Are you a forex trader who is searching for the best forex brokers in the market? If yes, then you should be aware of the biggest possible risk of hiring brokers who are not under any regulatory supervision. Such brokers don’t require conforming to any pre-set standards and hence you can’t even rule out illegal and illegitimate behavior. Even worse, in case anything happens, you can’t take any legal steps against such brokers.
Here comes the importance of forex broker regulations. They make sure that clients trade with a broker that abides by the business norms, provides some sort of financial protection and also keeps your best interests in mind. Choosing the right broker begins by ensuring that he is truly licensed, authorized and regulated at the place you live in.
Growth in speculative trading is spreading
In the retail forex market, speculative trading is going through an unprecedented growth. This is why there are intermediary brokers and banks who involve themselves in monetary irregularities, excessively high charges, scams, fees, high levels of leverage and all other sorts of bad practices. While app-based or mobile based trading provides you with a rather smooth process of trading, there is also a risk of unauthorized websites that can suddenly run away with the funds of the investors.
This is why regulations are so important in forex trading as they ensure that such aforementioned practices are averted as much as possible. Experts suggest that the most vital criterion for choosing a forex broker is to check its regulatory status and the governing authority.
Forex brokerage accounts – How American authorities regulate them
The NFA (National Futures Association) is the ultimate sole provider of innovative and efficient regulatory programs that protect the integrity of derivative markets including the forex markets. To know the scope of NFA activities, read the following points:
- The NFA conducts several tests before offering necessary licenses to the eligible forex brokers who are eager to start off with their forex trading business.
- For necessary capital requirements, the NFA enforces adherence.
- The NFA fights against all sorts of frauds.
- The NFA enforces reporting requirements and record-keeping rules regarding all transactions related to different sorts of business activities.
Basic provisions of American regulations on forex brokers
- Individuals owning assets worth less than $10 million and most small businesses are defined as customers. Such regulations are meant to safeguard the small investors but the individuals with high net-worth won’t be covered under the regulated brokerage accounts.
- The leverage is limited to 50:1 on the major currencies and this is why novice investors with no such experience don’t take unpredicted risks. By major currencies, we mean the Swiss Franc, the British pound, the Japanese Yen, the Canadian dollar, the Australian dollar, the Euro, the Norwegian krone, the Swedish krona and the Danish krone.
- In case of minor currencies, the average leverage is restrained to 20:1.
- For the longer forex options, the total option premium is needed to be kept as security.
- For the shorter forex options, the transactional value along with the option premium received has to be maintained as the total security deposit.
- The FIFO (first-in-first-out) rule bars a trader from holding simultaneous positions in a similar forex asset, in the current trade position in a specific currency pair. This ensured no hedging when trading the forex market.
- Money that is owed by the forex broker to the customer should be held at few qualifying institutions in the US or in other money-center countries.
How to verify the regulatory status of a broker
The NFA offers a system of online verification called BASIC (Background Affiliation Status Information Center) where the status of the brokerage firm based in US can be certified by entering the firm name, NFA ID, pool name or individual name. You should enter the proper name or the ID in its right form as there are several brokerage firms that are known by different names.
With the development of markets,there are also simultaneous changes in financial regulations. Too lenient regulations can lead to inefficient investor protection while too many regulations can lead to global competitiveness which could hamper economic activities. Hence, it is vital to strike a balance.