The regulation of Forex brokers

Before opening an account and starting investing in the Forex market, each trader is first of all interested in the reputation of a brokerage company and therefore, s/he studies the licenses regulating the activity of a brokerage company to increase not only the quality of trading but also the safety of funds. The mechanism of regulation ensures constant control on the activities of financial market participants.

The Forex market is a global network of currency trading comprised of the following large financial institutions: central and commercial banks, pension funds, insurance companies, transnational corporations, as well as brokers and dealers. Because of its structure, the currency market cannot be controlled by a single regulator, and therefore the relationship between Forex market participants is regulated by special bodies of individual countries with developed financial system. Over time, the most authoritative national regulatory institutions became transnational.

The most influential regulators of the Forex market or other segments of the global financial market having the most direct impact on the work of Forex brokers:

• NFA (US National Futures Association) is perhaps the most influential regulator in the global financial system. The association was founded in 1982 due to the urgent need for market regulation and control on unscrupulous brokers. The NFA protects financial market participants from possible manipulations and controls the clearing process of clients’ deals.
• SEC (US Securities and Exchange Commission) is an agency of the United States federal government, which executes the function of the main body for regulation of the national securities market. The Commission was established in 1934 for the purpose of restoring investors’ confidence in the stock market which was lost during the years of the Great Depression. The main purpose of the SEC is to inform the public of brokerage companies’ activities and protect them against fraud.
• FCA (Financial Conduct Authority. Until 2013 – FSA Financial Services Authority) is an independent, non-governmental body regulating financial markets in the United Kingdom. The main tasks of the FCA are to increase the level of confidence in the financial system, increase the level of the UK population literacy and protect the rights of consumers.
• MiFID (The Markets in Financial Instruments Directive) was established within the framework of the EU plan to create a single European market of financial services. It is applied in the field of regulation of stock exchanges and other financial institutions. The requirements of MiFID are the following: transparency of broker’s activity; informing clients about the possible risks; provision of reporting on transactions; protection of the privacy of investor’s personal data.
• CySeC (Cyprus Securities and Exchange Commission) mainly regulates and controls the activity of companies providing brokerage services in the territory of the Republic of Cyprus. The regulator was established in 2001 for the internal market of the country, but in 2004 it already expanded its powers beyond the island due to the entrance into the EU. Cyprus Commission is currently the part of the European regulatory body and issues licenses to companies which conduct their activities throughout the EU.

It is important to understand that the licenses of various regulators increase the reliability level of a Forex broker, but they do not give absolute protection against its unfair attitude towards clients. Therefore, the intermediary should be chosen carefully by studying many features of the company.