While all transactions in a stock or futures markets are carried out under the supervision of an exchange, Forex is an over-the-counter market where the transacting parties can be from different corners of the globe. Thus, in the interest of investors, it becomes all the more important for the regulatory authorities to closely monitor the brokers facilitating the trades. Here is an attempt to describe the most popular regulatory authorities around the world that uphold legal and ethical standards in the industry.
Contents
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1 CFTC (Commodities Futures Trading Commission)
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2 NFA (National Futures Association)
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3 FCA (Financial Conduct Authority)
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4 CySEC (Cyprus Securities and Exchange Commission)
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5 ASIC (Australian Securities & Investments Commission)
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6 FMA (Financial Markets Authority)
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7 FINMA (Swiss Financial Market Supervisory Authority)
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8 FSA (Financial Services Agency)
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9 IFSC (International Financial Services Commission)
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10 ISA (Israel Securities Authority)
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11 MFSA (Malta Financial Services Authority)
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12 Registration and compliance requirements
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13 Conclusion
Forex regulation is a hot topic for many traders. Unfortunately, there is little concrete information available on the subject outside the official websites of the government institutions. This post aims to provide such information to help traders understand the implication of this or that regulatory environment on their rights and trading conditions.
For each organization, a list of responsibilities, requirements, and powers is provided. Whenever possible, we provide examples of the regulatory actions committed by the given agency.
CFTC (Commodities Futures Trading Commission)
The was established in 1974 as an independent agency to supervise futures trading and to protect investors by taking legal action against fraudsters. The CFTC was also granted more powers than its predecessor, the Commodity Exchange Authority. The CFTC is made up of six divisions: clearing and intermediary oversight, market oversight, enforcement, office of chief economist, office of the general counsel, and office of the executive director. The objective of the CFTC as the Federal governmentâs regulator is as follows:
Encourage transparency in the financial market.
Protect investorsâ funds from fraud.
Prevent market manipulation.
Aid the creation of financially sound and competitive market.
The CFTC initially regulated the markets of agricultural commodities such as wheat, corn, and cotton. However, in the course of time, the CFTC took charge of supervising the contracts of energy, metals, crude oil, heating oil, gasoline, precious metals, and even financial products (interest rates, stock indices, and currencies). The 2008 credit crisis led to the inclusion of the $400 trillion swap market, dominated by large firms and financial institutions, under its supervision.
The CFTC does not involve itself in the day-to-day operations of an exchange. The organization usually uses the Chicago-basedCME Group and the NFA (National Futures Association) for registering and monitoring activities. The CFTC has a complete control over the exchanges (CME, Intercontinental exchange, etc.) and the NFA. The CFTC has powers to even take the NFA to court if the monitoring activities of the latter are not satisfactory.
Irrespective of whether an individual or organization is NFA member or not, the CFTC has the right to get involved in case of non-compliance of rules. However, the disciplinary action is usually centered on non-NFA members.
Who should register?
Any individual or organization willing to do business as futures professionals should compulsorily register themselves with the CFTC. Registration process enables a clear assessment the financial health of the individual or organization. Furthermore, subject to federal regulations, the activities of a registered individual or entity can be tracked quite easily.
The term futures professional refers to an individual or organization with any of the following status:
Futures Commission Merchant (FCM)
Swap Dealer (SD)
Major Swap Participant (MSP)
Retail Foreign Exchange Dealer (RFED) — Forex brokers, who are the counterparty to a trade, come under this category.
Introducing Broker (IB) â an individual receives commission for bringing new clients to a retail Forex broker. However, an IB will refrain from handling the clientâs money and trade executions.
Commodity Pool Operator (CPO) — an individual or entity, which receives money from multiple investors, pools it into a single trading account and executes trades on behalf of them. Hedge funds come under this category.
Commodity Trading Advisor (CTA) â an individual or organization providing trading advice to customers.
Associated Person (AP)
Principal
Floor Broker (FB)
Floor Trader (FT)
Notice registered Futures Commission Merchant and Introducing Broker.
It should be noted that any individual or entity willing to pursue futures-related business with the public should compulsorily have NFA membership or associate status.
What are registration and compliance requirements?
Using the NFAâs online registration system (ORS), an individual or entity can register with the CFTC and apply for the NFA membership. The rules governing a Forex broker are as follows:
A Forex broker should register as RFED or FCM. The minimum net capital required for registering as RFED or FCM is $20 million.
Should have a local office.
Risk disclosure statement should be given to clients compulsorily. The statement should be similar to the one provided in futures trading.
A Forex broker should disclose the number of non-discretionary trading accounts. Furthermore, it is must for the broker to reveal the number of accounts which were profitable during each of the four quarters.
Liquid assets equal to or more than the total amount of obligation to retail customers should be maintained in a bank account.
The leverage is limited to 1:50 for major currency pairs and 1:20 for minor currency pairs on trading accounts.
A detailed monthly statement should be sent to clients on the last trading day of every month.
All records of communications concerning possible violations of regulations should be maintained and reported to the division of enforcement.
Individuals and entities acting as IBs should compulsorily enter into a guarantee agreement with the Forex broker.
All RFEDs should compulsorily designate a compliance officer who should make annual certification (saying that the RFED acts as per regulations) to the Commission and the NFA.
Legal matters, if any, should be disclosed to the CFTC without any delay.
How CFTC monitors for frauds?
The CFTC identifies fraud by administering the activities of designated contract markets, swap execution facilities, derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, and commodity pool operators. Furthermore, the agency immediately acts on individuals or entities who fail to comply with the regulations discussed above.
The CFTC also acts on complaints received from the public and other market participants. In this regard, the online CFTC SmartCheck facility enables an individual to check whether a Forex or binary broker is registered with the CFTC in any capacity. The CFTC also publishes the Red list, which includes the list of Forex dealers and brokers who accept the US clients illegally, without being authorized by the Commission.
What powers are at CFTCâs disposal?
Impose fine
Deutsche Bank was fined $800 million in April 2015 for manipulation of the exchange rates and false reporting of LIBOR and Euribor. More than $2.8 billion was collected as fines and deposited to US Treasury in the fiscal year 2015.
File complaint in the US District Court
For soliciting $50 million from the public, the CFTC filed civil enforcement complaint in November 2015 against IB Capital FX LLC. The company was not registered with CFTC in any capacity.
