Forex Broker Regulation


If you’re going to deposit your hard earned cash with a Forex broker it’s a good idea to choose one that’s properly regulated. You might think all Forex brokers are regulated but the truth is they aren’t.

Regulations differ depending on where a broker is actually registered and where they do business.

In the US there are two bodies that regulate Forex brokers.

The NFA (the National Futures Association). NFA membership is mandatory for all brokers who want to offer services to US residents. This includes brokers that are based overseas.

Its purpose is to safeguard market integrity and protect investors by implementing Forex regulations and strict marketing guidelines.

You can find out more about the NFA regulations here.

 

The CFTC – (the Commodity Futures Trading Committee). The CFTC was created by congress in 1974 to directly regulate the United States commodity and futures markets.

Its remit only includes Brokers that are directly based in the USA, they have no jurisdiction over foreign based brokers.

The regulations from each organization are different so we’ll give a quick overview of them both. Remember US based brokers have to be licensed by both the NFA and the CFTC and offshore brokers that offer services to US residents only need to be licensed by the NFA.

You can find out more about CFTC regulations here.

 

Forex Trading Regulations

  • A broker must be licensed in the country in which they are based. This is on top of NFA registration which is required for any broker wishing to offer services to US Residents.
  • A broker must provide daily and weekly trading statements which detail all futures and options contracts traded within that time period.
  • Upon the receipt of an order the broker must time stamp the ticket and provide both account and order number for both opening and closing trades.
  • All brokers are subject to periodical audits, which ensure brokers are adhering to all the regulations and record keeping practices.
  • All brokers must maintain sufficient funds to ensure all clients trades can be covered at all times.
  • Forex brokers are in no way allowed to misrepresent their services or to solicit customers to trade Forex without a fair representation of the risks involved.
  • A broker is contractually obliged to honor each position opened by a client. Failure to do so will immediately result in the termination of the broker’s license.
  • Brokers licensed by the CFTC can offer a maximum of 1:50 leverage on major currency pairs and 1:20 leverage on smaller pairs.
  • Brokers must not misrepresent the profit potential of the Forex market. Potential profit claims are not allowed under any circumstances as the broker can in no way guarantee those profits.

 

Always bare these regulations in mind when opening an account. The main thing that differentiates NFA registered brokers form those licensed by the CFTC is the leverage allowance.

Most people choose to use an offshore broker to get around these limits. But just because they’re based offshore doesn’t mean they aren’t properly regulated.

If a broker is offering services to US residents they have to be registered with the NFA. Failure to do so will result in heavy fines and a discontinuation of service.

If you use a broker based outside the US make sure they are from a well respected country, the UK, Canada and Switzerland are all safe places to deposit your money as they have strong regulations in place to prevent fraud.



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