The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
Regulation Plays a Major Role in FX Trading | Trading Forex
When it comes to selecting a Forex broker, one of the most important factors to look for is whether or not it is covered by a reputable regulator. The surge in Forex brokers opening their doors these days has increased the likelihood that many of them are operating without any regulation or bona fide supervision.
Since the Forex market is decentralized and operates with no central exchange or clearing house, it is the regulatory bodies that are assigned the task of acting as watchdogs for their respective markets and providing financial licenses to organizations that are of good standing and have enough funds to run a brokerage business.
Why is regulation so important? The foreign exchange market is the world's biggest financial market with close to $4 billion in trades conducted each day. Forex has in the past been regarded as the exclusive domain of large banks and corporations but this has changed of late and Forex is now increasingly traded via Forex brokers, leading to the need of increased scrutiny and regulation.
The regulation process is burdensome and takes time to complete so many brokers choose not to bother with the undertaking. What makes the procedure even more difficult is that the regulatory environment is not the same in all locations. What is surprising is there are mostly local regulatory organizations rather than one broader one across Europe and each EU member country has its own set of individual rules and legislation concerning the regulation of financial services in that country.
CySec, FCA and MIFID
There are certain major regulators stand out from the crowd and are recognized as trustworthy by both Forex brokers and Forex traders. The most recognized FX regulatory bodies in Europe are the Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA).
Both of these organizations comply with the Markets in Financial Instruments Directive, or MiFID. MIFID allows Forex operators from one EU country to conduct business with all other European Economic Area (EEA) countries. A broker that declares it is EU regulated is saying that it follows MIFID rules. However, the extent of Forex regulation varies among the different countries, so regulation in one territory could be more stringent than in others.
MiFID regulation provides traders with some degree of protection although it does not cover all measures. It stipulates the need for some amount of mandatory investor compensation in the form of a refund of deposited funds should the brokerage claim bankruptcy. It also summaries minimum capital requirements needed by the broker and the need for segregated client and operator funds.
Brokers choose to set up their business in Cyprus under the CySec regulation for several reasons. The rate of corporation tax (currently a flat 10%) is the lowest in the EU and this is very attractive. And with its large and advanced financial sector, Forex providers find the business environment on the island to be quite favorable.
In addition, since Cyprus is a member of both the EEA and the EU, Cyprus-based FX operators find themselves under MIFID regulation which provides a minimum standard of protection to those domiciled in Cyprus despite doing business in different countries.
United States
The regulatory structure of the U.S. is considered to be one of the strictest in the world. The Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) has jurisdiction over leveraged Forex transactions offered to retail clients and permits regulated entities to act as counterparties for Forex transactions with retail customers. It requires all online Forex dealers to be registered and meet strict financial standards enforced by the National Futures Association (NFA).
U.S. regulators expect total transparency from Forex operators and they are required to publicly release a wide range of data, including profitability of the firm’s traders, the number of genuine accounts registered with the company and more. Because of the heavy regulation, only a limited number of foreign brokerages are permitted to do business in the U.S. or offer trading opportunities with American citizens. Some Forex operators who have tried opening brokerages in the U.S. have been forced to close their doors or leave the country.
Belize
Another popular tax haven for Forex operators is Belize. Besides the tax benefits, this island provides regulation under the International Financial Services Commission (ISFC) which offers traders several of the basic protection clauses and makes strict accountability demands of FX brokers doing business in the region.
United Kingdom
Forex brokers doing business in the UK can choose to be regulated by the Financial Conduct Authority (FCA) which recently assumed the responsibility of the Financial Services Authority (FSA.) They can also be registered with FSA UK, but be regulated in their home country. The EEA Authorized status is given to firms that are authorized in another European Economic Area (EEA) state and have been given a "passport" by FSA UK to provide cross border services to UK citizens according to MIFID.
Turkey
Turkey’s regulatory agency, Capital Markets Board (CMB), or SPK -Sermaye Piyasası Kurulu in Turkisk- is quite stringent and not many Forex brokers have been able to meet its criteria and receive permission to operate in the country. In January, 2016, CMB introduced several changes for companies smaller than $6620, limiting maximum leverage to 50:1 for the most popular trading pairs such as EURUSD, USDTRY, and EURTRY and gold; Maximum leverage for other currency pairs was changed to 25:1.
