Fiat currencies

Foreign exchange regulation

Overview

Foreign exchange regulation is a form of financial regulation specifically aimed at the over-the-counter Forex market that is decentralized and operates with no central exchange or clearing house. Due to its decentralized and global nature, the foreign exchange market has been more prone to foreign exchange fraud and has been less regulated than other financial markets. However, some countries do regulate forex brokers through governmental and independent supervisory bodies. For example, the National Futures Association and the Commodity Futures Trading Commission in the US, the Australian Securities & Investments Commission in Australia, and the Financial Conduct Authority in the UK. These bodies act as watchdogs for their respective markets and provide financial licenses to organizations that comply with local regulations.

Objective

The objective of regulation is to ensure fair and ethical business behavior. In their turn, all foreign exchange brokers, investment banks and signal sellers have to operate in compliance with the rules and standards laid down by the regulators. Typically, they must be registered and licensed in the country where their operations are based. Licensed brokers may be subject to recurrent audits, reviews and evaluations to check that they meet the industry standards. Foreign exchange brokers may have capital requirements which require them to hold a sufficient amount of funds to be able to execute and complete foreign exchange contracts concluded by their clients and also to return clients' funds intact in case of bankruptcy. Each Forex regulator operates within its own jurisdiction and regulation and enforcement varies significantly from country to country. In the European Union, a license from one member state covers the whole continent under the MiFID 2 regulation and has resulted in regulatory arbitrage where companies select the EU country that imposes the least controls such as CySEC in Cyprus. Not all foreign exchange brokers are regulated and many will register in jurisdictions that impose low-regulatory environments such as tax havens and corporate havens that form part of offshore banking.

Main regulatory requirements

Although regulatory requirements differ between jurisdictions, there are certain common points they focus on:

Client conduct - These ensure brokers cannot make unrealistic or misleading claims or promises. It also prevents brokers from advising clients to take risky trade decisions or to enter into positions that are not in their best interest. Segregation of funds - These restrictions ensure that the broker can not use any of the clients funds for its operational or other expenses. This regulation requires that all deposits be maintained separately from the broker’s bank accounts. Reporting and disclosure - These rules ensure the broker's clients are well informed of the status of their account and the risks associated with Forex products. Leverage limits - These limits ensure clients maintain an acceptable risk level. As such, firms may not offer increasingly higher leverage to consumers (e.g. 1:1000). Minimum capital requirements - These restrictions ensure that clients can withdraw their funds at any time including in the event of bankruptcy of the broker. Audit - Periodic auditing assures the broker financial risk is tolerable and there is no misappropriation of funds. To this end, brokers must submit periodic financial and capital adequacy statements.

Europe

Belgium - Financial Services and Markets Authority, FSMA Bulgaria - Financial Supervision Commission, FSC Bulgaria Croatia - Croatian Financial Services Supervisory Agency, CFSSA Cyprus - Cyprus Securities and Exchange Commission, CySEC Czech Republic - Czech National Bank, CNB Denmark - Danish Financial Supervisory Authority, Danish FSA Estonia - Estonian Financial Supervisory Authority, Estonian FSA Finland - Finnish Financial Supervisory Authority, Finnish FSA France - Autorité des Marchés Financiers, AMF Germany - Federal Financial Supervisory Authority, BaFin Greece - Hellenic Capital Market Commission, HCMC Hungary - Hungarian Financial Supervisory Authority, HFSA Iceland - Financial Supervisory Authority, Iceland FSA Ireland - Central Bank of Ireland Isle of Man - Financial Supervision Commission, FSC Italy - Commissione Nazionale per le Società e la Borsa, CONSOB Latvia - Financial and Capital Market Commission, FKTK Lithuania - Bank of Lithuania Liechtenstein - Financial Market Authority, FMA Luxembourg - Commission de Surveillance du Secteur Financier, CSSF Malta - Malta Financial Services Authority, MFSA Norway - Financial Supervisory Authority of Norway, FSA of Norway Poland - Polish Financial Supervision Authority, PFSA Portugal - Portuguese Securities Market Commission, CMVM Romania - Romanian Financial Supervisory Authority, ASF Russia - Central Bank of Russia, CBR Slovakia - National Bank of Slovakia, NBS Spain - National Securities Market Commission, CNMV Sweden - Financial Supervisory Authority, Swedish FSA Switzerland - Swiss Financial Market Supervisory Authority, FINMA United Kingdom - Financial Conduct Authority FCA

Asia

Azerbaijan - State Committee for Securities Bangladesh - Securities and Exchange Commission, SEC China - China Securities Regulatory Commission, CSRC UAE - Capital Market Authority, CMA Hong Kong - Securities and Futures Commission, SFC India - Reserve Bank of India, RBI Indonesia: Financial Services Authority, FSA of Indonesia Bank Indonesia, BI Israel - Israel Securities Authority, ISA Japan - Financial Services Agency, FSA of Japan Kuwait: Ministry of Commerce and Industry Kuwait Chamber of Commerce and Industry, KCCI Lebanon - Bank of Lebanon Malaysia - Securities Commission Malaysia Mongolia - Financial Regulatory Commission of Mongolia Pakistan - Securities and Exchange Commission of Pakistan, SECP Philippines: Securities and Exchange Commission Bangko Sentral ng Pilipinas, BSP Singapore - Monetary Authority of Singapore, MAS South Korea - Financial Services Commission FSC of Korea Sri Lanka - Securities and Exchange Commission of Sri Lanka Thailand - Securities and Exchange Commission of Thailand Turkey - Capital Markets Board, CMB

North America

Canada - Canadian Investment Regulatory Organization, CIRO Mexico - Comisión Nacional Bancaria y de Valores, CNBV United States: Commodity Futures Trading Commission, CFTC National Futures Association, NFA

Central America

Anguilla - Anguilla Financial Services Commission, Anguillan FSC Antigua and Barbuda - Eastern Caribbean Securities Regulatory Commission, ECSRC Belize - Financial Services Commission, Belize FSC British Virgin Islands - Financial Services Commission, BVI FSC Cayman Islands - Cayman Islands Monetary Authority, CIMA Dominica - Financial Services Unit, FSU Panama: Superintendency of the Securities Market, SMV Ministry of Industry and Commerce of Panama, MICI St. Vincent and the Grenadines - Financial Services Authority, SVG FSA

Africa

Morocco - Moroccan Capital Market Authority, AMMC Kenya - Capital Markets Authority, CMA of Kenya Mauritius - Financial Services Commission, FSC of Mauritius Nigeria - Securities and Exchange Commission, SEC of Nigeria Seychelles - Seychelles Financial Services Authority, Seychelles FSA South Africa - Financial Sector Conduct Authority, FSCA

Australia and Oceania

Australia - Australian Securities and Investments Commission, ASIC New Zealand - Financial Markets Authority, FMA Vanuatu - Vanuatu Financial Services Commission, VFSC