How are forex markets regulated?

by Josh Biggs in Finance on 30th September 2020

The global forex market is one of the biggest entities of its type anywhere in the world, with an estimated $6.6 trillion traded globally in this space every single day.

Despite the cumulative size of this marketplace and the amounts of capital traded during each 24-hour period, there’s no single global regulator operating within the forex market. Instead, each nation has its own set of regulations and regulatory bodies, each of which are responsible for safeguarding investors and their actions.

In this post, we’ll look at how forex markets around the world are regulated and ask why this is important.

An Introduction to Global Forex Regulations

If you cast your eye over the financial market, you can find the relevant forex regulatory body for each individual country.

In the US, for example, the Trading Commission (CFTC) is responsible for regulating the foreign exchange, while the National Futures Association (NFA) accounts for commodities and futures trading.

In Australia, the Australian Securities and Investments Commission (ASIC) regulates forex trading, while the Financial Services Agency (FSA) assumes this responsibility in Japan.

In the UK, the relevant forex authority is the Financial Conduct Authority (FCA), which also oversees all fiscal markets and asset classes within the region. 

To provide some context, this authority is registered as an independent consumer watchdog agency, which is funded by the various financial services firms and forex brokers who regularly make use of the marketplace.

They’re widely considered to be one of the best and most progressive forex regulators in the world, and as a result of this, they’re also licensed to regulate overseas brokers who operate within the UK marketplace.

In the UK, the regulator also works closely with the Bank of England (BoE) and the smaller Prudential authority, in order to continually work towards determining new and appropriate regulations as the market evolves.

It’s also important to note that established brokers operating within the industry should be fully regulated and licensed by the FCA, and it’s important to look for this accreditation on the website of any platform that attempts to sell your services.

How are Markets Regulated in 2020?

While reputable regulators such as the FCA may have blazed a trail for others to follow in this space, the lack of universal regulations remains a major bone of contention.

It’s also relatively bewildering, especially when you consider the sheer size of the forex market and the fact that it remains the most liquid sector of its type anywhere in the world.

There’s no doubt that this has prevented some day traders from embracing currencies, despite the daily trading volumes associated with the market. In fact, the accessible retail FX market represents scarcely 5% of the average daily currency turnover globally, and this trade shows no sign of abating anytime soon.

However, there have been some moves to overcome these challenges, with the implementation of the FX Global Code in August 2018 establishing a set of universal principles of good practice within the marketplace.

Developed by a partnership between central banks and market participants from 16 global jurisdictions, creating a robust foundation from which more global regulations can be forged in the future.

This is a crucial development, especially when you consider that nearly 26,000 are thought to have lost close to $460 million in currency-related swindles and fixes between the years of 2001 and 2007 alone.

Categories: Finance