Forex trading is characterised by high liquidity and frequent trading opportunities. While such characteristics make the Forex market popular among traders, they also attract scammers and money launderers, who can damage market integrity. This is why, despite being a decentralised marketplace, the Forex trading zone is now strictly monitored by different regulatory bodies on a nation to nation basis.
These agencies act as supervisory bodies to oversee market participants, ensuring that they adhere to fair trading practises and comply with local laws and regulations. These organisations are also responsible for evaluating and overseeing licensed Forex brokers, ensuring that their services are compliant and protect investor interests. The aim is to maintain market integrity and build investor confidence in the domestic financial markets.
Many forex brokers opt for multiple regulatory licenses, to establish credibility across different regions of the world. Here are the 5 most coveted Forex licenses to check for while choosing a forex broker.
The FCA is the financial regulatory body of the United Kingdom, responsible for providing the legal framework for financial services providers to operate within. It is also responsible for investigating, regulating and enforcing these laws in the FX market.
The Financial Services and Markets Act 2000 (FSMA) was replaced by the MiFID (Markets in Financial Instruments Directive), in 2007, providing a unified framework for all financial companies operating across the entire EU region. MiFID guidelines have been modified several times, with the latest one (MiFID II) being in force since January 2018.
Once a broker obtains a license from the FCA, it is permitted to operate and establish branches in the UK and all EU member states, provided it obtains a regulatory passport to do so. To acquire a license, brokers need to fulfill stipulated capital requirements.
For instance, to acquire a “dealer license,” the minimum capital requirement for a broker is €730,000. Apart from capital adequacy requirements, broker firms also need to adhere to the strictest guidelines for KYC requirements, a sound business plan, appointment of educated and experienced top management professionals, statutory audit reports, interim financial statements, separate client bank accounts and more.
The UK FCA license is one of the most coveted licenses, as it supports free market access to customers in the EU.
Cyprus offers a favourable destination for major forex brokers looking to enter the European markets and enjoy its lighter tax regulatory environment. CySEC operates under the umbrella of MiFID regulations, providing sound investor protection reforms like leverage limits on risky trading instruments, negative balance protection and presence of an Investor Compensation Fund (ICF).
Brokers need to maintain certain standards and abide by tough ESMA-issued guidelines to get licenses. To get a license, a forex broker needs to possess a minimum of €750,000 in operating capital, in order to compensate clients adequately in times of market volatility.
Licensed brokers are required to maintain audited financial reports and segregate client funds in separate bank accounts. CySEC is one of the few regulatory agencies with a positive stance on crypto trading.
The United States has the strictest regulations for forex market players. The National Futures Association (NFA) is an independent regulatory body, responsible for overseeing transactions made in the derivatives market, including that of forex and some leveraged foreign currency transactions offered to or entered into by retail traders.
The Commodity Exchange Act (CEA) requires firms to register themselves with the Commodities and Futures Trading Commission (CFTC), to be able to provide forex products to customers. Rules regarding license acquisition differ according to broker-dealers, investment banks, introducing brokers and so on. Minimum net capital of $20,000,000 is required to become a Forex Dealer Member (FDM).
Apart from granting the necessary licenses to eligible brokers, the NFA is also responsible for combating fraudulent activities, enforcing necessary capital requirements and ensuring sound trading practices. For instance, leverage limits on forex products are as low as 50:1 on major currencies, drastically lower than those allowed by European regulatory bodies.
There is also the First-In-First-Out (FIFO) rule, which prevents participants from holding simultaneous positions in the same currency pair. The NFA is also involved in periodic reviews of forex transactions in customer accounts.
A number of good reforms and a high affinity towards technological innovations in the forex space make the ASIC license very attractive for brokers and customers. ASIC-licensed brokers are required to maintain operating capital of a minimum of A$I million, to be able to meet their financial obligations. Apart from this, broker firms need to set up physical offices in Australia, maintain separate client accounts in top-tier banks and get financial statements audited by external bodies to ensure fair practices and due diligence.
Unlike many other regulatory agencies, the ASIC has not imposed leverage limits on forex products. It also does not restrict any trading practices. The ASIC places strong emphasis on investor education and has a portal, called “MoneySmart,” to impart information to traders for free.
FIMNA regulates a wide range of financial companies, including forex derivatives providers. Although Switzerland is not a member of the EU, it is a part of the EU single market, which means that FINMA license holders can provide services in EU member nations. All forex providers are required to register themselves as banks under the body, which is why the minimum operating capital requirement is higher. Participating firms are also required to maintain an average liquidity ratio of 120%, to reduce liquidity risks for investors.
FINMA has a strict audit compliance regime for financial institutions, which involves less frequent but more intensive audit procedure requirements. The licensing process is tough too and costs are high, which means only reputed and large institutions qualify for the FINMA license.
To ensure secure trading practices, forex traders prefer to open accounts with licensed brokers. This gives them peace of mind that their interests will be protected, even if the brokerage were to go bankrupt.
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