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Forex market regulatory framework

When one begins to trade in Forex markets one of the most frequent questions is: How is it regulated? The subject of who supervises this market is often a mystery for traders who hail from other asset classes, accustomed as they are to having one clear central regulatory entity. So, when they wade into the FX space and discover that there is no single governmental or legal authority charged with monitoring currency trading they are truly puzzled.

The Foreign Exchange market offers global decentralised trading of international currencies. Retail traders can gain access to it through brokerage and FDM firms. Each broker must follow his own country's legislation and regulations, the aim of which is to provide a clear and common regulatory framework for all participants in that market. Consequently, there are several tens of official (governmental) or private agencies charged with safeguarding the interests of investors around the globe. Their common goal is to protect the individual trader and prevent fraudulent practices.

Which is the best regulatory jurisdiction in Forex?

There are regulators who are more permissive than others; for example, in the United States, the Commodity Futures and Trading Commission (CFTC) and the National Futures Authority (NFA) are highly restrictive. However, institutions based in The Virgin Islands or Cyprus offer more flexibility to brokerage firms.

For instance, a non-US citizen will find that opening an account with a US broker is a long and complicated process, as the Office of Foreign Assets Control (OFAC) makes it difficult or directly prohibits brokers from accepting funds from traders originating from certain countries. It publishes a blacklist - which often changes ? for that purpose. This and other restrictive measures have forced many US brokerage firms to open offices overseas, mainly in the UK and Europe.

In the UK, the regulation is a bit more flexible and the financial activity is controlled by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) -the latter only for large banks and financial institutions. In Europe regulatory entities usually operate under the umbrella of the Markets in Financial Instruments Directive (MiFID). This legislation covers the 30 member countries of the European Economic Area (which are the 27 members of the European Union plus Iceland, Norway and Liechtenstein). However, as any quick perusal of each individual country's own regulations will reveal, it allows for a fair amount of flexibility as regards its interpretation.

The bottom line is that when choosing a broker to trade with in Forex it pays to select one of those regulated by one or more of the most restrictive regulatory entities.

Main financial regulatory organizations:

Argentina