Ban from trading
On September 2014, the CFTC ordered a three year ban on FXDirectDealer LLC (FXDD) for violation of the minimum capital requirements. The CFTC also imposed a $600,000 civil monetary penalty against the Forex broker.
NFA (National Futures Association)
NFAThe NFA is a self-regulatory body, which complements the actions of the CFTC. The CFTC bill, which was passed in 1974, allowed the creation of such an organization. However, it took about eight years for the formation of NFA. The NFA enforces the rules created by the CFTC. The NFA also implements additional rules, as and when required, for the protection of investors. Considering the stringent standards, both CFTC and NFA are categorized as level 1 or level A jurisdictions according to Principles for Financial Market Infrastructure by the Bank for International Settlements.
Additional rules for Forex brokers
Detailed risk disclosure (as advised by the CFTC) should be provided. The section should categorically state that the trading platform is not an exchange and there is no protection for the invested amount. Furthermore, the section should explain that the broker is a counterparty to the trade and there may be differences in prices offered to different customers. The NFA rules also demand that the IB should disclose that he earns a commission for introducing a client to the broker.
A Forex broker should not claim that the clientâs funds are segregated or have any special protection.
Claims of âno slippageâ or âguaranteed fillingâ is not allowed, unless and otherwise it can be proven.
Claims of hypothetical profit should also be accompanied by a statement of risk of loss.
The marketing materials should never claim that Forex trading is suitable for everyone.
Cancellation or adjustments to price should be done within 15 minutes of order execution. If changes are made at a later stage, then such a change should be in favor of the client.
Rules governing slippage should be described clearly to the client.
A Forex broker should have a net capital of $20 million plus 5% of the liabilities owed to clients. The annual membership fee is currently at $125,000.
NFA has banned the use of credit cards for funding the trading account. So, a Forex broker accepting a US client should not accept funding via a credit card (debit cards are still allowed though). Furthermore, the FIFO (first in — first out) order execution rule should be strictly followed.
How NFA monitors for frauds?
Apart from supervision, the NFA also conducts regular audits. If necessary, the NFA can bring enforcement actions against its member for violation of the rules. For minor violations, the NFA penalizes the concerned member straight away. For example, on March 15, 2016, a day after the CFTC slapped IBFX Inc (TradeStation). with a fine of $1 million for failing to maintain capital adequacy, the NFA announced that it has revoked the membership of the Forex broker. The decision was taken based on the failure on the part of IBFX to implement an adequate risk management program and maintain a minimum adjusted net capital.
If the infraction is large, the NFA should seek the involvement of the CFTC, which would pursue civil actions against the individual or entity for the infringement of rules. The NFA is allowed to assist the CFTC but cannot file a case on its own.
FCA (Financial Conduct Authority)
The is a UK based independent financial regulatory body funded by the firms it regulates. The organization is accountable to the Treasury and the Parliament. The FCA came into existence in 2013. Following the Financial Services Act 2012, the FSA (Financial Services Authority), a quasi-judicial body in charge of the regulation of the financial services industry between 2001 and 2013, was split into two separate regulatory authorities, namely, the FCA and the PRA (Prudential Regulation Authority).
The FCA regulates both retail and wholesale financial firms, including banks, mutual societies, and financial advisers. The main objective of the FCA is to protect consumer interests, to enhance market integrity, and to promote competition. The FCA also provides EEA (European Economic Area) authorization to European companies. The authorization allows the companies to do business with the citizens of the UK, according to MiFID (Markets in Financial Instruments Directive) rules. The EEA (or passport holders) companies are regulated in their home country (as per the EEA standards) and not by the FCA.
Who should register?
Individuals or entities dealing with investments (buying/selling).
Those who arrange investment deals or accept deposits.
Asset and safe keeping enterprises.
Investment advisors.
Those who run investment schemes, or web based investment transactions.
Entities dealing with stocks and derivative products
Dealers of insurance contracts.
Entities performing activities related to consumer credit (hiring, leasing, lending, hire purchase, credit cards, debt collection, etc.)
Registration and compliance requirements
It would take approximately a year for a Forex broker to get licensed.
License costs would be from £35,000 to £50,000. Additionally, a Forex broker should also have £100,000 of liquid cash, unrelated to clientsâ funds. The FCA is generally categorized as level 2 or level B jurisdiction according to BIS classification.
Depending on the business model (STP, dealing desk, mixed, etc.), the initial capital requirement would be anywhere between £100,000 and £1 million.
It is a must for companies to maintain sufficient liquid capital to cover clientâs deposits, expenses, and probable negative impact from the companyâs positions. Capital adequacy is regularly monitored.
The company should not have any outstanding debt. A detailed annual audit by an independent financial auditor is a must. Additionally, there should be a comprehensive audit of the clients’ money as well.
Should maintain clientsâ funds in extremely reputed financial institutions (safe top-tier banks).
The company should adhere to the anti-money laundering regulations, while following well-defined risk management procedures.
Powers at FCAâs disposal
Impose penalty for small violations. In May 2015, FCA imposed a fine of £284,432,000 on Barclays Bank PLC (Barclays) for unethical business practices.
Order investigation of individuals and entities. In January 2015, the FCA ordered an investigation on the online CFD trading company Plus500 for issues related to anti-money laundering rules. The company froze the accounts of some customers following a request from the FCA.
Ban any kind of financial products for up to a year or even permanently.
Order firms to take back or modify promotions, which it considers to be misleading.
For serious violations, the FCA can cancel license and even imprison individuals (by taking them to court). In October 2015, the FCA banned Kweku Mawuli Adoboli, a senior trader of UBS AG, for misusing his position and causing losses amounting to $2.25 billion. Adoboli was also sentenced to seven years of imprisonment.
In case a Forex broker goes bankrupt, the clients are covered under the FSCS (Financial Services Compensation Scheme). Traders can claim up to £50,000 invested (100% of the first £30,000 plus 90% of the next £20,000) with the concerned broker. The case of Alpari (UK) Limited can serve as a good example here.