For companies larger than $6620, the max leverage for the EURUSD, USDTRY, EURTRY pairs and gold was set at 100:1, with the remaining currency pairs seeing a cap of 50:1 leverage.
Australia
The regulation of retail Foreign exchange has been in the hands of ASIC (The Australian Securities and Investment Commission) since 2006. Brokerages operating in Australia must hold an Australian Financial Services license and the Australian regulator lists a number of criteria for firms wanting to acquire an AFS license. The requirements are pretty stringent and it is generally agreed that ASIC does a good job at protecting Australian clients.
Russia
Russia and other CIS countries currently do not have a regulatory framework for the provision of certain over-the-counter financial services, such as Spot FX and CFD trading. RAFFM, the Russian Association of Financial Markets, is just one of the many self-regulatory organizations that have been set up to try and reassure customers when dealing with unregulated brokerages who have a strong presence in the region.
RAFFM has only four member companies making it one of the smaller self-regulatory organizations (CFRIN is considered the region’s premier self-regulatory organization) and does not have a strong reputation, with many criticizing the neutrality and usefulness of the organization. However, the Russian government is working on regulating the provisions of retail FX and CFD trading in the country, which would put an end to companies basing themselves offshore and using self-regulatory organizations to coffer legitimacy, at least in Russia.
Israel
The last few years have seen an increase in Forex and CFD trading in Israel and the country’s financial markets regulator, the Israeli Securities Authority (ISA) has been introducing new regulatory stipulations in order to tighten reporting, provide transparency, limit leverage and other aspects required by Forex operators in other countries.
New regulations have gone into effect just recently that introduced important protections and that help bring Israeli regulation in line with regulatory definitions elsewhere in the world. In addition, firms currently regulated in other jurisdictions will be required to gain an ISA license if they want to solicit clients based in Israel.
Beware No-Regulated Brokers
For a retail Forex trader, the biggest risk of non-regulation is that of illegal activity or schemes. Fraudulent activities include excessive commissions generated by “churning” customer accounts, high-pressure “boiler room” tactics, Ponzi schemes and misrepresentation.
Although good regulation removes the likelihood of illegal activities occurring, it does not guarantee that a broker will be totally honest and above board. Keeping an eye on your broker is necessary with any account anywhere in the world.
Source
Regulation Plays a Major Role in FX Trading | Trading Forex
When it comes to selecting a Forex broker, one of the most important factors to look for is whether or not it is covered by a reputable regulator. The surge in Forex brokers opening their doors these days has increased the likelihood that many of them are operating without any regulation or bona fide supervision.
Since the Forex market is decentralized and operates with no central exchange or clearing house, it is the regulatory bodies that are assigned the task of acting as watchdogs for their respective markets and providing financial licenses to organizations that are of good standing and have enough funds to run a brokerage business.
Why is regulation so important? The foreign exchange market is the world's biggest financial market with close to $4 billion in trades conducted each day. Forex has in the past been regarded as the exclusive domain of large banks and corporations but this has changed of late and Forex is now increasingly traded via Forex brokers, leading to the need of increased scrutiny and regulation.
The regulation process is burdensome and takes time to complete so many brokers choose not to bother with the undertaking. What makes the procedure even more difficult is that the regulatory environment is not the same in all locations. What is surprising is there are mostly local regulatory organizations rather than one broader one across Europe and each EU member country has its own set of individual rules and legislation concerning the regulation of financial services in that country.
CySec, FCA and MIFID
There are certain major regulators stand out from the crowd and are recognized as trustworthy by both Forex brokers and Forex traders. The most recognized FX regulatory bodies in Europe are the Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA).
Both of these organizations comply with the Markets in Financial Instruments Directive, or MiFID. MIFID allows Forex operators from one EU country to conduct business with all other European Economic Area (EEA) countries. A broker that declares it is EU regulated is saying that it follows MIFID rules. However, the extent of Forex regulation varies among the different countries, so regulation in one territory could be more stringent than in others.
MiFID regulation provides traders with some degree of protection although it does not cover all measures. It stipulates the need for some amount of mandatory investor compensation in the form of a refund of deposited funds should the brokerage claim bankruptcy. It also summaries minimum capital requirements needed by the broker and the need for segregated client and operator funds.
Brokers choose to set up their business in Cyprus under the CySec regulation for several reasons. The rate of corporation tax (currently a flat 10%) is the lowest in the EU and this is very attractive. And with its large and advanced financial sector, Forex providers find the business environment on the island to be quite favorable.
