Forex (FX) is short for foreign exchange, which is a decentralized financial market for buying and selling currencies. Forex trading involves a global network of financial centers operating 24 hours a day. It is the largest, most liquid financial market in the world with more than US$ 5 billion traded daily. So, how is this massive currency trading market regulated?
There is no centralized global supervisory body governing the Forex Trade market. Multiple regulatory bodies and watchdogs oversee the currency trading market in different countries.
Each regulatory body operates within its own jurisdiction, and enforcement varies across countries. Different laws in countries establish duties of supervisory bodies and describe how they should enforce the rules and regulations of forex trading in the respective countries.
Forex regulatory bodies are primarily responsible for establishing forex operational and execution standards in their country of operation. In turn participants in forex trading operating according to the rules and standards put in place by the regulatory bodies.
Examples of top Forex trading regulatory bodies include; The National Futures Association (NFA) & The Commodities Futures Trading Commission (CFTC) in the U.S, The Financial Conduct Authority (FCA) in the U.K., The Financial Services Agency (FSA) in Japan and The Australian Securities and Investments Commission (ASIC).
The Importance of Regulations in Forex Trading
1. Registration and licensing
U.S. regulatory bodies (NFA & CFTC) register and NFA provide currency trading certificates to organizations that comply with the set rules and regulations. Eligible Forex brokers are registered only after due diligence and verification of their knowledge, competency, website, and location of the firm.
To avoid business with fraudulent companies and individuals, investors are widely recommended to work with regulated brokers. Unfortunately, many clients do not check the registration of the Forex brokers when they start investing; they only check when things go wrong along the way. It is important to check for this information before you start to know who you are dealing with.
2. Identification of Legit Forex Brokers
Regulated Forex brokers must keep adhering to the set rules and regulations laid down by the regulating body. If found to be in contravention of the rules, the company will have their license revoked and as a result, be prohibited from forex trading.
The power of the regulatory bodies to issue and revoke licenses has significantly helped clients identify legit forex brokers. The license number of your forex brokers will be stated clearly and conspicuously on their website.
To be completely sure, the NFA & CFTC have internal search engines where you can check the registration status of your potential broker. The regulatory bodies also have an updated list of brokers with suspended or revoked licenses. For instance, you can review NFA’s online verification system known as Background Affiliation Status Information Center BASIC.
3. Preventing Foreign Exchange Fraud
CFTC has reported a sharp rise in Forex trading scams in recent years and has even set up a task force to address the rise in forex trading fraud. The foreign exchange is so prone to fraud because of its decentralized and global nature.
Regulation remains one of the most effective means of protecting investors from rising levels of fraudulent activity. The first line of defense against forex trading fraudsters is to conduct a background check with the proper regulator to find out if the brokerage is properly licensed and whether any complaints have been lodged against them.