators

The most important regulators regarding Forex cover the territories where most Forex brokers operate. Some of the regulators are made up of independent government agencies, while in some cases, the national central banks take care of the regulations. Some of the most important Forex regulators bodies are FCA – Financial Conduct Authority (United Kingdom), ASIC – Australian Securities and Investments Commission, CFTC – Commodities and Futures Trading Commission (United States), FSB – Financial Services Board (South Africa), IFSC – International Financial Services Commission and many more.

European Forex Regulation

Since August 1, 2018, ESMA introduced temporary restrictions on the marketing, distribution or sale of CDFs for retail clients in the EU; a rule for closing the margin per account, negative balance protection, prohibiting the use of incentives by a CFD provider; and a company-specific risk warning issued in a standardized manner. These measures ceased at the end of July 2019, as most national authorities have taken national product intervention measures regarding the CDFs which are at least as strict as the ESMA measures.

This type of intervention shows the will to strengthen investor protection in the EU, mainly by protecting small investors against losses greater than their contributions and limiting the use of leverage and incentives by investors. This has put enormous pressure on investment firms offering CFDs. They have to meet a long list of conditions when offering these products to particular clients. Many financial firms have, therefore, stopped offering CFDs as part of their product offering.

Final Thoughts

The legal and reputational risks associated with cross-border financial services have skyrocketed in recent years. It’s because many countries began to enforce more stringent laws after the financial crisis. Banks and other financial investment firms that provide services and products from their home jurisdiction to other countries must comply with host country rules. Every financial investment firm needs a strong cross-border framework that defines specific market requirements for products and services to manage risk.

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