Regulation in the FOREX Market

The foreign exchange market has no central clearinghouse as do the stock market and the commodity futures market. Nor is it based in any one country; it is a complex, often freewheeling, electronically woven worldwide network of banks. This network is referred to as the Interbank system. Retail FOREX brokers -- in different ways -- tap into this network to fill their customers' orders. These facts permeate every aspect of currency trading, especially the regulatory environment. It is difficult, if not impossible, to get a complete regulatory grip on such an entity, at least pending the New World Order.
That fact cuts both ways. The market is laissez-faire, but it is also a caveat emptor enterprise. If you wish to trade currencies, you must accept these facts from the beginning. In the United States, the CFTC and NFA have implemented heavy-handed regulations to some degree, compensating for the areas they cannot control.

In 2010 I wrote:
The retail FOREX regulatory picture continues to evolve -- slowly. Three years ago some broker-dealers proudly advertised they were not NFA members. Curiously, one of those was REFCO, which failed soon thereafter. Today, all of the major broker-dealers have joined the NFA (National Futures Association) and come under the watchful government eye of the CFTC (Commodity Futures Trading Commission). My first advice to you: Do not trade with an unregistered broker-dealer. Every broker-dealer should have his NFA registration number on the web site's home page.

Regulation is seldom proactive; it usually is the result of a crisis. An NFA spokesman confessed to me that their hands were somewhat tied until a crisis provoked additional legislation. The NFA does host a booth at most FOREX trade shows. If you attend one of these, you might want to ask questions or voice your concerns to the people staffing them. They seem to be good listeners and keep close tabs on the pulse of the FOREX marketplace.

Broker-dealers register as Futures Commission Merchants (FCMs). Currently, Introducing Brokers (IBs) can be covered by the FCM or register independently. As below, it is likely that IBs will all soon be required to register.

Times have changed! Since 2008, the regulatory agencies in the United States have quickly evolved from a 90-pound weakling to an 800-pound gorilla. The CFTC and NFA have acted quite proactively.

They continue to change in 2012. In 2010, margins and leverage were modified substantially. Maximum leverage for major pairs is now 50:1, down from 100:1, down from 400:1. Spot gold and silver can no longer be traded on FOREX platforms as of July 2011. Financial requirements for FOREX brokers have ballooned and compliance duties greatly expanded. The days of the boutique FOREX shop with personalized service but small capitalization are numbered.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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