Blog Post by Emils Kragis, Business Development Officer at PayPugs
When it comes to the forex market regulations are a must. The forex industry works closely with the government regulatory bodies to provide adequate protection for investors and traders. With more than $6.5 trillion traded daily, forex brokers are under strict financial requirements to ensure the safety and stability of the traders’ funds and the market as a whole.
However, not all forex brokers need to be regulated because of the government’s varied rules. For example, the St. Vincent and Grenadines provides a forex license, but there is no governmental body overseeing the operations.
Like any other financial institution, forex brokers must follow certain rules and regulations. Although, as the forex market is decentralized, there are many independent regulatory bodies overseeing operations. Mostly, the regulatory bodies work on a national level, meaning that different rules and regulations apply to different companies depending on where the broker is located. For example, forex brokers located in Australia must follow completely different rules than forex brokers in Malta.
As forex brokers are subject to different rules, it also might limit the available trading options that the regulator allows for trading. Some brokers might give you the option of trading 1,000+ securities while others might offer you less.
One of the most common and important financial recruitment that any broker must comply with is operating capital. Operating capital is defined as the cash necessary for running the daily operations of a company. Forex brokers under CySEC license must have at least $750,000 of operating capital and brokers in the USA must have $20,000,000. The capital requirements vary depending on the licensing. As the USA license requires a relatively big initial capital, many forex brokers choose to open their company in Cyprus as the rules are less stringent.
To maximize the returns of an investment, forex brokers look for high leverage possibilities. Leverage is the use of debt to undertake investment, meaning that a forex broker might use debt to achieve greater returns on investment. A leverage ratio of 500:1 would mean that for every $1 of their capital, the trader receives $500 to trade with. Because of the fierce competition, leverage is considered to be an important factor for customer acquisition and profitability.
Leverage restrictions are implemented by regulatory bodies. In Europe, the leverage ratio depends on security. For example, forex brokers might offer a 30:1 leverage for fiat currency pairs but a 2:1 leverage for cryptocurrencies. On the other hand, the USA rules allow for a leverage ratio of 50:1 for fiat currencies and 20:1 for any other security.
In the risky environment of forex trading, safety and stability of your funds is the most important aspect. Due to the nature of the forex market, many regulatory bodies such as Financial Conduct Agency (FCA) have developed Financial Services Compensation Schemes (FSCS) to insure the clients’ funds up to a certain amount. Usually, forex brokers are required to adhere to a certain amount or a percentage of their share capital.
To ensure fair and ethical forex trading practices, most regulatory bodies including AFS (Australia), NFA and CFTC (USA), and CySEC (Cyprus) require forex brokers to keep clients’ funds in segregated accounts. The segregated accounts ensure safety and compliance with regulations as the forex broker is not able to dip into the client’s funds to cover operational expenses.
With years of experience and understanding of the forex market, PayPugs has developed different solutions for forex brokers to ensure effective, compliant, and efficient operations. If you wish to find out more, book a call to talk to one of our sales representatives.
The forex market is the biggest and most volatile market in the world. The highly leveraged market is also an unregulated market, without an international regulatory body overseeing trading operations worldwide. With different rules and regulations imposed by local regulatory authorities, forex brokers look for solutions for efficient and effective operations. Understanding the different financial requirements of forex brokers can help you pick the best one to do business with.