On December 6, 2016, the FCA published a consultation paper containing the list of proposed changes for improving the conduct of firms offering CFDs. The FCA also held a meeting with the CFD providers to know their opinion. The FCA is yet to announce their final decision. However, considering the disciplinary actions taken by the regulatory authorities in recent times, there may be only minor changes, if at all any, in the proposed rules:
All retail Forex brokers should provide a standardized risk warning and mandatory profit-loss disclosure such that it should be easy for even a layman to understand.
A maximum leverage of 1:25 should be allowed for retail traders who have less than one year of active trading experience in CFDs or other margined investment vehicles.
A maximum leverage of 1:50 should be allowed for experienced retail traders of CFDs. The volatility of the underlying asset should also be taken into consideration before deciding the leverage level.
A Forex broker should not offer any kind of trading or account opening bonus to lure new customers.
CySEC (Cyprus Securities and Exchange Commission)
The financial regulatory authority of the Republic of Cyprus is called as the (CySEC). The Central Bank of Cyprus was the regulating authority before the formation of CySEC in 2001. The geographical advantages and cost (tax) savings brought a huge inflow of retail Forex brokers. This prompted the creation of the CySEC, a licensing organization for Forex brokers and similar firms. The CySEC regulates some of the biggest brands in the retail Forex brokerage industry.
Responsibilities of CySEC
Supervise and control the Cyprus stock exchange.
Monitor operations of licensed investment services companies, investment consultants, collective investment schemes, and mutual fund management companies.
Provide licenses to investment firms, finance consultants, and brokerage companies.
Penalize brokers for regulatory non-compliance and impose administrative sanctions.
Who should register
Cyprus Investment Firms (CIFs).
Cyprus branches of investment firms of other EU states.
Agents of CIFs.
Undertakings for Collective Investment in Transferable Securities (UCITS).
Agents of UCITS.
Variable Capital Investment Companies.
Alternative Investment Fund Managers (AIFMs).
Trade depositories of over-the-counter derivatives.
Central Counterparty Clearing House (CCPs) of OTC derivatives.
Registration and compliance requirements
A minimum of â¬125,000 is required as a regulatory capital. Depending on the nature of the service provided, the capital requirement may be as high as â¬1 million.
Legal charges could run up to â¬35,000.
It would take about six months to receive a license from the CySEC authority.
Detailed daily, weekly, and monthly reporting is a must. In this regard, CySEC has begun to enforce EMIR (European Market Infrastructure Regulation) standards.
The Forex broker should compulsorily have an office in Cyprus. The nominated employees should reside in the country. If the company is outsourcing any brokerage related work, it should inform CySEC about it.
Clients should be allowed to withdraw their positive balance at any time. A Forex broker will have no right to put any kind of restrictions on withdrawal. This means that promotions of any kind should not be linked to withdrawal terms.
The Forex brokers should continue to monitor and evaluate their own funds level and capital adequacy ratio and ensure that it stays above the limit specified by the CySEC at all times. A Forex broker should also submit a capital adequacy report prepared by an external auditor within four months of the end of a financial year.
The employees of a Forex broker should not provide any kind of investment advice. In a case where the Forex broker has the necessary authorization to do so, only qualified employees, as stipulated by the CySEC, should offer investment advice to clients.
A Forex broker should also provide regular training to the staff providing investment advices such that they possess up to date knowledge and competence. Additionally, the staff employed by the Forex broker should not be bankrupt or have any criminal record. In this regard, a Forex broker should provide the necessary certificates from the competent authorities to the CySEC.
The staff should communicate with the clients in their original name and provide their true credentials.
Frequent phone calls to clients should be avoided. The staff should not use aggressive language or employ any kind of tactics to receive additional deposits from the clients. A Forex broker should have a credible internal assessment mechanism to evaluate staff. If a staff gets dismissed for serious violation of rules, CySEC should be informed immediately. If necessary, CySEC may take further legal action against the dismissed employee.
A Forex broker should not outsource investment advice, client support, and back office functions outside Cyprus. These critical functions should be provided from the headquarters or from the branch office situated in the Cyprus or another Member State.
CySEC has clearly announced that it is illegal to offer promotions such as welcome deposit bonus or perpetual deposit bonus, volume bonus, and risk-free trades. Additionally, bonus for referring a friend or participating in a webinar is also considered to be illegal. Even gifts in the form of electronic gadgets or bonus for identity verification are not allowed. The non-exhaustive list also cautions that tournaments, cash rebates, and unreasonably high interest rates on deposits are considered to be illegal. However, it is deemed legal to offer promotion in the form of lower spreads.
Without a written consent from a client, a Forex broker should not offer any kind of trading benefit. Furthermore, modification or cancellation of trading benefit conditions should not be done without advance information to the client. Most importantly, a Forex broker will not have any right to withhold the profits generated from clientâs funds, while cancelling a trading benefit. Thus, a Forex broker should clearly provide information regarding the funds available for withdrawal.
Withdrawal charges should be comparable to the regular commercial charges applied by major financial institutions.
The Forex broker should also have a proper system to prevent money laundering and terrorist financing. An annual statement, as prescribed, should be submitted by the board of directors of the Forex brokerage company to the CySEC.
A Forex broker should have an adequately trained risk management department.
Unless specifically requested by expert traders, the maximum leverage offered to any retail trader should not exceed 1:50.
The Forex brokers are also prohibited from offering their services to non-EU countries without permission from the CySEC. Additionally, the Forex broker should also have the necessary permission from the concerned authority in the territory in which they offer their services.
Forex brokers should also act on complaints/grievances from clients in a prompt, effective, and transparent manner. A broker should also maintain a detailed verifiable record of the complaint and the measures taken to resolve the issue.
Some of the Forex brokers were taking undue advantage of the supportive CySEC authority. However, things have changed a lot in the recent past. After joining the EU, Cyprus is taking all the necessary precautions to shed its âeasyâ regulator image. In 2012, CySEC became the first financial regulator to recognize binary options as financial instruments. It should be noted that many of the binary options brokers have their head office in Cyprus.
Considering the fact that Cyprus is a full member of the European Union since 2004, the CySEC follows the MiFID guidelines for the market. If a Cyprus broker becomes insolvent, then the retail clients can claim up to â¬20,000 from the Investor Compensation Fund. In 2014, the regulatory body banned promotions tied to trading volume. In 2015, the CySEC demanded the full list of worldwide call centers from the licensed brokers. Many believe that it is another right step towards tightening the grip over the brokers.
