As the Forex Exchange Market is a non-centralized OTC market, proper brokerage regulation is a top issue for all Forex traders and partners. An effective regulation requires a reliable regulatory authority with sufficient resources, capable of closely monitoring its members.
Regulatory authorities control Forex brokers in order to ensure the implementation of proper business practices. They can impose high penalties or even withdraw a license at any time. This means Forex brokers have a serious incentive to conduct business with ethics and transparency.
Eleven (11) Regulatory Authorities Around the Globe
These are the most popular regulatory authorities of our financial world:
- FCA UK (Financial Conduct Authority –United Kingdom)
- CySEC (Cyprus Securities and Exchange Commission -Cyprus)
- FINMA (Swiss Financial Market Supervisory Authority –Switzerland)
- ASIC (Australian Securities & Investments Commission -Australia)
- FMA (Financial Markets Authority -New Zealand)
- FSA (Financial Services Agency -Japan)
- CFTC (Commodities Futures Trading Commission -US)
- NFA (National Futures Association -US)
- FSB (Financial Service Board –South Africa)
- IFSC (International Financial Services Commission –Belize)
- FSC (Financial Services Commission - British Virginia Islands)
FCA UK (Financial Conduct Authority)
□ Foundation: 2013 (previously Financial Services Authority, about 4,500 employees)
□ Capital Requirement: 100,000 to 1 million GBP
□ License Cost: 35,000 to 50,000 GBP
□ Covering: 50,000 GBP per client
□ Reliability: 9/10
The Financial Conduct Authority monitors the British financial industry and regulates financial institutions such as commercial banks, investment firms, brokers, and dealers. FCA has under supervision 56,000 businesses, and it is the prudential regulator for over 18,000 of these firms. The FCA objectives include:
-Protecting financial markets & consumers
-Promoting competition in the domestic financial industry
European Economic Area (EEA) Authorization
The FCA also provides the European Economic Area (EEA) authorization, according to MiFID standards. However, the EEA firms are regulated in their home country, and not by the FCA.
FCA UK Registration Requirements
- The registration process requires 1 calendar year
- Initial capital requirement between £100,000 and £1 million, depending on the execution model (DD, STP, ECN)
- Liquid cash of £100,000, unrelated to clients’ funds
- License costs £35,000 to £50,000
- Sufficient liquid capital to cover any probable negative impact from the company’s positions (liquidity is regularly monitored)
- The broker should not have any debt
- Client bank account segregation
- Following the anti-money laundering regulations
Client Account Segregation
All FCA-regulated brokers are obligated to segregate their client funds from their own funds via Top-Tier banks.
Covering Client Funds in Case of Insolvency
In the case of insolvency, clients of FCA-regulated brokers can claim up to £50,000. The coverage operates under the FSCS (Financial Services Compensation Scheme).
■ FCA UK BROKERS: » FXTM | » FP Markets | » FXCC
CySEC (Cyprus Securities and Exchange Commission)
□ Foundation: 2001
□ Capital Requirement: €125,000 to €1.0 million
□ License Cost: €35,000
□ Covering: 20,000 EUR per client (through ICF)
□ Reliability: 7/10
► Website
Established in 2001, the Cyprus Securities and Exchange Commission (CySEC) regulates the domestic financial industry. CySEC was the first regulatory authority to provide licenses for binary options firms.
CySEC responsibilities include:
-Monitor and control the local investment industry (investment firms, consultants, brokers, etc.)
-Provide licenses to financial firms domiciled in Cyprus
-Impose penalties or even withdraw licenses in case of regulatory non-compliance
CySEC Registration Requirements
- The registration process requires 6 months
- €125,000 - €1 million minimum capital
- Registration cost up to €35,000
- Daily, weekly, and monthly reports
- The nominated employees of the regulated broker must be residents of Cyprus
- Since early 2017, CySEC banned bonus promotions tied to trading volumes.
Covering Client Funds in Case of Insolvency
In the case of insolvency, clients of CySEC-regulated brokers can claim up to €20,000 via the ICF (Investor Compensation Fund).
