Financial sectors like the cryptocurrency market have suffered from a lack of regulatory bodies. The past few years have shown how much deficit this causes in a system, the majority of which centers around susceptibility to scams, loss of funds, and theft. This indicates the importance regulation holds on any working system, including the global foreign exchange (forex or FX) market. Foreign exchange is the largest market in the world, with an average trading volume of $7 trillion. It makes a lot of sense for such a system to be heavily guarded regarding regulations. However, the question is, how exactly does regulation work in the currency market? Let’s unpack that in the article below.
What Does Regulation Entail in the Forex Market?
Regulation in the forex market covers the laws and standards a supervisory body sets, which all brokers within their jurisdiction must abide by. It is an approach to ensuring investor protection and maintaining market integrity. The need for regulation in every financial market should be emphasized more. It, ultimately, helps promote a secure and transparent environment for participants. The forex market is an OTC market, exposing it to various oversights that could easily enable abuse and unfairness.
The regulators in the space serve as intermediaries, enabling the market to trade freely while also looking out for investors and traders. One of the first things investors look out for in forex trading is a licensed and regulated brokerage system. Unregulated brokers are risky to trade with, and there most likely won’t be a way to recover losses incurred from such transactions.
Who Regulates the Forex Market?
There is no single regulatory body for the global forex market; individual governments have set up their bodies to guard their own laws. For instance, the United States has about six bodies carrying out these ordinances.
U.S Securities and Exchange Commission (SEC)
Commodities and Future Trading Commission (CFTC)
Financial Industry Regulatory Authority (FINRA)
National Future Association (NFA)
Chicago Board of Trade (CBOT)
Securities Investor Protection Corporation (SIPC)
Other countries also have individual regulatory authorities. China has the China Securities Regulatory Commission (SCRC), Germany has the Federal Financial Supervisory Authority (BaFin), and Hong Kong has the Securities and Futures Commission (SFC). The bottom line is that several laws bind currency trades in countries, and the approach to compliance differs across the board. If your forex broker is regulated, the regulator’s name is boldly indicated on the website and should be known to you before you begin transacting.
Standard Regulatory Requirements for Forex Brokers
While there is no single regulatory body globally, there are specific general standards that every broker is expected to comply with. The first and primary one is that they should be licensed with the regulatory body. This protects investors from undisclosed financial risks and illicit practices like order manipulation or fraud. Other standards, such as anti-money laundering (AML) and know-your-customer (KYC) policies, are undergoing constant audits.
AML regulations are centered around ensuring customers open their trading accounts under strict and standard procedures to avoid aiding or abetting illicit activities. At the same time, KYC policies are sound requirements that allow brokerage services to get sufficient information on their clients, including their financial standings and risk profile. These are some of the roles regulation plays, and we can conclude that it is pivotal in maintaining optimal operation and security for all parties involved.
Roles of Regulators in Forex
The roles of regulators in forex are no different from those of other financial markets, and we’ve briefly highlighted some of them in the sections above. However, other crucial parts they play in the system are standardization, market surveillance, and consumer education. They help keep and maintain set standards for investment services and brokers and constantly detect violations. These bodies also provide consumers and traders with the necessary information to look out for when approaching an investment service. They publish laws and policies that help investors in making the right choices.
How Does Regulation Help You as a Trader?
Regulations in the forex market are a huge plus for participants. This year, the crypto market suffered huge losses due to regulatory battles with the SEC. Having a working system in the forex market has contributed to its growth over the years, and the good part is that it doesn’t just end there.
The presence of regulatory bodies helps you, as a trader, to make better investment decisions and spot red flags early. It also provides security and trust that other financial markets have yet to achieve. Having a working regulatory body is one thing, but it is a huge game changer for users who learn to use these laws and regulations to their advantage.
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