“Brokers and Regulation“
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 16.04.2020>
Hi! If you are interested in Forex please read carefully the below article that describes which are current regulatory bodies of the market and the role.
Regulation in the Currency/FX Trading Market
We specifically mentioned that FX/CFDs trade over-the-counter (OTC) through a network of brokers that organize the market demand and supply for CFDs and make prices accordingly > CFDs are not traded on major exchanges (centralized).
With trillions traded every day, the activity of that huge size and scope creates unique challenges regarding market regulation.
> There are a number of governmental and independent bodies that supervise forex trading around the world.
These supervisory authorities regulate forex by setting standards that all brokers under their jurisdiction have to comply with. These standards ensure that Forex/CFD
trading is ethical and fair for all parties involved.
It is essential to have strong regulatory oversight to prevent malpractice. This market is regulated by the same regulating bodies that supervise banks and other financial institutions.
Risk and Regulation
We mentioned that trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk. Since investor protection is a high priority, regulatory standards are in place focusing on this target.
With Forex brokers supervised by a regulatory authority, investors can be confident about the credibility of the broker. It’s therefore very important for retail traders to look for brokers that obtain regulation that covers the jurisdiction where the trader resides.
For a retail trader, the biggest risk of trading with a non-regulated broker is that of illegal activity or schemes.
Fraudulent activities include:
> excessive commissions
> very high spreads (not best BID – best ASK)
> hidden Terms and Conditions, small letters or no clear terms.
> restrictions on withdrawals
When brokers are regulated, the authorities can provide a level of protection for investors as they can be trusted to restrict, sanction, or ban such unwarranted actions and to safeguard investors.
Suitability and Personal information
A regulated broker has the obligation to know who its customers are and assess whether the client understands the risks involved in trading.
For this reason, they ask for various documents to be provided to them and request from the client to complete a suitability test/appropriateness test which assesses if the client has enough knowledge, experience, and understanding of the industry and risks involved before commencing trading.
> Forex regulation is aligned with the clients’ best interests, but also offers safety, reliability, and security.
Examples of Regulation Impact
A broker that is regulated by a financial authority also offers segregated funds, meaning that client funds are not being used for any purposes other than trading.
Traders’ funds are held in segregated accounts and cannot be used by the brokerage.
> Impact on Marketing and online Presence: As per the regulatory authority, the below must to placed on the Regulated Broker’s website – a Risk Warning sign.
List of the most important Regulatory Authorities
In addition to the previous regulatory agencies, the European Union obligates each member to be responsible for the regulation of its financial markets and conform with the E.U.’s Markets in Financial Instruments Directive or MiFID.
This also allows for companies regulated in one E.U. member country to serve customers in other E.U. member nations.
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