■ CySEC BROKERS: » FXTM | » FP Markets
FINMA (Swiss Financial Market Supervisory Authority)
□ Foundation: 2009 (previously SFBC)
□ Capital Requirement: 1.5 million CHF (securities dealer) to 20 million CHF (Forex broker/banking license)
□ License Cost: The fees are relatively small and include the registration and the annual supervisory fee
□ Covering: 100,000 CHF per client
□ Reliability: 10/10
► Website | ► Publications
The FINMA founded in 2009 as the merger of the Swiss Federal Banking Commission, Federal Office of Private Insurance, and Anti-Money Laundering Control Authority. FINMA offers a wide variety of licenses:
- Swiss Banks
- Securities dealers
- Insurance companies
- Bond Institutions
- Financial intermediates
FINMA Registration Requirements
- The registration process requires a minimum of 6 months
- Forex brokers offering services to retail traders in Switzerland are obligated to set up as banks
- The minimum net capital is 20 million CHF (banking license)
- In order to offer additional investment products such as bonds, CFDs, futures, and options, brokers must receive a Securities Dealer license
- Securities Dealer license requires a minimum of 1.5 million CHF paid capital
- Brokers are obligated to keep 10% of their total risk exposure
- The audit must be performed, by a recognized audit firm
Client Account Segregation
All brokers are obligated to segregate their client funds from their own funds via Top-Tier banks.
Covering Client Funds in Case of Insolvency
In the case of insolvency, clients of FINMA-regulated brokers can claim up to 100,000 CHF.
■ FINMA BROKERS: » Dukascopy Bank
ASIC (Australian Securities & Investments Commission)
□ Foundation: 1998 (1,844 employees)
□ Capital Requirement: 50,000 AUD to 1 million AUD
□ License Cost: 35,000-50,000 AUD plus minor annual fees
□ Covering: No coverage in case of broker’s insolvency
□ Reliability: 7/10
► Website
Founded in 1998, ASIC (Australian Securities and Investments Commission) provides the Australian Financial Services (AFS) license to all Forex businesses domiciled in Australia. ASIC licensing is essential to domestic brokers, dealers, financial service providers, financial advisors, consumer credit entities, auditors, etc.
ASIC missions:
- Monitor and control the domestic financial system
- Ensure investor’s confidence and financial sector transparency
- Ensure that the essential information related to the financial sector is available to the general public
ASIC Registration Requirements
- The registration process requires a minimum of 7 months and a maximum of 10 months
- The setup cost ranges between 35,000 AUD to 50,000 AUD
- At least 10% of revenue in cash (minimum 1 million AUD) as net tangible assets (NTA)
- Reports about the NTA requirement (if the NTA level remains below the 10%)
■ ASIC BROKERS: » ICMarkets | » IronFx
FMA New Zealand (Financial Markets Authority)
□ Foundation: 2011 (168 employees)
□ Capital Requirement: 1 million NZD
□ License Cost: 10,700 NZD registration fee (Derivative Issuer)
□ Covering: (N/A)
□ Reliability: 6/10
► Website | ► Publications
The FMA regulates the financial sector in New Zealand. The FMA license is required for brokers, dealers, fund managers, financial advisors, crowdfunding platforms, derivatives dealers, Peer-to-peer lenders, auditors, etc. The FMA provides licensing for domestic firms, but foreign firms can also register as Financial Service Providers (FSP).
Registration Requirements (FSP)
- After providing all necessary information, it generally takes about 6 weeks to process applications
- 10,700 NZD registration fee (Derivatives Issuer), plus other fees
- 1 million NZD minimum net tangible assets
- Physical office in New Zealand with the presence of a compliance director
- Periodical audits according to the industry standards
- Maintaining sufficient liquidity, handling overall business risk, and honoring each and every executed trade
FSA Japan (Financial Services Agency)
□ Foundation: 1998
□ Capital Requirement: 50 million JPY net value (about 430,000 Euro)
□ License Cost: (N/A)
□ Covering: 10 million JPY (85,000 euro) in case of securities firms insolvency
□ Reliability: 9/10
► Website
Based in Tokyo, the Japanese Financial Services Agency (金融庁) is responsible for monitoring and controlling banks, investment firms, securities firms, and stock exchanges. Moreover, the FSA monitors in real-time the global economic trends and key changes in order to ensure the operational stability of the Japanese financial market participants.