Powers at CySECâs disposal
Issue warnings
On November 12, 2015, the CySEC issued a statement saying that Noerus capital was neither authorized nor regulated by CySEC to offer investment and ancillary services.
Impose penalty
In May 2015, the CySEC imposed a â¬20,000 penalty on Trademarker (Cyprus) Ltd., which offered its services through the SkyFx brand. The firm was penalized for violating the Article 28 (1) (non-compliance with the conditions under which it was granted authorization), Article 13 (shareholders suitability) and Article 18 (2) (d) (outsourcing execution of investment services/activities) of the Law. Similarly, on March 16, 2016, the authority announced a â¬10,000 fine on SpotOption Exchange Ltd. for the violation of rules.
Suspend license
On March 4, 2016, the CySEC announced the suspension of the authorization of Pegase Capital Ltd. (license number 225/14). The suspension was mainly due to the violation of code of conduct for business establishments, when providing financial services to clients. Pegase owns the InteractiveOption brand. Earlier in November, the CySEC hit the firm with a fine of â¬300,000.
Serious matters
If the violation is huge, the CySEC can even file a case in court to receive an order of detention or to freeze assets.
ASIC (Australian Securities & Investments Commission)
Before 2001, the Forex business was self-regulated in Australia. The brokers only had to register themselves with the Reserve Bank of Australia (RBA). Following the enactment of the Financial Services Reform Act and the Australian Corporations Act, the retail foreign exchange dealers are now required an Australian Financial Services (AFS) license from (Australian Securities and Investments Commission) to conduct business in Australia.
Role of ASIC
Being the countryâs financial services regulator, the ASIC has the following responsibilities:
Facilitate the improvement of the financial system and ensure market transparency.
Promote investors confidence.
Administer the law with minimum enforcement requirements.
Make information about companies available to public as soon as possible.
Who should register?
Financial service providers.
Investment advisors.
Entities involved in consumer credit activities (banks, finance companies, mortgage, etc.)
Australian companies, which are involved in managed investment schemes.
Auditors and liquidators.
Registration and compliance requirements
Since February 2014, according to the ASIC regulation, only a Forex broker who has at least 10% of revenue (minimum of $A1 million; 50% in cash or cash equivalent) as net tangible assets (NTA) is allowed to operate in Australia. The requirement was 5% of revenue (minimum of $A500,000; 50% cash or cash equivalent) a year earlier. Before 2013, a Forex broker with a capital of $A50,000 could apply for the ASIC regulation. The tough measures were imposed after the regulators started following Basel III norms for revenue and capital. However, it has deterred many brokers from setting up a business in Australia.
It takes about seven to ten months for a broker to receive the ASIC license. The legal costs range from $A35,000 to $A50,000.
The broker should compulsorily have a physical office in Australia.
If the licensee does not have the requisite NTA for a minimum of two months, then within three days the ASIC should be informed about the matter. In such a case, the licensee is forbidden to enter into new transactions, which could potentially create liabilities for the company.
The 50% cash or cash equivalent rule ensures that unexpected losses can be met quickly.
At the end of every year, the NTA details should be provided to ASIC along with other financial statements.
As soon as a broker becomes aware that its net tangible assets had fallen below 110% of the stipulated NTA requirement, the ASIC should be informed. A report on the NTA level should be submitted at the beginning of every month as long as the NTA level remains below the 110% threshold.
A fall below 110% of the stipulated NTA serves as a caution to the clients. The ASIC, on their part, would start monitoring (risk-based surveillance) the activities of the Forex broker closely. On the other hand, if the NTA falls below 10% (minimum $A1 million) of the revenue, then the broker will be issued a cease and desist order by the ASIC.
Forex brokers who have an AFL license and operate from Australia should have Australian citizens as majority clients.
In case a Forex broker accepts clients from some other country, a license from the regulating authority in the clientâs jurisdiction is a must. Forex broker Pepperstone is a classic example of this rule. Nearly 40% of Pepperstoneâs revenue in 2014 was earned from the Japanese clients. When the rule was enforced, Pepperstone, which did not have a license from the Japanese regulatory authority, stopped accepting Japanese clients after a warning from the ASIC.
Clientâs money cannot be used as working capital. This means that a Forex broker should hedge risk with their own capital. Furthermore, clientsâ funds should be held in a trust. By the end of 2017, all Forex brokers are expected to comply with the new rule.
Experts believe that ASIC would follow the footsteps of FCA and soon impose a cap on the leverage allowed for retail traders. ASIC conducted a detailed survey of the retail OTC market a year ago. In fact, they have not issued new licenses to Forex brokers in the past two years. Thus, in line with FCA, the following compliance rules are expected to be announced by ASIC:
- A maximum of 1:25 leverage to retail traders with less than one year trading experience.
- A maximum leverage of 1:50 for all retail clients.
- Lower leverage on the basis of risk associated with a different asset class.
Powers at ASICâs disposal
Amend or create rules to ensure the integrity of the financial markets.
Halt the issue of financial products under the rule of defective disclosure documents.
Investigate breach of regulation. In May 2015, ASIC canceled the AFS license of the Forex service provider Rainbow Legend Group Pty Ltd (Rainbow Legend) for failing to comply with the financial reporting obligations.
Issue infringement notice in case of breach of the law. In April 2015, Advanced Markets Ltd (Advanced Markets) agreed to make changes to its website, following the notice issued by the ASIC. Before the changes were made to the website, the statements had seemed to imply that the ASIC regulates all the financial services provided by the Advanced Markets, including those which are carried overseas.
Ban people from providing financial services. In December 2014, the ASIC banned Monarch FX Group Pty Ltd (Monarch FX) and its former director and general manager, Quinten Hunter, from carrying on, either directly or indirectly, a financial service business for four years. Without holding an AFS license, the company offered trading signals, which were automatically executed on the clientsâ trading accounts.
Commence civil penalty proceedings in the court.
Conduct prosecutions in minor criminal matters.
FMA (Financial Markets Authority)
The FMA, established under the FMA Act 2011, regulates the capital markets and financial services in New Zealand. The FMA principally regulates only domestic firms. On the other hand, foreign firms can register as FSP (Financial Service Providers). The main advantage in doing so was the reduced requirements. However, many foreign firms started misusing the facility. The financial service providers, particularly the Forex brokers, posed themselves as a company operating from a developed jurisdiction. However, they hardly had a proper physical office in New Zealand.
