Eternity Law International — News — Regulations for Forex Brokers in US

Regulations for Forex Brokers in US

Published:
May 24, 2021

Foreign currencies are constantly exchanged throughout the world through the use of over-the-counter markets. Since the trading space is unlimited, this allows for seamless access to currencies.

Speculative Forex trading is becoming more common. The result of this activity is the emergence of banks or intermediary brokers that engage in fraudulent transactions or financial irregularities, or that charge hidden or exorbitant fees, exposing parties to high risk through too high leverage or other unfair practices. Trading via the Internet or mobile applications is uninterrupted and unlimited, however, this, in turn, increases the risk that sites that do not have any official basis may stop their activities at any time and disappear, taking money of the investors. Special regulations are a guarantee against this risk as they are aimed at protecting the funds of individual investors and ensuring fair legal cooperation.

The most important criterion when choosing a forex broker is its status, that is, to what extent the regulatory authorities approve them, and how well their management body functions.

How US authorities regulate Forex brokerage accounts

The NFA, the National Futures Association, is a leading independent provider of innovative and effective regulatory programs that are designed to protect the integrity of the derivatives markets, in particular forex. The scope of the NFA includes the following:

  • ensuring mandatory compliance with capital requirements;
  • combating fraud;
  • provision of licenses necessary for forex brokers to carry out trading and foreign exchange activities;
  • Ensuring compliance with the requirements that are established for the accounting and reporting of any transactions and related business transactions.

Key provisions of US regulations

Clients are defined as individuals with assets of $ 10 million or more and most small companies. It is especially emphasized that these provisions were created in order to protect the interests of small investors. Individuals with large equity capital are not subject to the standard regulations for forex brokerage accounts. In particular, the following can be highlighted:

  • leverage is limited to 50: 1 for major currencies so that non-professional investors in the market do not take on unprecedented risks. The main currencies are the Swiss franc, the New Zealand dollar, the British pound, the Japanese yen, the Australian dollar, the Canadian dollar, the Swedish krona, the Danish krone, the euro, and the Norwegian krone;
  • for small currencies, the leverage is limited to 20: 1;
  • the notional value of the transaction and the received option premium for short forex options added to it is maintained and functions as a security deposit;
  • long forex options require the full option premium as collateral;
  • holding of simultaneous positions in the same Forex asset is prevented by the FIFO (first-in-first-out) rule. This means that any of the existing trading positions in a particular currency pair is squared for the opposite position in the same currency pair.

The money owed by the forex broker to clients is kept exclusively in one or more institutions in the United States or in countries that are major financial centers.

Features of the US regulations

Before registering a trading account, you need to determine the location and status of the trading company, ownership, application and website availability. There are many websites that list fairly low brokerage fees and high leverage to optimize trading with less capital.

At the same time, almost all web resources are hosted and operated outside the United States, and, therefore, cannot be officially approved by the relevant authorities. Even those who are locally authorized may not be subject to the same rules that apply to residents of the States. Regulations governing required deposits, leverage offered, investor protection and reporting requirements vary from country to country.

Checking the broker’s regulatory status

The NFA provides a dedicated online system through which the status of forex brokerage firms based in the States can be checked. This can be done via their NFA ID, company name, pool name or individual name. When starting to check, you should be very careful about using the correct name or identifier, as many brokerage companies may be known by several names, in particular, the name of the site may differ from that which is the official name of the company.

Summarize

The regulations and rules that govern the financial market are complex and change incessantly as markets develop. If regulation is sufficiently relaxed and mediocre, it could lead to insufficient protection of the interests and funds of investors. On the contrary, overregulation can reduce global competitiveness and economic activity.

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