In addition, since Cyprus is a member of both the EEA and the EU, Cyprus-based FX operators find themselves under MIFID regulation which provides a minimum standard of protection to those domiciled in Cyprus despite doing business in different countries.
United States
The regulatory structure of the U.S. is considered to be one of the strictest in the world. The Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) has jurisdiction over leveraged Forex transactions offered to retail clients and permits regulated entities to act as counterparties for Forex transactions with retail customers. It requires all online Forex dealers to be registered and meet strict financial standards enforced by the National Futures Association (NFA).
U.S. regulators expect total transparency from Forex operators and they are required to publicly release a wide range of data, including profitability of the firm’s traders, the number of genuine accounts registered with the company and more. Because of the heavy regulation, only a limited number of foreign brokerages are permitted to do business in the U.S. or offer trading opportunities with American citizens. Some Forex operators who have tried opening brokerages in the U.S. have been forced to close their doors or leave the country.
Belize
Another popular tax haven for Forex operators is Belize. Besides the tax benefits, this island provides regulation under the International Financial Services Commission (ISFC) which offers traders several of the basic protection clauses and makes strict accountability demands of FX brokers doing business in the region.
United Kingdom
Forex brokers doing business in the UK can choose to be regulated by the Financial Conduct Authority (FCA) which recently assumed the responsibility of the Financial Services Authority (FSA.) They can also be registered with FSA UK, but be regulated in their home country. The EEA Authorized status is given to firms that are authorized in another European Economic Area (EEA) state and have been given a "passport" by FSA UK to provide cross border services to UK citizens according to MIFID.
Turkey
Turkey’s regulatory agency, Capital Markets Board (CMB), or SPK -Sermaye Piyasası Kurulu in Turkisk- is quite stringent and not many Forex brokers have been able to meet its criteria and receive permission to operate in the country. In January, 2016, CMB introduced several changes for companies smaller than $6620, limiting maximum leverage to 50:1 for the most popular trading pairs such as EURUSD, USDTRY, and EURTRY and gold; Maximum leverage for other currency pairs was changed to 25:1.
For companies larger than $6620, the max leverage for the EURUSD, USDTRY, EURTRY pairs and gold was set at 100:1, with the remaining currency pairs seeing a cap of 50:1 leverage.
Australia
The regulation of retail Foreign exchange has been in the hands of ASIC (The Australian Securities and Investment Commission) since 2006. Brokerages operating in Australia must hold an Australian Financial Services license and the Australian regulator lists a number of criteria for firms wanting to acquire an AFS license. The requirements are pretty stringent and it is generally agreed that ASIC does a good job at protecting Australian clients.
Russia
Russia and other CIS countries currently do not have a regulatory framework for the provision of certain over-the-counter financial services, such as Spot FX and CFD trading. RAFFM, the Russian Association of Financial Markets, is just one of the many self-regulatory organizations that have been set up to try and reassure customers when dealing with unregulated brokerages who have a strong presence in the region.
RAFFM has only four member companies making it one of the smaller self-regulatory organizations (CFRIN is considered the region’s premier self-regulatory organization) and does not have a strong reputation, with many criticizing the neutrality and usefulness of the organization. However, the Russian government is working on regulating the provisions of retail FX and CFD trading in the country, which would put an end to companies basing themselves offshore and using self-regulatory organizations to coffer legitimacy, at least in Russia.
Israel
The last few years have seen an increase in Forex and CFD trading in Israel and the country’s financial markets regulator, the Israeli Securities Authority (ISA) has been introducing new regulatory stipulations in order to tighten reporting, provide transparency, limit leverage and other aspects required by Forex operators in other countries.
New regulations have gone into effect just recently that introduced important protections and that help bring Israeli regulation in line with regulatory definitions elsewhere in the world. In addition, firms currently regulated in other jurisdictions will be required to gain an ISA license if they want to solicit clients based in Israel.
Beware No-Regulated Brokers
For a retail Forex trader, the biggest risk of non-regulation is that of illegal activity or schemes. Fraudulent activities include excessive commissions generated by “churning” customer accounts, high-pressure “boiler room” tactics, Ponzi schemes and misrepresentation.
Although good regulation removes the likelihood of illegal activities occurring, it does not guarantee that a broker will be totally honest and above board. Keeping an eye on your broker is necessary with any account anywhere in the world.