FSA Japan Registration Requirements
- Forex brokers must have 50 million JPY as net asset value (about 430,000 Euro)
- The client funds must be held in segregated bank accounts (trusted banking institutions)
- The maximum capital leverage applied by traders cannot exceed 25:1
- The external audit of corporate financial statements
- The broker’s advertisements cannot exaggerate or misinform regarding the trading services provided
- Physical office in Japan with the presence of 2 officers who have a minimum of 3 years of experience in relative businesses
Investors Protection against Insolvency
In case securities companies are unable to return their clients' assets, a compensation system was established. The maximum reimbursement amount is 10 million yen per investor (85,000 euro).
CFTC US (Commodities Futures Trading Commission)
□ Foundation: 1974 (employees 435)
□ Capital Requirement: 20 million USD
□ License Cost: (N/A)
□ Covering: (N/A)
□ Reliability: 8/10
► Website | ► Smartcheck Providers
The Commodity Futures Trading Commission (CFTC) based in Washington, D.C. is an independent agency established in 1974. CFTC mission is to regulate the domestic futures and options markets. In the beginning, the CFTC founded as an organization to regulate the agricultural commodity markets but today regulates other derivative markets as well (currencies, stock indices, energy, precious metals, and interest rate products). After the 2008 crisis, CFTC regulates also the $400 trillion swap market. The CFTC objectives include:
- Ensuring the transparency in the financial sector by preventing manipulations
- Protecting investors from fraud
- Enforcing competition
Participants
- Retail Foreign Exchange Dealers (RFEDs) that include Forex Brokers
- Commodity Trading Advisors (CTAs)
- Introducing Brokers (IB)
- Futures Commission Merchants (FCMs)
- Swap Dealers (SDs) and Major Swap Participants (MSPs)
- Commodity Pool Operators (CPOs)
- Floor Brokers (FBs) and Floor Traders (FTs)
CFTC Registration Requirements
- 20 million USD minimum net capital (RFED or FCM registration)
- Segregated clients bank account
- Maximum capital leverage to 1:50 for Forex majors and 1:20 for Forex minors
NFA US (National Futures Association)
□ Foundation: 1982
□ Capital Requirement: 20 million USD plus 5% of liabilities owed to clients
□ License Cost: 125,000 USD annually
□ Covering: (N/A)
► Website
□ Reliability: 8/10
The NFA is headquartered in Chicago and maintains an additional office in New York City. Every entity conducting business with the public on futures exchanges and retail Forex marketplace must have an NFA license. NFA currently controls 4,000 firms and 55,000 associates. The NFA enforces the CFTC objectives by implementing additional policies.
NFA Extra Requirements for Forex Brokers
- $20 million net capital, plus 5% of the liabilities owed to clients
- $125,000 annual membership
- First-in-first-out (FIFO) order execution must be strictly followed
- Credit cards are banned (debit cards are allowed)
- Claims of profits must be accompanied by a statement of the risk of losing money
- Forex brokers cannot claim that the client’s funds have any special protection
- Forex brokers cannot claim ‘no slippage’ or ‘guaranteed filling’ (unless it can be proven)
FSB (Financial Service Board –South Africa)
□ Foundation: 2003 (411 employees)
□ Capital Requirement: (N/A)
□ License Cost: Find the ► full fees here
□ Covering: (N/A)
□ Reliability: 5/10
► Website
The FSB (Financial Services Board) is an independent institution that regulates the non-banking financial industry in South Africa. This includes the regulation of the Johannesburg Stock Exchange, which is the biggest stock exchange in the Africa continent.
The (FSB) oversees non-banking sectors such as brokers, financial advisors, retirement funds, insurance companies, investment schemes, and collective investment schemes.
IFSC Belize (International Financial Services Commission)
□ Foundation: 1999
□ Capital Requirement: 500,000 USD
□ License Cost: 25,000 USD annually, plus $1,000 (one-off)
□ Covering: (N/A)
□ Reliability: 3/10
► Website
Established in 1999, the International Financial Services Commission (IFSC) is the non-banking financial regulator of Belize. IFSC objectives include:
- Supervise and regulate non-banking financial firms
- Collecting and providing information to the general public
IFSC members include trustee and insurance services, investment and mutual fund services, asset management firms, securities trading services, Forex brokers and other Foreign Exchange service, providers.
