The Basics to Online Brokers Regulation

For retail FX traders, the biggest risk of non-regulation is that of illegal activity or outright fraud.

Regulatory agencies worldwide regulate brokers and financial markets to protect investors from unlawful practices. These regulatory bodies enforce rules and regulations that brokers have to abide by. We will take a look at which these are and how does regulation work.

One thing to note is that the regulatory body only regulates brokers in their own jurisdiction. For example, ASIC (Australian Securities and Investments Commission) is an independent supervisory authority overseeing the investment services markets and transactions of securities in Australia.

So what does it mean that a broker is regulated?

In a nutshell, it means that the broker adheres to all the rules and regulations put in place and receives a license to operate in that jurisdiction. Regulators set rules for different aspects of trading. This includes margin requirements, balance protections, minimum capital requirements, and more.

What do traders get with a regulated broker?

The purpose of regulation is to protect you from undisclosed financial risk and fraud.

There are quite a few benefits for traders choosing a well-regulated broker.

Transparency – brokers have to submit regular statements and undergo audits. Choosing a regulated broker is a great way to avoid scams.
Risk – regulated trading platforms have to display risk warnings before traders sign up for a trading account. This ensures you know about the average percentage of accounts that lose capital.
Leverage – maximum leverage that traders use is limited by the regulatory bodies. This adds an extra layer of security for traders’ capital. When trading with leverage, you are borrowing money from your broker and can lose more than your initial investment.
Anti-money laundering – when signing up with a regulated broker, you are required to pass ID verification and add proof of address. This helps with preventing money laundering.
Financial Compensation – this is in the case that your broker goes bust. For example, CySec regulated brokers have to implement the Investor Compensation Fund. This ensures you get some if not all of your funds back in case anything goes wrong.
Segregated funds – this means your funds are safe and segregated. In case you withdraw funds, your broker always has funds to pay you.

Brokers also benefit from regulation. Having a tier-1 regulatory oversee their operations adds a lot of trust and reputation. Another benefit is that with regulation, all brokers have to adhere to the same set of rules and don’t undermine each other.

What happens if a broker breaches regulation?

A regulatory agency can take a number of measures. One option is to strip the broker of their license, which has a massive impact on the brokers’ reputation. In severe cases, the regulatory bodies can pursue criminal and regulatory actions. These regulators publish notices and alerts both local and international, to warn investors and potential clients.

List of regulatory bodies

Not all regulatory bodies are the same. They offer a different level of protection and have a stricter or more lenient set of rules.

Below is a list of financial regulatory bodies for each country:

