What does Forex regulation actually do?

FinanceTrading / Investing

  • Author Giorgi Mikhelidze
  • Published May 23, 2020
  • Word count 935

Not too long ago, for many people, the word "trading" was a very foreign and alien concept. The truth is, not a lot of people were trading, and it was mostly something that only the people who had the necessary knowledge and experience in the financial market did. The situation is vastly different today. In this digital age of the internet, everything is much more accessible to the general public, and this does include trading. People who otherwise won’t have had anything to do with trading are finding it much easier to get into it and sometimes make it not only a hobby or a source of small additional income but something that they may potentially do full-time later on.

It is our firm belief, that one of the biggest reasons for this change is, without a doubt, Forex. Forex is absolutely huge. By some estimates, around $5.1 trillion’s worth of money is being traded every single day on the global Forex market, making it one of the most popular methods of trading out there.

Forex managed to open the doors of trading to millions of people around the world, and to this day, remains one of the preferred ways of trading for most newcomers. This, in large part, is due to the fact that it has a much lower entry point than its predecessors of trading. Aside from the respective Forex platform’s minimum entry amount, you’re the one choosing exactly how much you want to trade with, which is a gamechanger.

As Forex becomes more and more popular and the number of participants heavily increases, the need for a stronger and more effective regulation increases as well, because as it grows, so does the responsibility that rests upon it.

With such high volume and the amount of people trading, needless to say, the security concerns are high. Due to this, regulation is one of the most important aspects of Forex trading in general, and countries and companies go to great lengths to ensure that the regulatory environment is up to impeccable standards.

What purpose do Forex Regulations serve?

Due to a very different nature of different types of Forex environments in their respective countries, there doesn’t exist one universal definition of what Forex regulations do, but there are definitely some general aims that most of the countries share when they’re building their regulatory environments.

In general, Forex regulations are there to ensure, that the business is conducted in a manner that is ethical and fair to the existing and potential customers that may trade on Forex platforms. This is done by necessitating them to follow and comply with the rules and standards that the regulators set out.

The regulators provide necessary licensing and registration for the platforms, after which, they’re subjected to continuous audits, reviews and other forms of evaluations that will constantly make sure that they’re complying with the laws and meet the industry standards.

What type of demands are set by Regulators?

As mentioned, the goal of these regulations is to create a secure and encouraging environment for the market to prosper. This is done by setting up specific rules and laws that ensure the safety and well-being of the traders.

A very common practice by international Forex regulators is to impose the requirement of minimum operating capital. As an example, Australian Forex brokers are required to have a minimum of $1 million in operating capital. This ensures, that the companies that open for business are very serious, and are in there for the long run; thus decreasing the risk fo the customers from the companies that are there just for a quick profit.

Another common international demand from regulators is for the trading accounts to be in segregated bank accounts. As an example, England’s FCA demands segregated accounts in the Bank of England, which provides an extra layer of security.

The requirement for regular audits and reports is one of the most effective tools that all the financial regulators use for controlling Forex platforms. Depending on the specific regulatory jurisdiction, they may be yearly, quarterly, or even monthly. This ensures, that the activities of the broker remain transparent, and keeps the traders’ interests safe.

What many of the regulators do is to combat the fraud and protect the victims of brokers’ unethical behavior by encouraging the spread of education among traders. They do this by detailing useful info on their websites, running informational campaigns, and more. Though it may not seem so on the surface, spreading awareness like this is very effective, as it’s always better to prevent a scam from happening in the first place, as opposed to compensating it when it does happen.

How many regulators are out there?

Seeing as every major country that’s heavily involved in Forex has one of their own, there are probably hundreds of financial regulators monitoring Forex activities in the world. However, You have the well-known ones like FCA, CySEC, ASIC, FSA, ESMA, etc., and they all, more-or-less, serve the same purpose, with minor differences based on their specific market.

Curiously, if a broker is licensed by any of the EU member states, their license covers the whole continent. This has led to some security concerns in the past, as many of the brokers deliberately went with the countries that were more lenient with providing licensing, Cyprus’ CySEC being an example. Although this is not to say that CySEC doesn’t do a decent-enough job at providing a robust regulatory environment. On the contrary, it’s one of the most highly-respected regulators out there.

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