It has been a common knowledge that a good forex broker must be regulated in at least one regulatory entity for safety measures. However, there are some disadvantages that you should recognize about it.
The transaction value in the forex market recorded more than $5 trillion on average every day. It became the largest financial market in the world. Many traders or investors are really interested to allocate fresh funds in the forex market. They are able to get giant gains by taking positions over a short duration.
The forex markets run all day with many opportunities that traders or investors can get. There are several benefits if traders or investors trade in the forex market, such as high liquidity, low capital requirements, ease of entry, and low costs.
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However, only a few traders or investors are truly successful in the forex market. Many traders or investors fail for several reasons. For instance, they use the extreme amount of leverage, basically a capital borrowed from forex brokerages to increase the potential return of investments.
They don't realize that the forex market cannot consistently offer greater investment returns. It prevents traders or investors from getting the opportunity of earning profitable gains. They take more risks and get small amounts of gains in return. Consequently, the forex market has been more regulated since there are many unscrupulous forex brokerages who should not be in the industry.
The Most Well Known FX Jurisdictions Around the World
Identifying forex brokerages who are reliable and viable is most important to get better services and to assist traders or investors to maximize profits. When a broker implements practices that work against the traders or investors, it is nearly impossible for the clients to make a profit.
Therefore, the forex market needs regulations to restrict malpractices. Many regulators around the world have begun to impose their restrictions on the activities of forex brokerages. They take much of the focus on CFD trading, binary, options, bonuses, and leverage.
It is a response, partly from a large amount of negative press and from aspiration to clean up the industry from the rampage of scam brokers. By targeting to protect the rights of the consumer, the regulators can avoid unscrupulous business practices and high-risk offerings. For instance, these are considered as the top jurisdictions for FX regulators:
US FX Regulations
Everybody knows that the United States has established one of the largest financial markets in the world for a long time. Moreover, US FX trading offers enormous liquidity. In line with the massive transactions in FX trading, the US government issued a tight regulation for brokerage companies resided in the country.
To protect the clients from scams and frauds, the US regulation allows them public access to data and information such as lists of the brokerages' legitimate accounts and their financial position. The jurisdiction's over-leveraged FX transactions are under the authority of the US Commodity Futures Trading Commission (CFTC). By extension, the National Futures Association (NFA) monitors the strict compliance with financial standards by online brokerages. However, these numerous and stringent rules are sometimes counterproductive and forestall the US residents from engaging in flexible transactions available in other jurisdictions.
UK FX Regulations
The United Kingdom has a reputable regulatory agency, which is the UK's Financial Conduct Authority (FCA). They aim to make financial markets, including FX markets, are safe for clients to get a fair deal. They protect clients, elevate market integrity, and promote competition. FCA uses a cost-benefit approach in formulating its FX regulations. The agency adopts and integrates innovative practices to regulate their local FX industry in order to give many benefits for all FX players and stakeholders.
Moreover, The UK adopts a global posture in its FX trade that's very competitive and friendly to offshore companies. It also established a government guarantee fund program for up to a maximum of fifty thousand pounds as insurance protection for the affected clients of FX dealers who run into financial trouble. It is an implication based on a principle that innovations are not unduly restricted and can be incorporated to a feasible extent.
Swiss FX Regulations
It is widely known that the Swiss banking system is remarkably trusted. They offer high levels of privacy and low levels of financial risk, by enforcing high capital requirements and strong depositor protection. It practically ensures that any deposits will be safe from financial crises and conflict. Given this reliability, Swiss has the safest standards in the FX industry.
However, a financial scandal still happened in 2009. Therefore, the government moved to authorize the Swiss Federal Banking Commission (SFBC) to have jurisdiction and impose regulations on Swiss FX trading. It is a good move, safety-wise, and attracts many interested brokers and traders. For setting up a brokerage firm and bank account for use in retail trading, Swiss FX regulation requires strict and good documentation. The whole process must comply with rigid banking standards.
Swiss regulation also gives specific freedom to businesses and perceives clients of financial services as responsible adults. For that reason, unlike other top FX jurisdictions, Switzerland doesn't cap leverage, doesn't prevent credit card funding, or impose other detailed restrictions. This Swiss approach gives the freedom to both Swiss brokerage firms and their clients to agree on mutually satisfactory conditions.
Cyprus FX Regulation
Aside from the three jurisdictions above, there is a certain popular FX jurisdiction among brokers and traders that is worth mentioning, which is Cyprus financial regulation agency called the CySEC (The Cyprus Securities and Exchange Commission).