AFSC – Anguilla Financial Services Commission regulates the financial services industry in Anguilla.
ECSRC – Eastern Caribbean Securities Regulatory Commission is the regulatory body that administers the securities legislation governing securities business in the Eastern Caribbean Currency Union.
FINRA – The Financial Industry Regulatory Authority regulates the exchange markets and brokerage firms.
CFTC – Commodity Futures Trading Commission was established in 1974 and regulates the U.S. derivatives markets such as swaps, options, futures, and others.
NFA – National Futures Association is a regulatory body headquartered in Chicago. It oversees exchange-traded futures, off-exchange traded foreign currency, and over-the-counter derivatives.
MAS – Monetary Authority of Singapore regulates a number of markets in Singapore.
SFC – Securities and Futures Commission is based in Hong Kong and oversees online trading in Hong Kong.
ASIC – Australian Securities & Investments Commission
FCA (was FSA) – Financial Conduct Authority is the main regulatory body in Europe.
BaFin – Federal Financial Supervisory Authority is the regulator in Germany.
MiFID – Markets in Financial Instruments Directive is a European regulation that oversees the European Union’s financial markets. MiFID has strict rules on the regulatory disclosures for brokerage firms’ operation in the EU.
CySEC – Cyprus Securities and Exchange Commission is compliant with the MiFID regulation. A number of brokers have the CySEC license, as they are regarded as less stringent as other European regulators.
FSMA – The Financial Services and Markets Authority.
IFSC – International Financial Services Commission is the regulatory body for non-bank financial services in Belize.
FSC of BIV – British Virgin Islands Financial Services Commission as an autonomous regulatory authority responsible for the regulation, supervision and inspection of all financial services in and from within the BVI.
BCSC – British Columbia Securities Commission regulates how businesses raise money and how securities, such as stocks, bonds and mutual funds, are bought and sold.
CIPF – Canadian Investor Protection Fund provides protection within prescribed limits to eligible clients of member firms suffering losses if client property comprising securities, cash, and other property held by such member firms is unavailable as a result of the insolvency of the member firm.
FINTRAC – Financial Transactions and Reports Analysis Center of Canada facilitates the detection, prevention and deterrence of money laundering and the financing of terrorist activities, while ensuring the protection of personal information under its control.
IIROC – Investment Industry Regulatory Organization of Canada is the pan‑Canadian self‑regulatory organization that oversees all investment dealers and trading activity on Canada’s debt and equity marketplaces.
OSC – Ontario Securities Commission.
CIMA – The Cayman Islands Monetary Authority.
Danish FSA – Danish Financial Supervisory Authority.
FSU Dominica – Financial Services Unit.
DMCC – Dubai Multi Commodities Centre.
DGCX – Dubai Gold & Commodities Exchange.
DFSA – Dubai Financial Services Authority.
FINANTSINSPEKTSIOON – The Financial Supervision Authority (Estonia)
FIN-FSA in Finland.
AMF – Autorite des marches financiers (France)
Banque de France.
CECEI France – Credit Institutions and Investment Firms Committee.
ACPR – French Autorité de Contrôle Prudentiel et de Résolution.
HCMC – The Hellenic Capital Market Commission (Greece).
HFSA – Hungarian Financial Supervisory Authority.
FME Iceland – The Financial Supervisory Authority.
CoFTRA – Commidity Futures Trade Regulatory Agency (Indonesia).
RBI – Reserve bank of India.
FSA Japan – Financial Services Agency of Japan.
JSDA – Japan Securities Dealers Association.
JIPF – Japan Investor Protection Fund.
CMA – Capital Markets Authority (Kenya).
Ministry of Commerce and Industry in Kuwait.
KCCI – Kuwait Chamber of Commerce & Industry.
FKTK – The Financial and Capital Market Commission (Latvia).
Banque Du Liban (Lebanon).
CSSF – Commission de Surveillance du Secteur Financier (Luxembourg).
FMA – The Financial Market Authority Liechtenstein (Liechtenstein).
Securities Commission Malaysia.
FSA in Malta – Malta Financial Services Authority.
FSC Mauritius – Financial Services Commission of Mauritius.
FMA New Zealand – Financial Markets Authority.
FSPR New Zealand – Financial Service Providers Register.
FSCL New Zealand – Financial Services Complaints Limited.
Securities & Exchange Commission Nigeria.
The Financial Supervisory Authority of Norway.
SMV Panama – Superintendencia de Mercado de Valores – The Securities Market Superintence.
MICI Panama – Ministry of Industry and Commerce.
Securities and Exchange Commission Philippines.
BSP – The Bangko Sentral ng Pilipinas.
PFSA – Polish Financial Supervision Authority.
CMVM Portugal – Comissão do Mercado de Valores Mobiliários.
ASF – Romanian Financial Supervisory Authority.
CRFIN Russia – Centre for Regulation of Off-Exchange Financial Instruments and Technologies.
FSA Seychelles – Seychelles Financial Services Authority.
SLA Seychelles – Seychelles Licensing Authority.
SGX – Singapore Exchange.
NBS – National Bank of Slovakia.
Financial Supervisory Commission (South Korea).
Securities and Exchange Commission of Sri Lanka.
The Financial Services Authority (St. Vincent and the Grenadines).
Swedish FSA – Swedish Financial Supervisory Authority.
ARIF Switzerland – Association Romande des Intermediares Financiers.
PolyReg General Self-Regulatory Organisation (Switzerland).
SBA – Swiss Bankers Association.
SFBC – Swiss Federal Banking Commission.
SFDF – Swiss Federal Department of Finance.
SFFA – Swiss Federal Finance Administration.
FINMA – Swiss Financial Market Supervisory Authority.
SNB – Swiss National Bank.
Securities and Exchange Commission, Thailand.
Capital Markets Board – SPK (Turkey).
FSCS UK – Financial Services Compensation Fund.

Forex Trading Regulation

The foreign exchange market is one of the largest markets by daily trade volume. It exceeds more than $5 trillion in daily trade volume. Countries worldwide are developing and updating regulations for the massive FX marketplace. One of the most active retail Forex markets is Japan. The FSA regulates the markets in Japan including Forex. Some of the changes include the maximum leverage allowed.

In the US, the SEC states that all forex brokers must be registered with the (RFEDs) Retail Foreign Exchange Dealers. Normal regulations and rules are in place to protect clients as well.

Copy Trading Regulation

Some regulatory bodies are starting to regulate copy trading brokers. Copy trading is when traders automatically copy the buy and sell orders of other traders. Some regulators put rules in place that copy trading services have to register as investment managers.

Alternative Trading Systems

Alternative Trading is a basic system that isn’t regulated as a normal exchange. These systems match buy and sell orders as an ECN (electronic communication network). In most jurisdictions, these brokers have to register as broker-dealers and not exchanges. These systems only match orders electronically and don’t have regulations in place to protect the consumers. They are essential in providing liquidity.

Conclusion

Picking a regulated broker is always a good idea, as you are protected with various rules and laws brokers have to adhere to. Make sure you check brokers’ licenses, regulations, terms and conditions, before opening an account and depositing money.

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