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Guide to Forex Regulation

Review By: Alan Little
Review Updated: June 22, 2022

Guide to Forex Regulation

Trading forex comes with a fair amount of risk. Forex markets can be highly volatile, which gives traders the opportunity to profit but may also lead to loss. As a forex trader, you can protect yourself and your funds by trading with forex brokers operating under a recognised regulatory body. 

But what exactly does this mean? Who regulates the forex market? And how can you tell if your forex broker is fully regulated? 

Today, we are going to address those questions and make sure you have the information you need to trade forex as safely as possible.

What is forex regulation?

Forex regulation is a form of financial regulation specifically aimed at the forex market to ensure companies comply with legal and ethical standards. The forex market has not always been easy to regulate due to its decentralised and global nature. There are offshore forex brokers who operate legally but are not subject to regulation by a central body as this is not required in their jurisdiction.

Many countries, however, have independent supervisory bodies to oversee, licence and regulate forex brokers that operate in that country. These organisations act as watchdogs for the forex market within that country, issuing financial licenses to brokers who comply with regulations and investigating complaints

Who regulates the forex market?

Each country or region has their own regulating body to oversee forex trading in that region. The most important forex regulators are based in countries where the most forex trading takes place.

Some of the world’s most important forex regulators are:

How is forex regulated?

Regulation is carried out by the regulating body of the jurisdiction where a broker offers its services. In the case of forex brokers, regulators aim to preserve the integrity of the markets and ensure investor confidence. This is done by overseeing various aspects of the brokers operating in the forex market.

Regulating bodies are responsible for granting registration and licensing to forex brokers. Brokers who are registered and licensed must meet certain requirements, depending on their jurisdiction. Regulating bodies conduct reviews and audits of licensed brokerages to ensure they are continuing to meet those requirements. 

Requirements include segregating traders’ funds from the operating funds of the brokerage, complying with strict reporting standards regarding the broker’s business activities, and publishing policies and information that will allow traders to make decisions as to whether a broker is right for them. 

Regulators have the authority to investigate brokerages and impose sanctions if the broker is found guilty of fraudulent practices. Traders who have a complaint to make against a broker can consult the regulating body who will investigate the potential infraction or pass it to a specific body to investigate.

Why forex needs regulation

Forex needs regulation to protect everyone involved in forex trading. The forex markets are open 24 hours a day, five days a week, and around $6.6 trillion worth of forex transactions happen daily across the world. Due to the vast amount of money passing through the market each day, it is not surprising that the industry is vulnerable to scams. 

There are offshore unregulated brokers who are legitimate. However, trading with such brokers is still riskier than trading with a regulated broker in your own country. There is no guarantee that such a broker will be able to return client funds if the broker should get into financial trouble or go into liquidation.

Forex trading regulations aim to ensure that only legitimate companies can offer forex services. Forex regulators have various ways of protecting forex traders and ensuring that companies offering forex services comply with strict rules and regulations. Regulators put rules in place to protect client funds and make sure that trading is as safe as it can be.

How to check a forex broker is regulated

There are a few things you can do to check that a broker is fully regulated and licenced. Remember that no broker is going to advertise the fact that they are not regulated, and some scam brokers may claim to be licenced when they are not. Therefore, it is up to you to make sure your broker is safe to trade with.

FAQs 

Are forex traders regulated?

Forex traders are not regulated. Anyone can sign up at a broker and begin trading. Brokers who offer forex trading, however, should be registered with a relevant regulatory body. 

Do you need a license to trade FX?

You do not require a license to trade forex as an individual, but those who offer forex trading to others should be licensed. To start trading forex, sign up at a licensed brokerage in your country or region.