Soon, the regulatory authorities understood the bad impression created on the country by these organizations. On February 2013, the FMA began its crackdown on foreign firms, which did not have a proper physical office or a resident Compliance Director. The FMA revoked the registration of hundreds of firms. Stringent conditions were laid out for receiving a license from the FSP.
Who should register under FMA?
The domestic firms and individuals, who should register under the FMA are:
Financial entities.
Product providers (fund managers, derivatives dealers).
Auditors and independent trustees.
Superannuation schemes and KiwiSaver providers.
Financial advisors.
Crowd funding platforms.
Peer-to-peer lenders.
NZX (registered exchange) including NZSX (main board), NZAX (alternative market), NZDX (debt market), FSM (Fonterra shareholders market), and NZCX (derivatives market).
Who should register under FSP?
The foreign firms which should register as FSP are:
Financial advisors.
Finance companies.
Forex dealers.
Fund managers.
Insurers.
Money changers.
Registered banks.
Professional trustees of debt securities or superannuation scheme.
Registration and compliance requirements (FSP)
Minimum net tangible assets of 1 million NZD or 10% of average revenue.
Must have a physical office in New Zealand.
A Compliance Director should be present in the office.
Client handling, KYC and AML procedures should be handled from the New Zealand office and not from elsewhere.
The Forex broker should be a registered corporation and comply with the business law within the New Zealand jurisdiction.
Forex brokers should subject themselves to periodical audits and comply with the industry standards.
Maintain sufficient liquidity to pay customers without delay.
Should not misrepresent facts and should disclose risks to customers.
Should honor each and every executed trade.
All compliance activities would be overseen by the FMA.
How does FSP settle disputes?
All financial service providers should belong to an approved Dispute Resolution Scheme (DRS) under section 48 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA). In the case of a Forex broker, the Financial Dispute Resolution Service is the approved scheme.
Whenever there is a problem with a Forex broker, a client should initially call the FDRS on their toll free number.
The FDRS will discuss the issue and guide the client to make a formal complaint to the FSP.
The FSP will try to resolve the issue. In case the client is not willing to accept the resolution, the FSP will provide a deadlock notice.
The client can now formally launch a complaint with the FDRS.
The FDRS will discuss the matter with the Forex broker and offer a resolution to the client. If the client refuses to accept the solution, then again a deadlock notice will be provided by the FDRS.
An independent adjudicator will then make a preliminary and a final decision on the issue. If the client is still not satisfied, the matter can be taken to Court or Disputes Tribunal.
Powers at FMAâs disposal
Issue warnings against unauthorized Forex brokers.
Deregister those Forex brokers who do not comply with regulations. Since 2014, the FMA directed the Registrar to remove hundreds of companies and individuals from the FSP register.
Negotiate out-of-court settlements for investors and award penalties. Between June 2014 and July 12 2015, the FMA secured $51.14 million in compensation for investors. During this period, the FMA also fined Forex brokers to the tune of $1.71 million.
The FMA also takes extremely serious cases of fraud to court. Between 2014 and 2015, judgments were passed in six cases of serious frauds related to the financial market. The judgments include four years and nine months imprisonment to the lawyer of Belgrave Finance Limited. The lawyer, Hugh Edward Staples Hamilton, was convicted for intentionally facilitating a white collar crime, which saw 1,200 investors lose about $22 million.
As much as 40% of the total complaints received by the FMA are about Forex brokers who offer short-term derivative products (currency pairs). In order to regulate the industry, the FMA had gone a step further and announced that it would be mandatory for all the Forex brokers to obtain a derivative license. Previously, institutions which are dealing with short-term derivatives were exempted from this rule. The new rule would come into force on December 2, 2017. Thus, Forex brokers who do not apply and receive the derivative license before December 1, 2017 will not be able to continue their business in New Zealand. Notably, FMA started issuing derivative license in 2014. The last date for applying for the license is August 1, 2017.
FINMA (Swiss Financial Market Supervisory Authority)
The was created by a merger of the SFBC (Swiss Federal Banking Commission), FOPI (Federal Office of Private Insurance), and AMLCA (
Anti-Money Laundering Control Authority) on January 1st, 2009. The principal aim for the merger was to create an integrated authority to supervise the activities of the financial market. As an institution serving the public interest, FINMA is financially and functionally independent.
The role of FINMA
Licensing
Any individual or entity interested in doing business in the financial sector need a license from FINMA. The organization provides a variety of licenses, depending on the nature of business. Furthermore, considering the quantum of financial risk involved, varying degree of strictness is applied while processing an application for the license.
Regulation
FINMA has the powers to intervene at any time and enforce law in a credible manner. The organization has enough expertise to draft laws and Federal Council Ordinances. While advising the parliament objectively, the organization can also issue ordinances and circulars.
Supervision
The intensity or supervision increases in areas where there is a considerable risk to creditors, investors and policy holders. If the risk profile is low, then FINMA would monitor the activities of the entity or organization in a superficial manner.
Enforcement
The process involves judging whether there is a genuine violation of law. If so, FINMA will use its powers to penalize the concerned individual or authority and ensure that such a happening does not repeat again. Individuals or entities who are not satisfied with the actions of FINMA can challenge the decision in court.
Who should register?
Banks and securities dealers (Forex brokers are registered as securities dealers).
Insurance companies.
Self-regulatory organizations (SROs).
Financial intermediates.
Central mortgage bond institutions.
Registration and compliance requirements
To set up a Forex broking business in Switzerland, an entity should have a banking license as per Swiss Bank Directive 3a.
To offer trading in other securities (futures, options, bonds, CFDs, etc.), a Forex broker should additionally apply for a securities dealer license.
An entity should have 100 million CHF as net capital to apply for a banking license. Furthermore, as a bank, the institution should maintain 10% of total risk exposure as
loss-absorbing capital.
To apply for a securities dealer license, a Forex broker should have at least 1.5 million CHF as Forex brokers.
A detailed business plan showing that the firm can maintain capital adequacy and risk management rules at all times should be provided to FINMA.
The Forex broker should manage business from an office in Switzerland.
An internal audit function, independent of the Forex brokerâs management, should be established.
