The Forex Market, while it is one the biggest marketplaces, is also one of the most under-regulated capitals markets in the world. Primarily, under-regulation stems from the lack of a tangible, physical location, for transactions to occur and process within. This is directly unlike stock or commodity exchanges. Moreover, technology facilitates market access to forex almost 24 hours a day, Monday through Friday. Unless you are looking to trade currency future contracts on the Chicago Mercantile Exchange, the bulk of all FX trading happens online, over the phone, or via ECNs.
The relatively unregulated nature of the FX market fosters a fertile ground for scammers and frauds. Given my many years in the market, I have seen all sort of scams and witnessed brokerages going out of business by paying fraudulent liabilities to their clients. Refco was just one notorious example of forex fraud within the past twenty years.
In order to avoid exploitation by scammers in the FX Market, one of the main criteria in considering your brokerage is to look at the regulatory body which oversees the firm.
Since there is no central organization to oversee the FX market yet, some countries have taken the lead and implemented strict rules on running forex operations, specifically forex brokers. The regulatory organizations hold the right to prosecute and penalize fraudulent behavior within their borders. Some of the more credible regulatory bodies are listed below:
US Commodity Futures Trading Commission (CFTC) is an independent agency of US government that regulates all forex brokerage companies based and/or located in United States. Additionally, CFTC is known for regulating and overseeing the activities in commodity and future exchanges.
U.S National Futures Association ( NFA) is self-regulatory organization for the US derivatives market including on exchange traded futures, retails off-exchange currency (forex) and OTC (over the counter) derivatives and swaps. NFA has not only developed and enforced regulations, but also it has provided programs and offered services that safeguard market integrity and protect investors. As a result, brokers executing transactions for clients in the forex market must register as a Commodity Trading Advisor, a Futures Commissions Merchant, an Introducing Broker, or a commodity pool operator with one or more US agencies in order to execute forex transactions.
Cayman Island Monetary Authority (CIMA) is the primary financial service regulator of Cayman Islands. While CIMA manages Cayman Islands’ currency, it further supervises and regulates financial institutions. In 2012, the United States Securities and Exchange Commission (SEC) and CIMA signed a ‘Memorandum Of Understanding’ regarding mutual cooperation in order to increase credibility to this reputable regulatory body.
UK Financial Service Authority (FSA) is the British principal regulator of the financial services similar to CFTC in US.
UK Financial Conduct Authority (FCA) is the Regulatory body in UK which operates independently of the UK government and acts similarly to the NFA in the US. In recent years, many brokers in the UK or Cyprus have claimed to be FSA or FCA registered, however, not regulated. To clarify, these brokers have taken the advantage of the FSA and FCA names despite not being regulated by them. It is important to check if the broker is regulated by FSA or FCA and not only registered with them.
Australian Securities and Investment Commission (ASIC) is the Australian version of American CFTC and British FSA. ASIC regulates the Australian capital markets, corporations, and financial institutions.
A Forex broker registered and in good standing with the NFA, CFTC, or any of the regulatory bodies mentioned above can be considered as a trusted broker. Having said that, scammers use different types of methods to mislead their clients. To reiterate, they often will claim to be registered but unregulated by a given regulatory body. Conversely, they could claim to have a base in a regulated country, while in reality, the company domicile is elsewhere. Make sure to do your homework and carefully research any broker and their regulatory bodies before trading with them.
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