A Few Words about Belize
Belize is an English-speaking country in Central America. Since attaining independence from Britain in 1981, the country focuses on the international financial services by providing incentives to businesses, with the offshore investor in mind. A Belizean IBC corporation allows business activities such as asset protection to operating bank accounts, brokerage accounts, ship ownership, and commission arrangements. The currency of Belize is the Belize Dollar.
IFSC Registration Requirements
- $500,000 minimum paid capital, and another $500,000 if derivative products as offered as well
- $1,000 application fee
- $25,000 annual license fee
- Another $25,000 if derivative products as offered as well (CFDs, options, futures, and other derivative products).
- Monthly statements reporting the capital owned by clients
- Full client funds segregation
- The Forex broker is allowed to conduct business only in the OTC market
- No residents of Belize can become customers to the Forex services
- The Belize currency cannot be used to conduct brokerage business in the Foreign Exchange
- Deposits of $10,000 or above must be checked by the Forex broker (anti-money laundering policy)
■ IFSC BROKERS: » JustForex
FSC British Virginia Islands (Financial Services Commission)
□ Foundation: 2001
□ Capital Requirement: (N/A)
□ License Cost: Find the ► full fees here
□ Covering: (N/A)
□ Reliability: 1/10
► Website
The British Virgin Islands Financial Services Commission (FSC BVI) was established as an independent regulatory authority for the supervision of all financial services in and from within the BVI. FSC provides regulation for banking, insurance, mutual funds business, financial brokers, etc.
A Few Words about British Virginia Islands
The British Virgin Islands is part of the Caribbean and it is a British overseas territory. Comprising 4 main islands and many smaller ones, it is a popular destination for offshore business activities. The currency of BVI is the United States Dollar.
The FSC's Objectives
- Protect the general public by ensuring that all firms are competent and financially sound
- Monitor and detect financial crime
- Facilitate innovation in financial services
- Maintaining regular contact with foreign regulatory authorities
According to 2016 data, IFSC has 7,800 members.
The Markets in Financial Instruments Directive (MiFID)
The Markets in Financial Instruments Directive is the legislative framework of the European Union for the financial industry. That includes banks, investment firms, stock exchanges, and alternative trading venues. All Forex brokers domiciled in EU countries are obligated to follow the MiFID policies.
The MiFID 2
In June 2014, the European Commission established MiFID 2 and MiFIR. The application date is January 2018. MiFID 2 involves:
- Ensuring that organized trading takes place on regulated platforms
- Introducing rules on algorithmic and high-frequency trading
- Addressing some shortcomings in commodity derivatives markets
- Enhancing investor protection and improving the conduct of business rules
Conclusions Regarding Forex Licensing and Regulation
The proper regulation of the Foreign Exchange industry is very important for all participants. Regulatory authorities can force Forex brokers to conduct business with ethics and transparency, to avoid large risks, and to keep sufficient liquidity at any given time.
Each and every regulatory authority aims to protect the general public and especially as concerns the safety of investor’s funds. This is happening by monitoring Forex brokers and by implementing certain policies. For example, the segregation of client funds from the broker’s corporate funds, via Top-Tier banks. However, one of the key aspects of funds safety is the depositor protection scheme in case of a broker’s insolvency. European Union (EU) countries offer in general €20,000 as compensation in case of insolvency. Clients of FCA UK regulated brokers can claim up to £50,000 under the UK Financial Services Compensation Scheme. In Switzerland, deposits are guaranteed against insolvency up to 100,000 CHF per client. On the contrary, the US and Australia do not offer a protection scheme in case of a broker’s insolvency.
In most European countries a Forex broker license can be obtained with 100,000 EUR capital. In the United Kingdom, it is almost the same (100,000 GBP). In the US, Forex brokers need to have 20 million USD as capital. In Switzerland, Forex services to retail customers require a banking license. This means 20 million CHF as minimum capital. That explains why so many Forex brokers choose to set up in EU countries and in the UK.
□ Forex Regulation and Forex Broker Licensing
George Protonotarios, Financial Analyst
OnlineForex.biz (c)
