Arguably one of the most integral players in the forex industry is the US, as its currency forms part of the major currency pairs and is considered one of the safe haven currencies for trading. In light of the USD serving as the base currency for many global transactions and trade activity, the role it plays on the financial markets cannot be overlooked. Forex trading in the US is regulated by the National Futures Association (NFA), which describes itself as the “premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets,” which also extends to forex. The NFA is tasked with combatting fraud, licensing eligible forex brokers and trading businesses, as well as enforcing compliance with capital requirements, record-keeping and reporting on all relevant transactions and trading-related activity. The NFA also works alongside the Commodity Futures Trading Commission (CFTC) to fight systemic risk and protect traders.
Forex traders are encouraged to verify the ownership, status and location of their chosen trading platform, as regulations differ in each country. This is particularly important because the growing interest in forex trading has resulted in scammers and deceptive brokers, some of whom may be located outside of the US. Therefore, you need to verify that they are indeed approved by the regulating authorities in their respective countries. Additionally, those that are approved in their host countries may not comply with all the regulations that apply to forex brokers in the USA, which adds an extra layer of caution that must be observed by those looking to trade legally in the US.
Financial markets and their governing regulations can be very complex, understandably so because of the sensitivity of finances, and they tend to change and evolve over time as the markets develop. The same can be said for forex trading regulations. It is important that regulatory bodies strike a good balance and avoid too much or too little regulation. The former will result in the country having less global and competitiveness and appeal, which will invariably have a negative impact on the country’s economic activity. The latter, on the other hand, does very little to boost investor confidence, as they may feel at risk of not being sufficiently protected and may view it as a threat to their finances. Any unregulated or poorly regulated industry is an invitation for unscrupulous characters to take over. It means that investors have very little recourse and options to explore if their funds are mismanaged, stolen or used for fraudulent activity.
Some of the key regulations to ensure compliance by a broker include, but are not limited to:
- Using real numbers and facts in promotional collateral, as some brokers may opt to put deceptive or partially inaccurate information as a way to attract more people through misleading them.
- Keep client funds in segregated accounts.
- Submit the necessary reports and financial statements to the regulatory bodies as proof of transparency and non-fraudulent activity that may put investors and their finances at risk of unfair practices.