A recognized audit firm for regular supervision should be appointed.
It will take at least Forex brokers to receive a securities dealer license. The time period does not include the response time from the concerned authorities.
The organization responsible for protecting the clients deposits as per the Swiss banking act is esisuisse. In case a Forex broker goes bankrupt, the client can claim up to 100,000 CHF.
Clientsâ funds cannot be used for operating expenses.
Powers at FINMAâs disposal
Ensure compliance. Between October 2013 and November 2014, the FINMA initiated enforcement proceedings against UBS AG for market abusive practices in foreign exchange trading. The investigation exposed that UBS AG, along with three other banks, had attempted to manipulate the foreign exchange market and acted against the interest of its clients. The FINMA fined UBS for a sum of 134 million CHF and further tightened the monitoring process. The senior officers who were involved in the manipulation were dismissed.
Issue warning. In December 2015, FINMA placed the Forex broker AlgoBanque in the warning list. The Forex broker is not registered with FINMA. However, if an unregulated Forex broker targets Swiss clients, then FINMA would act on them. In September 2015, the regulator issued a warning against OptionFx, the binary broker.
Cancel license and liquidate (assist systematic exit) company. In May 2009, FINMA announced that Crown Forex had gone bankrupt and the companyâs assets would be liquidated, following a rejection of the appeal in the court. The regulator clarified that the Crown and several other brokers were given one year time to comply with the amended regulations.
File criminal complaint in court.
Conduct restructuring.
Act against illegal financial intermediates.
File a case when an organization hides details about shareholders.
FSA (Financial Services Agency)
Tokyo-basedFSA is a government body which oversees the operations of banks, securities exchanges, and insurance sector. The organization ensures stability of the financial services sector of Japan. This integrated financial regulator reports to the Minister of State for Financial Services.
To streamline the operations of FSA, there is a Commissioner, Certified Public Accountants (CPA) and auditing oversight board, and Securities and Exchange Surveillance Commission.
The Vice Minister for Internal Affairs reports to the Commissioner. Under the Commissioner, there is an administrative law judge, planning and coordination bureau, inspection bureau, and supervisory bureau. The three bureaus have further divisions to take care of different financial sectors (banks, insurance companies, etc.)
The Securities and Exchange Surveillance Commission is made up of a Chairman, Commissioner, and an executive bureau. The executive bureau has further divisions to manage the financial markets.
Role of FSA
The FSA aims to achieve market stability, integrity and transparency in the following manner:
Monitor capital market
The FSA comprehensively monitors each stage of funds flow in the investment chain. Furthermore, the organization constantly reviews whether an independent or entity, which buys/sells or manages financial products, follows their fiduciary duties properly by putting customersâ interest before everything else. The FSA also establishes measures to maintain the credibility of accounting and auditing.
Supervise financial institutions
The FSA market stability, integrity and transparency companies every year, including Forex brokers, to assess the manner in which they deal with their customers. Furthermore, the organization regularly reviews corporate governance practices of financial institutions. Apart from reviewing the sustainability of a financial organization, the FSA also evaluates the risk management procedures.
Cyber security
Considering the fact that algorithmic/automated trading is gaining prominence in the financial sector, the FSA has taken cyber security as a top priority.
Global regulatory reforms and cross-border cooperation
The FSA co-operates with overseas financial service regulators in the case of complex cross border transactions. Furthermore, the FSA performs real-time monitoring of global economic trends and changes in the operational behavior of financial market participants.
Who should register?
The following is the list of organizations who should register with the FSA:
Banks.
Foreign banks’ agent banks.
Financial instruments business operators. The list includes Forex brokers, securities finance companies, and credit rating agencies.
Insurance companies (life, non-life, and holding companies).
Foreign audit firms and individual accountants.
Trust companies.
Registration and compliance requirements
A Forex broker who wishes to register as a Financial Instruments Business Operator should have a net asset value of at least ¥50 million.
The Forex broker should have specific procedures to avoid conflict of interest.
Client money should be held in a Trust bank accounts. It cannot be used as collateral by the Forex broker in any manner.
The maximum leverage that can be allowed for clients is 1:25.
There should be established internal rules for running the company.
An acceptable external audit of financial statements and internal control is a must. In this regard, the Forex broker should prove that they have made arrangements for a proper external audit.
Employees should have sufficient knowledge about compliance and risk management procedures.
None of the employees should have any past history of involvement in organized crime.
Advertisements should not exaggerate the services provided. If the brokerâs website provides details in Japanese language, then it is a must for the broker to register with FSA in Japan.
The company should have a clear decision making body.
There should be a physical office in Japan from where the business should be conducted. Additionally, there should be a minimum of two officers who have at least three years of experience in running a similar business.
The staff should have adequate training in processing complaints and resolving disputes.
Powers at FSAâs disposal
Impose fine or administrative restrictions
In June 2012, the FSA found serious shortcomings in the contingency plans of FXCM Japan Securities Co Ltd. The FSA also blamed FXCM Japan that it has no real intention to resolve the slippage related issues. The FSA just stopped short of imposing a monetary penalty after FXCM cooperated totally with the regulator. The business improvement order, issued in July 2012, was removed in January 2014 after FXCM submitted the report on August 3, 2012.
Revoke license
Based on an onsite inspection conducted at the Credit Suisse Financial Products bank, between January 1999 and July 1999, the FSA identified misuse of Trust accounts and inappropriate transactions in the financial markets. The license of Credit Suisse Financial products bank was revoked by FSA in July 1999 and the decision came into effect in November 1999.
Issue warnings
The FSA issued warning against two Forex brokers and one binary option broker in December 2015. The Forex brokers were Fox International Partners Ltd (Fox Forex) and BM Group Asia, Inc (FX Best), while the binary broker was Sun Ford Biz (SSTrade).
Issues with other regulatory authorities
In 2014, the FSA entered into an agreement with ASIC to ban Australian Forex brokers from targeting Japanese clients. In fact, the FSA made it mandatory for any broker, which offers a Japanese website, to compulsorily register with it. Similarly, the ASIC made it mandatory for the Forex brokers to state that ASIC regulation will protect only Australians. The move was considered as a tactic to protect the Japanese market from brokers regulated elsewhere. Several brokers, including InstaForex and Pepperstone, were affected by the move. Earlier in 2011, the FSA also made a complaint to CySEC demanding better conduct of the firms regulated by the latter. The FSA also insisted that the Cypriot firms have no legal right to do business with the Japanese clients.
