The Forex market runs 24/5 across the globe through OTC markets. The access to this market with the growth of mobile technology and software means almost anyone in the world with an internet connection can trade forex.

The geographical boundaries no longer exist in an online world and it means forex traders from the far east can trade using an online broker based in london. As we already know as our pro membership group spans worldwide from our hub in East London with traders in our group spanning to South Africa, Malaysia, Dubai and the lebanon.

However is all of this legal?

In some places as much as it may not be illegal there are restrictions that traders must adhere to and those who are avoiding these regulations risk their own capital safety by dealing with un regulated rogue brokers operating in areas of loose financial controls.

Speculative trading in retail FX continues to grow and as a result there can be intermediaries (brokers) who engage in financial irregularities, scams, exorbitant charges, hidden fees, high-risk exposure offered through high-leverage levels, or other bad practices. Make no mistake though the market makers are not in your favour and even from what we have seen some serious ill practice goes on even with the biggest providers in the UK. Widely moving spreads, “Limited Risk” accounts that force overly large stop losses over risking your account causing margin calls before the chance to profit and far away that it renders your small balance account useless in one hit.

Because of the rogue brokers, regulations are necessary and set by competent authorities to ensure poor practices are avoided, however not all can be. Regulations are aimed at protecting individual investors and ensuring fair operations to safeguard clients’ interests.

The most important criteria when selecting a forex broker are the regulatory approval status of the broker and which authority governs the broker.

How US Authorities Regulate Forex Brokerage Accounts

The National Futures Association (NFA) is the “premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets”. The scope of NFA activities is as follows:

After due diligence, provide necessary licenses to eligible forex brokers to conduct forex trading business.
Enforce required adherence to necessary capital requirements.
Combat fraud.
Enforce detailed record keeping and reporting requirements regarding all transactions and related business activities.
A detailed regulatory guide is available on the official NFA website.

Key Provisions of US Regulations:

“Customer” is defined as “individuals with assets of less than $10 million and most small businesses,” underscoring that these regulations are meant to protect the small investor. High-net-worth individuals may not be necessarily covered under standard regulated forex brokerage accounts.
Limits available leverage to 50:1 (or deposit requirement of only 2% on notional value of forex transaction) on the major currencies, ensuring ignorant or uneducated investors do not overstep and take unprecedented risks. Major currencies are defined as the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone.
Limits leverage of 20:1 (or 5% of notional transaction value) on minor currencies.
For short forex options, the notional transaction value amount plus the option premium received should be maintained as security deposit.
For long forex options, the entire option premium is required as security.
First-in-First-out (FIFO) rule prevents holding simultaneous positions in the same forex asset, i.e.. any existing trade position (buy/sell) in a particular currency pair will be squared off for opposite position (sell /buy) in the same currency pair. This also implies no possibility of hedging while trading forex.
Money owed by the forex broker to the customers should be held only at one or more qualifying institutions in the US or in money center countries.
How US Regulations Differ

Care should be taken to verify each ownership, status, and location of each forex trading firm, website, or app before signing-up for a trading account. There are many websites claiming low brokerage charges and high leverage (allowing more trading exposure with less capital), some as high as 1000:1. However, almost all such sites are hosted and operated from outside the US and may not be necessarily approved by the concerned authority in the host country. Even those authorized locally may not necessarily have regulations that apply to US residents. Regulations may slightly vary from country to country in terms of offered leverage, required deposits, reporting requirements, and investor protections.

Here are some of the regulatory bodies for a few select countries:

Australia – Australian Securities and Investments Commission (ASIC)
Cyprus – Cyprus Securities and Exchange Commission (CySEC)
Russia – Federal Financial Markets Service (FFMS)
South Africa – Financial Services Board (FSB)
Switzerland – Swiss Federal Banking Commission (SFBC)
UK – Financial Conduct Authority (FCA)

How to verify a brokers regulatory status

In the USA the NFA provides an online verification system called Background Affiliation Status Information Center (BASIC), where the status of US-based forex brokerage firms can be verified using their NFA ID, firm name, individual name, or pool name. Care should be taken to use the correct name/ID in the correct form, as many forex broker firms are known by different names (e.g., a website name may be different from the legal corporate name).

In the UK a firms FCA regulatory status is easy to find and you can search the company details using either their name or their publicly available companies house ID number here at the FCA’s website.

The Bottom Line

Financial regulations are important not just for your own safety trading, but the protection of your capital that is sat in your trading account and for when you make a profit from your trading a crooked broker could easily show you a terms of use agreement stating that you have breached terms of news trading etc. These brokers are no more than bookmakers at the side of a dog track.