Forex regulation in the US and EU

This article will be useful for every beginning trader who is interested in finding a reliable broker. Forex regulation can vary from country to country, and if you are looking for a reliable broker, you should pay attention to this. The EU countries and the USA have strict requirements for the Forex market. If you want to get a quality service, it makes sense to use the services of these companies. You should also check the information about the broker whose services you have decided to use. This will help you find a trusted company.

Forex regulation in the US

How is the foreign exchange market regulated in the US? This is the most severe area of Forex regulation in the world. The CFTC and the NFA keep an eye on the order. American residents can’t open an account with a broker from another country. The US regulation of the foreign exchange market is considered one of the toughest, but the most reliable in the world. Its mechanism is built on the principle of maximum protection of clients from fraudulent actions, although some features of the regulation are still a subject of active discussions. Today we will consider the functioning of the Forex regulation in the United States.

Financial regulatory tandem

Regulation of the U.S. currency market is performed by two most respected financial regulators: the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The CFTC was created in 1974 with the original function of regulating the futures market. In 2010 Congress passed the Dodd-Franc Act of 2010 to reform Wall Street. This Act gave the CFTC broad powers for the Forex regulation.

In 2000 and 2008, a series of laws were passed which outlined the types of companies in the foreign exchange market:

  • companies that are second party deal makers;
  • fund managers;
  • trading advisors;
  • introducing brokers.

Under these laws, it is mandatory for a company to be registered with the CFTC and to be a member of the NFA. The National Futures Association NFA is a self-regulatory organization (SRO), which covers not only the foreign exchange market, but also exchange-traded futures, swaps and derivatives. A company, which is not a member of NFA, has no right to operate on the markets, covered by the Association.

Basic requirements of American regulators to Forex-brokers

In order to work at the currency market in the United States the company must obtain a license RFED (Retail Foreign Exchange Dealer), issuance of which is accompanied by a number of examinations of all executive staff of the company, verification of the capital sources and the owners’ personal information, etc. In this case, the term of RFED license obtainment takes from 1 to 2 years.

  • The broker must have a minimum equity capital of 20 million dollars. At the same time, the early warning level is 150%. It means that the broker is obliged to maintain the level of capitalization not lower than $30 million. When it is reduced, the broker must notify the NFA each time.
  • The company is obliged to pay annual membership fees to NFA in the amount of $125 thousand.
  • All reporting must be transparent, which requires a broker to put in the public domain almost all the information, such as profitability of clients, and data on the accounts of the company.
  • The maximum leverage allowed is 1:50.

Currency regulation in the USA

As mentioned above, foreign exchange regulation in the United States is one of the most stringent in the world.

  • Forex brokers without an RFED license are not allowed to offer their services to U.S. citizens. Americans are only allowed to use the services of brokers with an RFED license.
  • All company personnel are checked, right down to the physical addresses. The regulators pay the closest attention to the accounts and capital flows, which practically excludes any shady management of the broker through fictitious persons.
  • A broker in the USA is obliged to file a huge amount of reports in time. Regulators, in turn, are required to conduct surprise inspections of companies without warning.
  • One of the main differences from regulations in other countries is that in the case of bankruptcy of the company no compensation is provided for the deposits of clients.
  • Constant reporting, from weekly to annual, allows regulators to react promptly to any violations of clients’ rights. Even the most insignificant manipulations from the broker’s side are strictly suppressed, and the company is fined.

In general, it should be understood that the CFTC and NFA activities are traditionally focused on the stock market, so the rules and requirements of maximum severity are applied to currency brokers. Therefore, the Forex regulation in the U.S. can not be called comfortable for the brokers of the foreign exchange market.

Forex regulation in the EU

How is Forex regulated in EU? By each state separately and with one common directive MiFID II. Some Forex brokers are proud to announce that they provide their services in the framework of the European regulation. For many traders it is a kind of quality sign. It is time to understand how exactly the Forex regulation is implemented in the EU.

The legal basis of the Forex regulation in the EU

It should be noted at once that there is no single regulator in the European Union, unlike other countries. However, this does not mean that no one controls the Forex brokers in Europe. Each member-state of the EU has its own organization which regulates the financial markets and each regulator has its own rules and requirements within the bounds of the legislation of their countries. In some countries, the regulator is the Central Bank (Ireland, Czech Republic), in some countries it is a specially created organization. The best known of them are:

  • UK’s Financial Conduct Authority (FCA);
  • Federal Office of Financial Control (BaFin) of Germany;
  • Cyprus Securities and Exchange Commission (CySEC);
  • Malta Financial Services Authority (MFSA).

In spite of the fact that each regulator imposes different requirements to Forex brokers which may differ, the regulation of their activity on the foreign exchange market is regulated by the key document for all EU countries.

MiFID II and MiFIR directives

This document was developed on the initiative of the British FCA, Directive 2004/39/EC, which is better known by the abbreviation MiFID (Markets in financial instruments directive). The directive was in effect from January 31, 2007 to January 2, 2018. In June 2014, Directive 2014/65/EU, which was abbreviated MiFID II, and Directive 600/2014 Markets in Financial Instruments Regulation (MiFIR) was developed.

Since January 3, 2018, the MiFID II and MiFIR directives are the key documents under which EU Forex regulators operate, and their requirements are mandatory for all financial market participants. Any Forex broker operating within the EU must have an MiFID II license.

Requirements and characteristics of the MiFID II directive

One of the key features of the MiFID II directive is the possibility of the so-called passportization of the EU territory. This means that a Forex broker holding a MiFID II license, issued by one of the regulators has the right to work on the entire territory of the EU, not only in the country, the regulator of which issued the license.

As mentioned above, each regulator imposes its own requirements on the applicant. In turn, the MiFID II directive defines the minimum regulatory threshold, and the regulator’s management can tighten them in accordance with their national legislation. This is the reason why most Forex brokers try to obtain the MiFID II license from regulators in Malta and Cyprus where requirements for them are not as strict as in the UK, for instance.

The MiFID II directive contains the following key requirements:

  • The amount of minimum capital;
  • Mandatory availability of compensation funds;
  • A clear separation between corporate funds and client funds;
  • Provision of quality services to clients.

For example, the determination of the leverage size is the prerogative of the EU Forex regulator, which is why many brokers offer leverage up to 1:500. Generally, MiFID II directive is not some kind of strict law; it rather defines the frames within which EU Forex regulators are obliged to act. Accordingly, some regulators are satisfied with the minimum, while others go in the direction of tightening their requirements to the values allowed by the directive. The MiFID II directive has become quite an effective tool, and the Forex brokers who received the license enjoy very high confidence among traders.

The Forex market is growing every year and it gives many beginning traders an opportunity to earn money. The brokers from the USA and the EU can be useful for those traders who have decided to get serious about trading and are ready to spend time on their training. The right approach to this issue will help you get great results. So start using the tools available and look for reliable brokers in the service market.