Foreign exchange regulation

Short description: Financial regulation of the Forex market

Foreign exchange regulation is a form of financial regulation specifically aimed at the over-the-counter Forex market that is decentralized and operates with no central exchange or clearing house. Due to its decentralized and global nature, the foreign exchange market has been more prone to foreign exchange fraud and has been less regulated than other financial markets.^[1]

However, some countries do regulate forex brokers through governmental and independent supervisory bodies.^[2] For example, the National Futures Association and the Commodity Futures Trading Commission in the US,^[3] the Australian Securities & Investments Commission in Australia,^[4] and the Financial Conduct Authority in the UK.^[5] These bodies act as watchdogs for their respective markets and provide financial licenses to organizations that comply with local regulations.^[6]

Objective

The objective of regulation is to ensure fair and ethical business behavior. In their turn, all foreign exchange brokers, investment banks and signal sellers have to operate in compliance with the rules and standards laid down by the regulators. Typically, they must be registered and licensed in the country where their operations are based. Licensed brokers may be subject to recurrent audits, reviews and evaluations to check that they meet the industry standards. Foreign exchange brokers may have capital requirements which require them to hold a sufficient amount of funds to be able to execute and complete foreign exchange contracts concluded by their clients and also to return clients' funds intact in case of bankruptcy.^[7]

Each Forex regulator operates within its own jurisdiction and regulation and enforcement varies significantly from country to country. In the European Union, a license from one member state covers the whole continent under the MiFID 2 regulation and has resulted in regulatory arbitrage where companies select the EU country that imposes the least controls such as CySEC in Cyprus.^[8]^[9] Not all foreign exchange brokers are regulated and many will register in jurisdictions that impose low-regulatory environments such as tax havens and corporate havens that form part of offshore banking.^[10]

Main regulatory requirements

Although regulatory requirements differ between jurisdictions, there are certain common points they focus on:^[11]

Client conduct - These ensure brokers cannot make unrealistic or misleading claims or promises. It also prevents brokers from advising clients to take risky trade decisions or to enter into positions that are not in their best interest.

Segregation of funds - These restrictions ensure that the broker can not use any of the clients funds for its operational or other expenses. This regulation requires that all deposits be maintained separately from the broker’s bank accounts.

Reporting and disclosure - These rules ensure the broker's clients are well informed of the status of their account and the risks associated with Forex products.

Leverage limits - These limits ensure clients maintain an acceptable risk level. As such, firms may not offer increasingly higher leverage to consumers (e.g. 1:1000).

Minimum capital requirements - These restrictions ensure that clients can withdraw their funds at any time including in the event of bankruptcy of the broker.

Audit - Periodic auditing assures the broker financial risk is tolerable and there is no misappropriation of funds. To this end, brokers must submit periodic financial and capital adequacy statements.

Regulatory Bodies by Country

Europe

Belgium - Financial Services and Markets Authority, FSMA
Bulgaria - Financial Supervision Commission, FSC Bulgaria
Croatia - Croatian Financial Services Supervisory Agency, CFSSA
Cyprus - Cyprus Securities and Exchange Commission, CySEC
Czech Republic - Czech National Bank, CNB
Denmark - Danish Financial Supervisory Authority, Danish FSA
Estonia - Estonian Financial Supervisory Authority, Estonian FSA
Finland - Finnish Financial Supervisory Authority, Finnish FSA
France - Autorité des Marchés Financiers, AMF
Germany - Federal Financial Supervisory Authority, BaFin
Greece - Hellenic Capital Market Commission, HCMC
Hungary - Hungarian Financial Supervisory Authority (hu), HFSA
Iceland - Financial Supervisory Authority, Iceland FSA
Ireland - Central Bank of Ireland
Isle of Man - Financial Supervision Commission, FSC
Italy - Commissione Nazionale per le Società e la Borsa, CONSOB
Latvia - Financial and Capital Market Commission (lv), FKTK
Lithuania - Bank of Lithuania
Liechtenstein - Financial Market Authority, FMA
Luxembourg - Commission de Surveillance du Secteur Financier, CSSF
Malta - Malta Financial Services Authority, MFSA
Norway - Financial Supervisory Authority of Norway, FSA of Norway
Poland - Polish Financial Supervision Authority, PFSA
Portugal - Portuguese Securities Market Commission, CMVM
Romania - Romanian Financial Supervisory Authority, ASF
Russia - Central Bank of Russia, CBR
Slovakia - National Bank of Slovakia, NBS
Spain - National Securities Market Commission, CNMV
Sweden - Financial Supervisory Authority, Swedish FSA
Switzerland - Swiss Financial Market Supervisory Authority, FINMA
United Kingdom - Financial Conduct Authority FCA

Asia

Azerbaijan - State Committee for Securities
Bangladesh - Securities and Exchange Commission, SEC
China - China Securities Regulatory Commission, CSRC
UAE - Capital Market Authority, CMA
Hong Kong - Securities and Futures Commission, SFC
India - Reserve Bank of India, RBI
Indonesia:
- Financial Services Authority, FSA of Indonesia
- Bank Indonesia, BI
Israel - Israel Securities Authority, ISA
Japan - Financial Services Agency, FSA of Japan
Kuwait:
- Ministry of Commerce and Industry
- Kuwait Chamber of Commerce and Industry, KCCI
Lebanon - Bank of Lebanon
Malaysia - Securities Commission Malaysia
Pakistan - Securities and Exchange Commission of Pakistan, SECP
Philippines:
- Securities and Exchange Commission
- Bangko Sentral ng Pilipinas, BSP
Singapore - Monetary Authority of Singapore, MAS
South Korea - Financial Services Commission FSC of Korea
Sri Lanka - Securities and Exchange Commission of Sri Lanka
Thailand - Securities and Exchange Commission of Thailand (th)
Turkey - Capital Markets Board, CMB

North and Central America

North America

Canada - Canadian Investment Regulatory Organization, CIRO
Mexico - Comisión Nacional Bancaria y de Valores, CNBV
United States:
- Commodity Futures Trading Commission, CFTC
- National Futures Association, NFA

Central America

Anguilla - Anguilla Financial Services Commission, Anguillan FSC
Antigua and Barbuda - Eastern Caribbean Securities Regulatory Commission, ECSRC
Belize - International Financial Services Commission, IFSC
British Virgin Islands - Financial Services Commission, BVI FSC
Cayman Islands - Cayman Islands Monetary Authority, CIMA
Dominica - Financial Services Unit, FSU
Panama:
- Superintendency of the Securities Market, SMV
- Ministry of Industry and Commerce of Panama, MICI
St. Vincent and the Grenadines - Financial Services Authority, SVG FSA