Regulation and oversight is essential in all industries, more so in the financial sector. Since the forex market is worldwide, every country should have a regulator to oversee the trade. The role of the regulator is to act as the overseer to the brokers, ensuring they follow the financial laws of the country. This is also why every country needs its own forex regulator – since the financial laws change by region.
National Futures Association (NFA)
In the US, forex trading is actually regulated by the NFA, and not by the Commodity Futures Trading Commission (CFTC). However, a forex broker must be registered and licensed by the CFTC first, then become a member of the NFA. It might seem like a complicated system, but you need to understand the structure from its beginning.
The CFTC came first in 1974, through legislation made by Congress. Within the legislation, the CFTC was also authorized to create registered futures associations, of which the NFA is the only one. Therefore, forex brokers are overseen by the NFA, which is subsequently overseen by the CFTC through its Division of Swap Dealer and Intermediary Oversight (DSIO).
The main role of the NFA is thus to monitor the activities of the forex brokers directly, but it doesn’t have the authority to prosecute. Remember, the NFA is just a subsidiary, sort of. As a result, any enforcement actions have to be reviewed and approved by the CFTC, which is why you notice it is the CFTC that actually fines forex brokers. The same is true for regulatory changes, as can be seen by the Dodd-Frank Act of 2011, which changed the laws on forex trading. The law affected the CFTC, and then subsequently the NFA.
Despite the structure, the NFA and CFTC together are among the top 3 forex regulators worldwide, maintaining fair practices by the brokers they regulate. Among the laws that make US forex regulators different include:
- A cap on leverage at 1:50 for major pairs and 1:25 on minors
- $20 million capital requirement by forex brokers
- Hedging is not allowed
Financial Conduct Authority (FCA)
Across the pond from the NFA is the FCA, which oversees forex markets in the UK. Fortunately, the structure is not as complex as it is in the US since the FCA regulates all financial market sectors, including the forex market. Before Brexit, the reach of the FCA was very clear as it would coordinate with the European Securities and Markets Authority (ESMA). Now, though, the structure is somehow in flux as the Brexit talks continue.
Regardless, the FCA is still in charge of regulating forex brokers in the UK, and it is solely responsible for prosecuting any misconduct. Regarding the passing of legislation, on the other hand, the FCA still takes its cues from the ESMA; at least until Brexit is finalized. This is why regulatory changes by ESMA tend to affect those the FCA enforces in the UK. For example, last year’s crackdown on forex brokers by ESMA had the FCA taking a backseat.
European Securities and Markets Authority (ESMA)
All EU nations use legislation from ESMA, after they have been passed by the European Parliament. Even tough individual countries may have a few modifications to the law, they still have to be approved by ESMA. As mentioned earlier, the FCA still takes its cues from ESMA, and these laws are covered under the Markets in Financial Instruments Directive (MiFID). Some changes have been proposed, enshrined into MiFID II, and these are expected to come into effect next year. Some of these changes include:
- A limit on leverage to 1:50 for amateurs and an increase after approval
- Elimination of forex bonuses
- Clear risk warnings
Cyprus Securities and Exchange Commission (CySEC)
CySEC is perhaps the most robust forex regulator in terms of the number of forex brokers under their wing. Although Cyprus is in the EU, they have the authority to make minor changes to their financial laws. Besides, Cyprus has become an attractive location for forex brokers for corporate purposes. Regardless, most of their forex laws are similar to those by ESMA. CySEC has often been accused of being lax on enforcing rules, but they are still among the top forex regulators all the same.
Australian Securities and Investments Commission (ASIC)
Another very reputable forex regulator, ASIC mostly follows the laws by the FCA. Although they still haven’t implemented the regulatory changes of the FCA, most experts believe they will. For now, though, traders can keep enjoying the security of working with a reputable forex regulator and attractive trading conditions.