In choosing a forex broker, one of the most vital factors to check is if a reputable regulator covers it. The boost in regulation forex brokers opening their doors recently has boosted the chance that many are operating without regulation or bona fide supervision.
As the forex market is decentralized and runs with no central exchange or clearing house, the regulatory bodies are the ones acting as watchdogs for the markets. Also, they provide financial licenses to organizations with good standing and have plenty of funds to operate a brokerage business.
The regulation is important as the foreign exchange market is the world’s biggest financial market with nearly $4 billion in trades made each day. Before, forex has been regarded as the exclusive domain of large banks and corporations. However, this has changed, and forex increasingly traded via forex brokers – resulting in the need for more scrutiny and regulation.
Furthermore, the regulation process is burdensome and needs time to finish. With that, plenty of brokers do not bother with the undertaking. And the fact that the regulatory environment is not the same in all locations, making the procedure way harder.
CySec, FCA, and MIFID
Forex brokers and forex traders recognized some major regulators, making them stand out from the crowd. The most recognized forex regulatory bodies in Europe are the Cyprus Securities and Exchange Commission (CySec) and the Financial Conduct Authority (FCA).
These organizations abide by the Markets in Financial Instruments Directive (MiFID). It enables forex operators from one EU country to conduct business with other European Economic Area (EEA) countries. A broker declaring as EU regulated is saying that it follows MiFID rules. But the extent of forex regulation differs from different countries. Thus, regulation in one place might be more stringent than others.
MiFID regulation gives traders some degree of protection, but it does not cover all measures. It stipulates the need for several amounts of mandatory investor compensation to refund deposited funds if the brokerage claims bankruptcy. Aside from that, it summarizes the broker’s minimum capital requirements and the need for segregates client and operator funds.
Brokers often choose to set up their business in Cyprus under the CySec regulation for some reasons. The rate of corporation tax – recently a flat 10% – is the lowest in the EU, which is very luring. And due to its large and advanced financial sector, forex providers see the business environment on the island as more favorable.
Also, because Cyprus is a member of the EEA and the EU, Cyprus-based forex operators find themselves under MiFID regulation. And as a result, it provides a minimum standard of protection to those domiciled in Cyprus – even if they do business in different countries.
For retail forex traders, the most significant risk of non-regulation is that of illegal activity or schemes. Fraudulent activities involve excessive commission made by ‘churning’ customer accounts, high pressure ‘boiler room’ tactics, Ponzi schemes, and misrepresentation.