Source
Regulation Plays a Major Role in FX Trading | Trading Forex
When it comes to selecting a Forex broker, one of the most important factors to look for is whether or not it is covered by a reputable regulator. The surge in Forex brokers opening their doors these days has increased the likelihood that many of them are operating without any regulation or bona fide supervision.
Since the Forex market is decentralized and operates with no central exchange or clearing house, it is the regulatory bodies that are assigned the task of acting as watchdogs for their respective markets and providing financial licenses to organizations that are of good standing and have enough funds to run a brokerage business.
Why is regulation so important? The foreign exchange market is the world's biggest financial market with close to $4 billion in trades conducted each day. Forex has in the past been regarded as the exclusive domain of large banks and corporations but this has changed of late and Forex is now increasingly traded via Forex brokers, leading to the need of increased scrutiny and regulation.
The regulation process is burdensome and takes time to complete so many brokers choose not to bother with the undertaking. What makes the procedure even more difficult is that the regulatory environment is not the same in all locations. What is surprising is there are mostly local regulatory organizations rather than one broader one across Europe and each EU member country has its own set of individual rules and legislation concerning the regulation of financial services in that country.
CySec, FCA and MIFID
There are certain major regulators stand out from the crowd and are recognized as trustworthy by both Forex brokers and Forex traders. The most recognized FX regulatory bodies in Europe are the Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA).
Both of these organizations comply with the Markets in Financial Instruments Directive, or MiFID. MIFID allows Forex operators from one EU country to conduct business with all other European Economic Area (EEA) countries. A broker that declares it is EU regulated is saying that it follows MIFID rules. However, the extent of Forex regulation varies among the different countries, so regulation in one territory could be more stringent than in others.
MiFID regulation provides traders with some degree of protection although it does not cover all measures. It stipulates the need for some amount of mandatory investor compensation in the form of a refund of deposited funds should the brokerage claim bankruptcy. It also summaries minimum capital requirements needed by the broker and the need for segregated client and operator funds.
Brokers choose to set up their business in Cyprus under the CySec regulation for several reasons. The rate of corporation tax (currently a flat 10%) is the lowest in the EU and this is very attractive. And with its large and advanced financial sector, Forex providers find the business environment on the island to be quite favorable.
In addition, since Cyprus is a member of both the EEA and the EU, Cyprus-based FX operators find themselves under MIFID regulation which provides a minimum standard of protection to those domiciled in Cyprus despite doing business in different countries.
United States
The regulatory structure of the U.S. is considered to be one of the strictest in the world. The Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) has jurisdiction over leveraged Forex transactions offered to retail clients and permits regulated entities to act as counterparties for Forex transactions with retail customers. It requires all online Forex dealers to be registered and meet strict financial standards enforced by the National Futures Association (NFA).
U.S. regulators expect total transparency from Forex operators and they are required to publicly release a wide range of data, including profitability of the firm’s traders, the number of genuine accounts registered with the company and more. Because of the heavy regulation, only a limited number of foreign brokerages are permitted to do business in the U.S. or offer trading opportunities with American citizens. Some Forex operators who have tried opening brokerages in the U.S. have been forced to close their doors or leave the country.
Belize
Another popular tax haven for Forex operators is Belize. Besides the tax benefits, this island provides regulation under the International Financial Services Commission (ISFC) which offers traders several of the basic protection clauses and makes strict accountability demands of FX brokers doing business in the region.
United Kingdom
Forex brokers doing business in the UK can choose to be regulated by the Financial Conduct Authority (FCA) which recently assumed the responsibility of the Financial Services Authority (FSA.) They can also be registered with FSA UK, but be regulated in their home country. The EEA Authorized status is given to firms that are authorized in another European Economic Area (EEA) state and have been given a "passport" by FSA UK to provide cross border services to UK citizens according to MIFID.
Turkey
Turkey’s regulatory agency, Capital Markets Board (CMB), or SPK -Sermaye Piyasası Kurulu in Turkisk- is quite stringent and not many Forex brokers have been able to meet its criteria and receive permission to operate in the country. In January, 2016, CMB introduced several changes for companies smaller than $6620, limiting maximum leverage to 50:1 for the most popular trading pairs such as EURUSD, USDTRY, and EURTRY and gold; Maximum leverage for other currency pairs was changed to 25:1.
For companies larger than $6620, the max leverage for the EURUSD, USDTRY, EURTRY pairs and gold was set at 100:1, with the remaining currency pairs seeing a cap of 50:1 leverage.
