Forex Regulations – How Is the Safety of the Trader Secured?

Forex Scams and Scandals

One of the main reasons why there is a need for a regulator in financial markets is to protect customers from forex scams and scandals. Indeed, the industry was plagued with scandals for many years.

Regulators had to step in.

By setting new industry standards, they raised the bar for brokerage houses to be able to offer their services in a specific country or region. The stricter regulation filtered the number of brokerage houses that could provide their services in that country/region, thus lowering the probability of forex scams and scandals.

Forex Regulatory Bodies

A regulatory body in the currency market has one aim and one aim only. That is, to protect investors.

It does not mean that it makes life more challenging for the broker. Instead, it lays down the rules the broker must follow and the conditions to be met to offer its services to customers in the regulator's jurisdiction.

Forex Regulations – UK, US, Asia, India, Philippines, Australia, Canada, Singapore

Each area has its own rules and regulations for the currency market. In some parts of the world, such as the Euro area, the maximum leverage is 1:30, as we already mentioned.

But conditions differ. Some countries are less strict, for example.

In the United Kingdom, the FCA sets the standards for the industry. It is one of the most respected financial authorities in the world. Complying with the FCA rules is often a significant step for a broker to establish trust with investors.

The Securities and Exchange Commission in the United States sets the rules to follow. Complying with the SEC comes at high costs for brokers, but the reward is having access to customers in the largest economy in the world, with high income and strong risk appetite.

Asia is a large part of the FX market. In particular, Japanese investors are well accustomed to the currency market and willing to take risks. Some other traders in different parts of the world would not do so. The Financial Services Agency of Japan, or JFSA, regulates currency trading. Each Asian country has its regulator, such as the BSP (Bangko Sentral ng Pilipinas).

Here are other important regulators:

• ASIC (Australian Securities and Investments Commission)
• IIROC (Industry Regulatory Organization of Canada)
• MAS (Monetary Authority of Singapore)

The Need for Regulation

Some traders/investors, as well as brokers, see regulation as a burden. Unnecessary.

But the truth is that the forex regulations establish some limits to an industry known for its high volatility and an increasing number of speculators. With its rules and norms, regulation establishes an environment where only the best of the best survive – both from the investors' world and the brokerage houses' world.

Investor Protection

Investor protection is paramount in financial markets. Forex is not an exception.

It is only relatively recently that regulators tightened their grip on the forex market. All to protect the investor.

For those still struggling to understand why regulation is necessary for investor protection, we should not look back more than 2015. In January of that year, the Swiss National Bank (SNB) dropped the 1.20 floor it held for EUR/CHF. The decision took markets by surprise.

As a result, the EUR/CHF and other CHF pairs moved sharply. The next available quote for the EUR/CHF was below 0.90 in the following minutes. Investors took losses and also did brokers. The regulation was loose, and investors did not benefit from negative balance protection as it is now.

Since then, investors' protection increased thanks to tighter regulation. To an extent, the broker's protection increased, too.

Ensuring Transparency

Transparency is key to the FX industry. A regulated broker has all its cards on the table. Namely:

• Jurisdictions where it is regulated
• License number
• Where the investor could check
• All information publicly displayed

All of the above lead to transparency, which leads to trust and confidence. Those are critical for both investors and brokers.

Maintaining Market Integrity

Regulators also serve the role of maintaining market integrity. Promoting market integrity is a way to attract new investors; thus, regulators have their specific role in the market.

Investors need to be assured that the brokers act in their best interests and that there is nothing dubious about dealing with a regulated broker.

Promoting Financial Stability

Regulation brings financial stability. To continue with the same example mentioned before, after the SNB dropped its 1.20 EUR/CHF peg in 2015, many brokers went bust, even in developed countries.

However, regulation helped protect customers' funds. Despite brokers going bust, customers recovered their losses to the extent the regulator imposed conditions on the broker. This was not the case in other parts of the world with unregulated brokers.