IFSC (International Financial Services Commission)
The , a Central American country, was established in 1999 with a main objective of regulating the non-banking finance sector. The organization consists of members from both public and private sectors. Prominent people include the Governor of Central Bank of Belize, Director of financial intelligence unit and the Commissioner of Income tax authority. The IFSC expects the concerned individual or entity to comply with the enacted rules. Being a member of the Caribbean Financial Action Task Force (CFATF), the country is committed to anti-money laundering principles.
Role of IFSC
Promote Belize as a prime international financial center.
Maintain the reputation of Belize as a responsible offshore financial center.
Supervise and regulate firms involved providing financial services. However, it the supervision is not as rigorous as in Japan or the USA. The IFSC promotes self-regulation.
Assist the government in formulating policies, as and when necessary, to regulate the firms effectively.
Collecting and providing timely information to the public.
Who should register?
An individual or entity involved in any of the below mentioned financial services should register compulsorily with IFSC.
Trustee services.
Insurance services.
Collective investment schemes and mutual fund services.
Asset protection and management.
Securities trading services.
Money lending and safe custody services.
Foreign exchange trading services (List J).
Money transmission, payment, and exchange services.
Payment processing and accounting services.
Registration and compliance requirements
The application form for a foreign exchange trading business license costs $1,000. The annual license fee is $25,000. If a Forex broker offers derivative (CFDs, futures, options, etc.) instruments in commodities or stocks, then it will cost another $25,000 as an annual license fee.
The non-refundable application fee should accompany every application. The license fee is payable upon the grant of license by the Commission.
A Forex broker should have a minimum paid-up capital of $25,000.
For offering derivatives, the broker should have $500,000 more as paid-up capital.
The currency of Belize should not be used to conduct the Forex brokerage business.
The Forex broker should send monthly statement clearly indicating the amount due to the customer. The broker should also include a statement saying that the payment will be made on demand without delay.
Should compulsorily keep the customersâ funds segregated.
Should not encourage a customer to increase trading volumes with an ambition to earn more commission.
There should not be any unauthorized use of customersâ funds.
The Forex broker should disclose the commission and other charges prior hand to a customer. Furthermore, all customers should be treated equally.
If a client makes a written complaint to the Forex broker alleging misappropriation of funds or any other kind of fraud, then the Forex broker should inform those details to the IFSC within five days of receipt of the letter.
Any civil proceedings exceeding $25,000 against the Forex broker, in Belize or abroad, should be immediately informed about.
A Forex broker should sign a margin agreement with a customer before allowing trade executions. Furthermore, the Forex broker should compulsorily receive $2,000 as a margin deposit from the client.
The Forex broker will have a right to conduct business only in the OTC market.
By the 10th day of every month, a Forex brokers should compulsorily send the details regarding the paid-up and unimpaired capital. Additionally, the Forex broker should inform the number, volume and value of all the transactions executed in the previous month.
In the event of bankruptcy, the Forex broker should immediately inform the IFSC. The appointment of a trustee, admission to insolvency, or prolonged inability to maintain the net capital as per the licensing agreement is considered as bankruptcy.
The Forex broker should not enter into any kind of mergers without permission from IFSC. No changes in the Memorandum of Articles of Association should be made. The Forex broker is not allowed to implement any change in address or transfer a portion or the whole of the liabilities to any other entity.
Residents of Belize are not allowed to become customers to the Forex brokerage trading services.
Cash deposits of $10,000 or above should be properly checked by the Forex broker for money laundering related crimes.
The Forex broker should provide IFSC with a detailed operating manual of the business. No new branches should be established without the IFSCâs approval.
There will be a compulsory annual meeting with the IFSC. Previous yearâs performance and future prospects would be discussed.
No bearer shares should be issued by the Forex broker.
Powers at IFSCâs disposal
Issue warning. In November 2015, IFSC announced that Financial Strategy Holdings Ltd (New Trade FX) does not hold any license issued by IFSC to offer retail Forex trading services. In January 2016, the IFSC issued a warning against FXPrivate Company Ltd. for offering Forex brokerage services without any license.
Revoke license. In November 2013, the IFSC stated that InstaMarkets Ltd, the parent company of InstForex, no longer holds license to conduct Forex or any other financial service related activities in Belize. Earlier in October 2013, the IFSC warned public to avoid doing business with InstaMarkets. No reason was provided by IFSC in this regard. Similarly, on January 7, 2016, the IFSC announced that G. Star FX Inc., no longer holds the license to conduct financial service related business in Belize. The reason for the cancellation was not provided.
Impose fine.
ISA (Israel Securities Authority)
Established in 1968, the national securities regulator of Israel — — ensures efficient and transparent capital market. The agencyâs rules are mostly similar to that of the US securities laws and primarily intended to protect the interests of investors.
Responsibilities
Issues licenses to financial institutions, investment advisors, and portfolio managers.
Supervises operations of financial institutions, including Forex brokers.
Reviews quarterly and annual reports filed by financial institutions.
Oversees operation of the stock exchange.
Monitors and ensures fair operation of trading platforms.
Conducts investigations of violation of rules by license holders.
If a financial institution is found to have violated the law, administrative enforcement proceedings are carried out by the ISA Enforcement Committee, at the behest of the ISA Chair.
Before 2014, Israel-based Forex brokers carried out business without any kind of supervision. All that changed when legislation for the regulation of Forex brokers was passed on August 3, 2014, and became active in 2015. Only those Forex brokers having a Trading Arena license will be allowed to operate in Israel.
Who should register?
Forex and stock market brokers
Financial institutions providing investment advice
Investment and portfolio managers
Mutual funds
The ISA has prohibited licensed brokers to offer binary options to residents of Israel. A broker who wishes to offer binary options to an overseas client should necessarily possess the appropriate license from the regulatory authority in the clientâs jurisdiction.
Registration and compliance requirements
For a limited license, which involves stringent rules and supervision by the authorities, a Forex broker should have a starting capital of about $200,000. A capital of about $380,000 would enable a Forex broker to receive a full license with the condition that they have an agreement with a liquidity provider to protect the former from the market risks.
