Forex Regulation – What You Need to Know

With approximately $5.3 billion traded daily, the Forex market is one of the most liquid markets in the world. This is great news for anyone interested in profiting from currency fluctuations – but with so many different brokerage options, it’s important to think about your account security before putting your capital at risk.


With approximately $5.3 billion traded daily, the Forex market is one of the most liquid markets in the world. This is great news for anyone interested in profiting from currency fluctuations – but with so many different brokerage options, it’s important to think about your account security before putting your capital at risk.

At the time of this writing, there are literally plenty of Forex brokers online, and new ones are sprouting up monthly. Having a lot of options means that you’ll almost definitely find a broker that can meet your specific needs.  It also means that you may need to search a bit until you find the perfect brokerage.

Although it’s difficult to determine exact numbers, it is estimated that only five percent of Forex brokers are regulated by a recognized regulatory body.  In other words, most Forex brokers are not subject to oversight and monitoring and these brokers may be more likely to participate in unscrupulous business practices that traders should stay away from.

Forex Regulation

The Risks of Trading with an Unregulated Forex Broker

For retail Forex traders, the biggest risk of using an unregulated Forex broker is that the broker will engage in unscrupulous or illegal activity and that there will be no way to recover funds lost through these fraudulent means.

After a significant number of fraud claims in the United States between 2001 and 2008, the CFTC formed a unique task force to deal with the challenge and codified Forex regulations were drafted to shield retail traders from questionable practices.

With the passing of the Commodity Exchange Act (CEA), the CFTC took control over leveraged Forex dealings offered to retail traders within the United States. The CEA allows only regulated bodies to serve as counterparties for Forex transactions with retail customers in the States and it mandates that all online Forex brokers be listed and meet the rigorous financial standards put forth by the National Futures Association (NFA) which includes maintaining minimum funding requirements and other serious requirements.

Other countries have taken on similar forms of regulation and oversight for Forex brokers as well, though not all brokers opt to file for regulatory permits. Further, the requirements needed to get regulated in every country are different, making it easier to get regulated in Belize, let’s say, as compared to the United Kingdom.  If you’re looking for a regulated broker, consider not just the fact that the broker is regulated, but which body provides the oversight and what the ramifications are.


Why is Forex Regulation Important?

Why is Forex broker regulation so critical? The main purpose of this oversight is to guarantee appropriate and moral business behavior. All regulated foreign exchange brokers, banks and even some signals providers are required to comply with the rules and standards put forth by their regulatory body or they can be subject to fines, penalties and perhaps even closures. All regulated Forex brokers are subject to periodic inspections and reviews which demand that they act in accordance with industry guidelines and professional ethics. In addition, as mentioned previously, regulated Forex brokers must keep an adequate amount of cash on hand to be able to implement and complete foreign exchange trades requested by their clients and also to return clients’ funds properly in the event of bankruptcy or other unexpected financial troubles.

It should be noted that there can be no guarantees that regulated brokers who are found to be fraudulent will rectify their actions or repay their clients if necessary.  While regulatory bodies can demand that action be taken, it is possible that the brokerage will be unable or unwilling to meet its regulator’s obligations and demands.  Still, this type of wonton behavior is extremely dangerous for any broker that wishes to remain in business, so it can be assumed that most regulated brokers will take their obligations seriously.  

Likewise, it should be noted that a country’s regulatory agencies can also take action against unregulated Forex brokers accused of improper or illegal behavior.  However, the mandate of the regulatory body will be limited in these cases, and may not be as effective as actions taken against a regulated broker. 

As a general rule, Forex regulators operate only within their country’s own borders, but they can work together to deal with cross-border fraud and other issues. This practice is especially common in the European Union where regulation is treated quite seriously.  In fact, a cross-border initiative called MiFID (Markets in Financial Instruments Directive) was created in the UK in 2007, and has since set the industry standard for regulation worldwide.

Interestingly, there are some agencies that are aggressively lobbying against widespread regulation in the Forex industry. The Association for Financial Markets in Europe (‘AFME’), for example, has come out against the latest MIFID II regulations and has contended that ‘over-regulation’ could prevent brokers from servicing their retail clients comfortably.

At the moment, the fact that most Forex brokers opt to remain unregulated creates ongoing challenges to retail Forex traders who want to maximize their trading experiences while protecting their funds.  it is both difficult and expensive to obtain regulation in any country, but proper regulation should be a sign to potential retail traders that the brokerage is invested in its clients and in itself and committed to providing reliable, honest service.



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