Australia
The regulation of retail Foreign exchange has been in the hands of ASIC (The Australian Securities and Investment Commission) since 2006. Brokerages operating in Australia must hold an Australian Financial Services license and the Australian regulator lists a number of criteria for firms wanting to acquire an AFS license. The requirements are pretty stringent and it is generally agreed that ASIC does a good job at protecting Australian clients.
Russia
Russia and other CIS countries currently do not have a regulatory framework for the provision of certain over-the-counter financial services, such as Spot FX and CFD trading. RAFFM, the Russian Association of Financial Markets, is just one of the many self-regulatory organizations that have been set up to try and reassure customers when dealing with unregulated brokerages who have a strong presence in the region.
RAFFM has only four member companies making it one of the smaller self-regulatory organizations (CFRIN is considered the region’s premier self-regulatory organization) and does not have a strong reputation, with many criticizing the neutrality and usefulness of the organization. However, the Russian government is working on regulating the provisions of retail FX and CFD trading in the country, which would put an end to companies basing themselves offshore and using self-regulatory organizations to coffer legitimacy, at least in Russia.
Israel
The last few years have seen an increase in Forex and CFD trading in Israel and the country’s financial markets regulator, the Israeli Securities Authority (ISA) has been introducing new regulatory stipulations in order to tighten reporting, provide transparency, limit leverage and other aspects required by Forex operators in other countries.
New regulations have gone into effect just recently that introduced important protections and that help bring Israeli regulation in line with regulatory definitions elsewhere in the world. In addition, firms currently regulated in other jurisdictions will be required to gain an ISA license if they want to solicit clients based in Israel.
Beware No-Regulated Brokers
For a retail Forex trader, the biggest risk of non-regulation is that of illegal activity or schemes. Fraudulent activities include excessive commissions generated by “churning” customer accounts, high-pressure “boiler room” tactics, Ponzi schemes and misrepresentation.
Although good regulation removes the likelihood of illegal activities occurring, it does not guarantee that a broker will be totally honest and above board. Keeping an eye on your broker is necessary with any account anywhere in the world.
Source
Regulation Plays a Major Role in FX Trading | Trading Forex
When it comes to selecting a Forex broker, one of the most important factors to look for is whether or not it is covered by a reputable regulator. The surge in Forex brokers opening their doors these days has increased the likelihood that many of them are operating without any regulation or bona fide supervision.
Since the Forex market is decentralized and operates with no central exchange or clearing house, it is the regulatory bodies that are assigned the task of acting as watchdogs for their respective markets and providing financial licenses to organizations that are of good standing and have enough funds to run a brokerage business.
Why is regulation so important? The foreign exchange market is the world's biggest financial market with close to $4 billion in trades conducted each day. Forex has in the past been regarded as the exclusive domain of large banks and corporations but this has changed of late and Forex is now increasingly traded via Forex brokers, leading to the need of increased scrutiny and regulation.
The regulation process is burdensome and takes time to complete so many brokers choose not to bother with the undertaking. What makes the procedure even more difficult is that the regulatory environment is not the same in all locations. What is surprising is there are mostly local regulatory organizations rather than one broader one across Europe and each EU member country has its own set of individual rules and legislation concerning the regulation of financial services in that country.
CySec, FCA and MIFID
There are certain major regulators stand out from the crowd and are recognized as trustworthy by both Forex brokers and Forex traders. The most recognized FX regulatory bodies in Europe are the Cyprus Securities and Exchange Commission (CySEC) and the Financial Conduct Authority (FCA).
Both of these organizations comply with the Markets in Financial Instruments Directive, or MiFID. MIFID allows Forex operators from one EU country to conduct business with all other European Economic Area (EEA) countries. A broker that declares it is EU regulated is saying that it follows MIFID rules. However, the extent of Forex regulation varies among the different countries, so regulation in one territory could be more stringent than in others.
MiFID regulation provides traders with some degree of protection although it does not cover all measures. It stipulates the need for some amount of mandatory investor compensation in the form of a refund of deposited funds should the brokerage claim bankruptcy. It also summaries minimum capital requirements needed by the broker and the need for segregated client and operator funds.
Brokers choose to set up their business in Cyprus under the CySec regulation for several reasons. The rate of corporation tax (currently a flat 10%) is the lowest in the EU and this is very attractive. And with its large and advanced financial sector, Forex providers find the business environment on the island to be quite favorable.