A starting capital of $1 million would enable a Forex broker to receive the highest degree of license. The Forex broker must maintain the amount as reserves. Annual checks would be conducted and re-categorization would be done if necessary. Additional charges for restricted and unrestricted license would be approximately $7,000 and $14,000 respectively.
Forex brokers should remain insured at all times. Furthermore, a minimum of 10% of capital should be set aside for managing unexpected risks.
Forex brokers should also determine the spread based on the profile of a retail trader. Even the age of the retail trader should be taken into account while determining the spread.
A retail trader should also provide some sort of security before trading and also sign a legal agreement with the broker before making a deposit. Clientâs deposit should be maintained in a segregated account. The balance should be modified on the basis of outcome of every trade made by a retail trader.
Under no circumstances, a Forex broker is allowed to withdraw funds from the segregated account and deposit in their business account, whenever a client makes a loss making trade. There should not be any delay in processing withdrawal requests.
Conflict of interest, if any, should be detailedly disclosed to the retail trader. Additionally, it is the duty of the Forex broker to explain the measures taken to mitigate risk.
ISA has also proposed a list of documents that have to be kept safely for future verification if required. Safekeeping period varies from one document to another. ISA has demanded Forex brokers to safeguard certain documents for up to 7 years. Various reports should be regularly sent to ISA on a biweekly, monthly, quarterly, annual, and biannual basis. Additionally, any significant event in the traderâs account should be reported immediately.
Forex brokers should also send detailed biweekly and monthly statements to clients.
Forex brokers should refrain from providing any kind of investment advice to traders. Forex brokers should comply with American FATCA (Foreign Account Tax Compliance Act) and avoid having US clients who do not report their earnings to the IRS.
Forex brokers are expected to hold multiple insurance policies to protect company from clientsâ lawsuits, employee malpractice, and hacking related incidents.
Forex bonuses in any form is not allowed. Along with each advertisement, there should be at least three disclaimers. Furthermore, all ads should be approved by the regulator before becoming available online.
ISA also sanctions hard ceiling for trading leverage. Forex brokers are allowed to offer a maximum leverage of 1:100 for low-risk instruments. For medium- and high-risk assets, the maximum leverage that should be allowed is 1:40 and 1:20, respectively.
Powers at ISA’s disposal
Conduct investigations.
Issue warnings. ISA issued warning to Forex broker Matach24 in November 2015 for suspected involvement in unlicensed portfolio management.
Impose fine. Binary options operator
DGI-Media was fined $129,000 in November 2016 for operating without a license.
Cancel license.
As of today, only six Forex brokers possess the Trading Arena license issued by the ISA.
MFSA (Malta Financial Services Authority)
is the sole regulator for financial service providers in Malta. Before the establishment of MFSA in July 2002, the financial institutions in Malta were supervised by the Central Bank of Malta, Malta Stock Exchange, and the Malta Financial Services Centre. This autonomous body is a member of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), to name a few.
Responsibilities
Regulates financial institutions.
Carries out due diligence and issues license to companies involved in all forms of financial services.
Supervises investment, trust, and insurance business.
Maintains Maltaâs registry of companies.
Issues guidance through circulars as and when required.
Coordinates with relevant parties on legislative matters.
Provides training to staff in Malta and abroad.
Educates and protects consumers.
Works in tandem with international law enforcement agencies to combat financial crimes.
Who should register?
Banks
Insurance companies
Pension funds
Stock broking companies
All categories of financial service providers, including Forex brokers
Registration and compliance requirements
Forex brokers must get category 2 (white label entities) or category 3 (own account dealers with multilateral trading facility) investment services licenses from MFSA.
At least one of the qualifying shareholders should be regulated in the provision of financial services. Additionally, the shareholder should also be involved in active management of the company.
A minimum capital of â¬730,000 is required for the license.
A fee of â¬2,250 should be paid while applying for a category 3 license. At the time of issuance of license, a sum of â¬4,000 should be paid. In case of a category 2 license, the amount to be paid is â¬1,500 and â¬3,000. Additionally, a registration fee of â¬2,250 is also applicable.
Once license is received, a Forex broker holding category 3 license should pay the annual supervisory charge of â¬4,000 for revenue of up to â¬250,000. A fee of â¬350 should be paid for incremental revenue of â¬250,000, but limited to a maximum of â¬5 million.
Forex brokers should offer a maximum leverage of 1:50 to retail clients.
For retail clients who wish to be treated as professional traders under MiFID terms, a maximum leverage of 1:100 can be allowed by a Forex broker.
There are no limits on leverage for other categories of traders.
An annual audit of the IT systems of Forex brokers has been proposed but the decision stands pending.
Forex brokers can only use liquidity providers that are authorized by officials in the European Union or some other reputed jurisdiction.
Monitoring of clients transactions and pricing policies should be carried out in Malta.
Powers at MFSAâs disposal
Depending on the level of violation of rules, the Malta Financial Services Authority can unilaterally decide the level of punishment:
Conduct investigation for breach of regulation.
Issue warnings. On May 16, 2016, MFSA issued a warning saying that a Forex broker named AlphacmMarkets is falsely claiming that it is licensed by the MFSA. The regulator also asked traders to avoid any kind of business or transactions with that entity. On April 18, 2017, MFSA issued a warning about One Coin Malta, a virtual currency.
Impose penalty. For breach of standard license conditions, FXDD Malta was fined â¬25,000 on January 28, 2014.
Cancel license. On March 8, 2016, MFSA cancelled the license of FX-CAM consulting (formerly Sensus Capital Markets Limited) for breaking the regulatory rules regarding conflict of interest requirements, dealing in own account, and appointment of introducing brokers.
Conclusion
Despite the variety in Forex regulatory environments around the world, traders should understand that there are licensed brokers with a bad reputation and unregulated brokers with a good reputation. Thus, a final decision should be made after thoroughly assessing the history of a particular Forex broker.
Update 2017-05-08: The post has been updated to reflect the most recent changes to the Forex regulation laws in Australia (ASIC), Cypris (CySEC), United Kingdom (FCA), and New Zealand (FMA). The article now also describes Israel Securities Authority and Malta Financial Services Authority as both organizations have started to play an important role in the retail FX ecosystem.
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