A brief insight into the regulators governing forex markets and the ploys retail forex traders should be wary of…
Most of us are aware that forex trading is de- centralized and traded over the counter using a large network of computers and telephone lines. The participants comprise of central, commercial and investment banks, financial institutions, corporations, hedge funds, traders etc.. and these markets are open 24/7….
Now, according to the Triennial Central bank survey published by BIS, the average daily turnover in the global forex markets as of April 2010 was about USD 4 trillion, of which around USD 1 trillion was from spot forex.
With forex markets growing at a tremendous pace over the years, retail forex fraud too has increased dramatically. The fraud normally comprises of churning customer accounts, abrupt volatility in spreads leading to losses, lack of transparency, luring vulnerable individuals by offering high leverage, joining bonus etc.., phony advertisements promising unthinkable returns and so on.
Being the single largest market in terms of trading volumes, forex markets are mostly unregulated or under- regulated with no regulatory authority or agency completely overseeing the trading activities when compared to exchange traded currency derivatives.
Between 2001- 2007, the Commodities Futures Trading Commission (CFTC) has prosecuted a number of forex firms with fraudulent cases involving more than 20,000 clients with losses exceeding USD 450 million. There’s no doubt that the total number of reported incidents is just a drop in the ocean, nevertheless, forex fraud remains unabated and in fact appears to mushroom.
The Dodd- Frank Wall Street reform and consumer protection act which was passed by the US Congress in 2010 came up with some stringent guidelines for forex dealers to be registered in addition to restricting the quantum of leverage offered to traders.
In the US, the Financial Industry Regulatory Authority (FINRA), Securities and Exchange Commission (SEC) along with other state securities regulators regulate the OTC markets and broker- dealer activities. Any disagreement or complaints about your forex broker can be forwarded to the SEC and for issues with investment professionals and broker- dealers, you can approach FINRA. There are a number of regulatory agencies overseeing off- exchange forex operations globally. A few of them along with a brief description of their functions are highlighted below….
Regulatory authorities in the US-
Commodity Futures Trading Commission (CFTC)-
Established as an independent agency in 1974, CFTC is mandated to regulate commodities and currencies traded on the US exchanges. In 2008, the agency setup a special task force to identify and prosecute firms involved in foreign exchange fraud.
National Futures Association (NFA)-
Is a self- regulatory, industry- wide organization governing the US futures industry and overseeing all forex brokerage firms operating in the US. The NFA audits and enforces minimum financial requirements for its FCM, FDM and IB members and examines financial reports from these members in addition to providing a fair and speedy settlement of customer claims and grievances when a demand for arbitration is filed.
In the UK, the regulatory framework is monitored by
Financial Services Authority (FSA)-
FSA is an independent body regulating most of the financial services industry in the UK and sets standards that must be met and can take action against firms not meeting the criteria. The regulatory framework covers primary and secondary markets and the approach of FSA involves supervision, surveillance, policing and enforcement.
In Australia, the financial markets are regulated by the
Australian Securities and Investments Commission (ASIC)-
ASIC is an independent government body set up under the ASIC Act to protect consumers, investors and creditors by enforcing the financial services law.
In Switzerland, financial markets are governed by
The Swiss PolyReg regulates financial intermediaries operating from Switzerland. It is a self- regulatory body recognized by the Swiss Federal money laundering control authority.
In the European Union, each member country is given the responsibility of regulating the financial markets according to the 2007 guidelines set by the Markets in Financial Instruments Directive (MiFID).
Following are some of the regulators in Europe
Germany- Federal financial supervisory authority (BaFin)
France- Autorite des Marches Financiers (AMF)
Italy- Commissione Nazionale per le Societa e la Borsa (CONSOB)
Austria- Financial Market Authority
Sweden- Financial supervisory authority of Sweden
To conclude, this article is not to alarm potential investors, rather it is an attempt to educate beginners in the forex markets, the risks associated with it and to encourage them to perform due diligence about the markets they are about to invest in and selecting the right forex broker. Regulatory authorities have a certain amount of control over forex transactions and if a forex broker is registered with any of the regulatory agencies, there is a high probability that the services offered by the broker will meet the requisite compliance set by the regulator in terms of safety of funds, execution of trades and client satisfaction.
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