With the exception of currency futures and options traded on exchanges like the Chicago IMM, foreign exchange trading generally takes place in a remarkably decentralized manner. Essentially, the forex market has no formal exchange or location, despite being the largest capital market in the world.
In fact, the majority of forex trading occurs on a huge global telephone and electronic communication network or ECN where banks and other major participants trade forex 24 hours a day, five days a week.
Despite the enormity of the volume traded on the forex market, it remains one of the last largely unregulated financial markets, with no international organization or agency overseeing Interbank trading activity which is ongoing and global in its scope.
This comparative lack of regulation provides considerable benefits to forex traders, since a number of strategies that are prevented by regulation in the stock market are readily available to them.
Regulatory Agencies in Specific Countries
Nevertheless, a number of regulatory agencies exist in several countries which oversee the foreign exchange operations in their countries, and specifically those dealing with customers like forex brokers.
These agencies also usually prosecute cases involving fraud or other breaches of their rules. Specifically, these regulatory agencies include:
- U.S. National Futures Association – consists of an industry wide self regulatory organization for the U.S. futures industry. The NFA’s objective is to protect investors and safeguard the integrity of the markets. Because currencies are considered commodities and trading is for two-day delivery in the spot market, forex brokers must register as Futures Commission Merchants or Commodity Trading Advisors with at least one U.S. regulatory agency. Other forms of registration include Introducing Broker and Commodity Pool Operator.
- U.S. Commodity Futures Trading Commission – an independent agency of the U.S. government, this agency oversees all forex brokerage companies doing business based in the United States. The agency actively enforces its regulations and prosecutes companies engaged in fraud in the forex market.
- U.K. Financial Services Authority – the regulator of the financial services industry in the United Kingdom, the FSA is the United Kingdom’s analog of the U.S. CFTC.
- Swiss Federal Department of Finance – is a Swiss government agency which oversees and regulates financial institutions in Switzerland.
- Swiss PolyReg – is a self-regulatory body recognized by the Swiss Federal Money Laundering Control Authority which acts to regulate all persons and legal entities domiciled in Switzerland that act as financial intermediaries.
- Australian Securities & Investments Commission – also known as ASIC, the Commission regulates Australia’s corporate, markets and financial services. Basically, the ASIC is the Australian version of the U.S. CFTC and FSA all rolled into one agency.
Furthermore, within the European Union, each member country is responsible for regulating its local financial markets in conformity with the E.U.’s Markets in Financial Instruments Directive or MiFID. Also the MiFID “passport” concept allows companies regulated in one E.U. country to offer services to customers located in another E.U. country.
Forex Brokers and Regulation
Generally, if a forex broker has a registration in good standing with the CFTC, NFA, ASIC, FSA or a similar agency in another EU country, and it has already been doing business in the forex market for some time, this is a positive indication that some legal recourse might be available in the event of a dispute arising.
Nevertheless, even regulated and well-established companies sometimes get caught engaging in fraudulent behavior. Many customers of the now-defunct Refco forex broker found this out the hard way since their funds were comingled with the broker’s thereby preventing recovery when it was bankrupted by a major fraud.
Accordingly, make sure to double check a broker’s credentials, policies, reputation and business standing before committing any of your hard earned funds to an account with them.