Famously known as a provider of offshore FX license that complies with the European MiFID financial law, CySEC implemented some major changes in 2019. They greatly affect the trading industry in Cyprus as significant restrictions on Forex and CFD trading brokerages were enhanced. From pulling the plug on attracting clients with high bonuses to limit the leverage ratios, the Cypriot watchdog intended to put the clients' safety out front.
CySEC assigned regulations were aimed to increase transparency by standardizing the regulations governing the European financial markets in 31 states. Due to this, they have wide powers to control the activities of its members by implementing regulations that ensure the safety of clients' investment. These regulations also enforce the providing of clear information about products and a requirement to "operate in a way that is fair to clients", so that the clients can stay clear of high-risk investment firms.
The situation on leverage is one that drew the most reaction in the forex industry. CySEC regulated brokers can now only offer as much as 1:30 on FX pairs and 2:1 on cryptocurrencies, as opposed to 1:1000 or even to 1:2000 previously. The adopted ESMA (European Securities and Markets Authority) is a response to the many possible risks of dramatic losses exposed by high leverages.
Though the protection from these regulators looks good for consumers, some traders are not happy to welcome the regulations. Here are some of the reasons:
Regulators are Not Trusted to do the Job
Yet, many traders are skeptical that the regulators are up to the task. Instead of protecting the rights of the consumers, the regulators place restrictions that are only implemented as a reaction to media pressure. Also, regulators are generally slow to update their terms. It means that a brokerage company can exploit a loophole for years before it is addressed.
For instance, the regulators cannot control effectively over virtual companies who can shut down and start-up in a new jurisdiction at will. Brokerages are able to contravene local regulators by not having a physical presence in the jurisdiction.
Traders Believe That Regulators are Part of the Mess
Regulators receive big funding from their member companies. So, it is not a surprise that they have a certain kind of obligation to protect and support the bottom line of the brokerages. Yet, many unscrupulous brokerages are regulated without adequate protections. Regulators try to create more user-friendly and reasonable requirements to support and protect only their own bottom line. Many traders believe that it is to be a significant trust issue and they blame lenient regulators for compromising on their protection.
See also: How to Find Out if Your Broker is a Scam
Regulated and Non-regulated Binary Options
A binary option is exercised automatically based on the option expires. If the price of the underlying asset is on the correct side of the strike price, a trader can make a profit. Hence, a binary option offers one of the alternative investments with much higher risk. Other than that, non-regulated binary option companies still exist while the regulators can't stop it. The powerless regulators against non-regulated binary option companies result in the growing of the offerings of attractive products at higher risks with no consumer protection. It harms many traders because of the lack of trust in regulators.
Traders Do Not Want Their Consumer Rights Restricted
Investors or traders just want to make a sizable profit and take the sizable risk to do it. To trade freely, they want to determine by themselves what is too risky and what is shady. They don’t want someone else restricting their freedom to trade the way they want to. Yet, they also want protection from fraudulent and non-regulated companies, so that their funds are protected.
Hence, the restrictions may be generally good for people who don't have the knowledge to trade successfully. However, traders with sufficient knowledge would feel restricted as strict regulators usually put a lot of limitations on the way their trading strategies are applied.
Take an example from the CySEC new restrictions that eliminate most of the more lenient offerings that may be crucial for both forex brokers and their traders.
For almost all brokers, bonuses became a fundamental business component, especially small brokers who have limited capital to compete with the others. If they want to maintain their CySEC license, they will be subjected to re-evaluate their marketing strategies to focus on long-term solutions that favor their clients' interest. Some brokers eventually have changed their strategy to focus only on the reduction of spreads and commissions, while the others focused only on offering a wider selection of instruments.
From the traders' perspective, bonus programs can be an alternative to earn more trading credits without having to make additional deposits to their accounts. Some bonus schemes may be tricky or dangerously unfair, but for experienced traders who understand the intricacies of the bonus programs, they may still want to join in any way to achieve certain targets. If the traders are aware of the risk then it should not be a problem. The brokers only have to make sure that the traders registering for the bonus programs have a good understanding of the terms and conditions.
Regardless of those problems, many traders still believe in the licenses issued by regulatory agencies as the safety indicators when it comes to choosing a forex broker. Licenses from the abovementioned top FX jurisdictions are particularly well-trusted and held in high regard compared to licenses from other jurisdictions.
Yet, the dilemma between safety and flexible trading conditions creates a situation where many experienced traders are eventually driven to choose to trade in two kinds of forex brokers; the strictly regulated and the loosely regulated only for the purpose of trading with no restrictions. But before that, make sure that you have built a winning trading system that can't be hindered from any restrictions. If not, trading in a well-regulated forex broker should be your top priority.