In addition, since Cyprus is a member of both the EEA and the EU, Cyprus-based FX operators find themselves under MIFID regulation which provides a minimum standard of protection to those domiciled in Cyprus despite doing business in different countries.
United States
The regulatory structure of the U.S. is considered to be one of the strictest in the world. The Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) has jurisdiction over leveraged Forex transactions offered to retail clients and permits regulated entities to act as counterparties for Forex transactions with retail customers. It requires all online Forex dealers to be registered and meet strict financial standards enforced by the National Futures Association (NFA).
U.S. regulators expect total transparency from Forex operators and they are required to publicly release a wide range of data, including profitability of the firm’s traders, the number of genuine accounts registered with the company and more. Because of the heavy regulation, only a limited number of foreign brokerages are permitted to do business in the U.S. or offer trading opportunities with American citizens. Some Forex operators who have tried opening brokerages in the U.S. have been forced to close their doors or leave the country.
Belize
Another popular tax haven for Forex operators is Belize. Besides the tax benefits, this island provides regulation under the International Financial Services Commission (ISFC) which offers traders several of the basic protection clauses and makes strict accountability demands of FX brokers doing business in the region.
United Kingdom
Forex brokers doing business in the UK can choose to be regulated by the Financial Conduct Authority (FCA) which recently assumed the responsibility of the Financial Services Authority (FSA.) They can also be registered with FSA UK, but be regulated in their home country. The EEA Authorized status is given to firms that are authorized in another European Economic Area (EEA) state and have been given a "passport" by FSA UK to provide cross border services to UK citizens according to MIFID.
Turkey
Turkey’s regulatory agency, Capital Markets Board (CMB), or SPK -Sermaye Piyasası Kurulu in Turkisk- is quite stringent and not many Forex brokers have been able to meet its criteria and receive permission to operate in the country. In January, 2016, CMB introduced several changes for companies smaller than $6620, limiting maximum leverage to 50:1 for the most popular trading pairs such as EURUSD, USDTRY, and EURTRY and gold; Maximum leverage for other currency pairs was changed to 25:1.
For companies larger than $6620, the max leverage for the EURUSD, USDTRY, EURTRY pairs and gold was set at 100:1, with the remaining currency pairs seeing a cap of 50:1 leverage.
Australia
The regulation of retail Foreign exchange has been in the hands of ASIC (The Australian Securities and Investment Commission) since 2006. Brokerages operating in Australia must hold an Australian Financial Services license and the Australian regulator lists a number of criteria for firms wanting to acquire an AFS license. The requirements are pretty stringent and it is generally agreed that ASIC does a good job at protecting Australian clients.
Russia
Russia and other CIS countries currently do not have a regulatory framework for the provision of certain over-the-counter financial services, such as Spot FX and CFD trading. RAFFM, the Russian Association of Financial Markets, is just one of the many self-regulatory organizations that have been set up to try and reassure customers when dealing with unregulated brokerages who have a strong presence in the region.
RAFFM has only four member companies making it one of the smaller self-regulatory organizations (CFRIN is considered the region’s premier self-regulatory organization) and does not have a strong reputation, with many criticizing the neutrality and usefulness of the organization. However, the Russian government is working on regulating the provisions of retail FX and CFD trading in the country, which would put an end to companies basing themselves offshore and using self-regulatory organizations to coffer legitimacy, at least in Russia.
Israel
The last few years have seen an increase in Forex and CFD trading in Israel and the country’s financial markets regulator, the Israeli Securities Authority (ISA) has been introducing new regulatory stipulations in order to tighten reporting, provide transparency, limit leverage and other aspects required by Forex operators in other countries.
New regulations have gone into effect just recently that introduced important protections and that help bring Israeli regulation in line with regulatory definitions elsewhere in the world. In addition, firms currently regulated in other jurisdictions will be required to gain an ISA license if they want to solicit clients based in Israel.
Beware No-Regulated Brokers
For a retail Forex trader, the biggest risk of non-regulation is that of illegal activity or schemes. Fraudulent activities include excessive commissions generated by “churning” customer accounts, high-pressure “boiler room” tactics, Ponzi schemes and misrepresentation.
Although good regulation removes the likelihood of illegal activities occurring, it does not guarantee that a broker will be totally honest and above board. Keeping an eye on your broker is necessary with any account anywhere in the world.
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