With the growth of the foreign exchange market, there is an increase in the number of brokers. Since the forex market is decentralized, it can become a breeding ground for the operations of some brokers who seek to rob you of your hard-earned money under the guise of trading. To prevent this from happening, in the first place, various agencies to regulate and enforce law among retail foreign exchange brokers were created to ensure that brokers operate on legal ground and provide transparency and top-notch service to their clientele. Despite all the efforts of these agencies, there are still some brokers engaged in dishonesty.
If you already trade with a company or are about to start trading, one of the most important things to check is how well the firm is adjusted. In other words, how safe is your money if you invest with them? If you want to know what to look for to determine if a brokerage firm is licensed, keep reading.
Is forex trading legal?
The forex market is the largest market in the world, with trading volumes in excess of 5.3$ trillion daily. There are absolutely now limitations when it comes to trading on the foreign exchange market. In fact, the only thing you’ll be responsible for is to make money. But it is also important to know and respect what your country’s legislation says about online trading in the Forex market. Some countries do not allow or otherwise put severe restrictions on forex, while other countries, such as the US, have such strict rules that impose harsh entry barriers for legal operation within given jurisdiction. It is to be hoped that these countries will soon make some amendments to their constitutions in order to ensure good inflows of forex trading in order to attract citizens to it. Therefore, if your country does not fall into any of these categories, then there is nothing. Forex trading is legally available to you.
Who provides regulatory oversight to retail brokers?
Each country is responsible for managing the activities of brokerage firms. In some countries, there are relatively stricter rules for their brokers. American brokers, for example, must obtain many licenses before they are allowed to work. Among them – the license NFA (National Futures Association). RFED (forex retailer) and FCM (futures commissioners) are licensed by the CFTC (Commodity Futures Commission).
One of the most popular licensing agencies is CySEC (Cyprus Securities Commission), based in Cyprus. Another authoritative agency is MiFID (Markets in Financial Instruments Directive), which is the EU body. These two are responsible for the licensing and regulation of many European brokers. Another agency is ASIC (Australian Securities and Investment Commission), based in Australia.
How do these agencies adopt regulatory oversight?
The CFTC, for example, has a list of scam brokers which they constantly update to warn the traders of these fraudsters. If any broker is found in any form of negligence, they impose huge fines and sanctions on them. They sometimes take a license depending on the seriousness of the malpractice. The CFTC also regularly conducts checks and reviews of its brokers to make sure that your money is not being misused.
As part of the license agreement, brokers are required to reserve money in the bank to cover trade contracts and return funds to customers in the event of bankruptcy of firms. All this is done in order to protect customers from losing their hard-earned money. If all brokers were to comply with these rules, there would be no problems, but some of them operate in low-tier jurisdictions to avoid heavy taxation. Some firms simply do not have the capital to start the company, and therefore they can not afford to reserve huge amounts in the bank as part of their licensing requirements.
Choosing a Broker
Now that you know about the regulatory bodies of brokerage firms, choosing a company is the easiest part. First of all, think about what you are looking for in the firm. Some firms have relatively higher minimum amounts to create accounts. So consider all these options before making a decision. Then check the country in which you are located and what regulators are responsible for the brokers. After all of them have been checked, and you are confident in the broker, then you go ahead and trade.
To the extent that you receive education on the right path of trade, it is equally important that the brokerage firm with which you invest is regulated. Otherwise, all your efforts in trade will go to waste. Be warned, because many of them have become victims of such fraudulent companies. So be careful with whom you are investing your money. As soon as you feel any suspicion, immediately stop trading with them. For more information – read our guide for beginners.