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What rules apply to forex brokers in the US?

What rules apply to forex brokers in the US? 

Through over-the-counter marketplaces, foreign exchanges (FX) take place continuously all over the world. Access is effortless in the space without boundaries. For instance, despite geographical restrictions, an Australian trader can transact in euros and Japanese yen (EURJPY) through a U.S.-based broker.

 

The amount of speculative trading in the retail FX market is increasing. As a result, there may be intermediaries (banks or brokers) who participate in unethical financial activities, fraud, outrageous fees, unstated costs, high-risk exposure presented through excessive leverage levels, or other unethical behaviours.

 

Online and mobile trading apps make trading easy, but they also increase the risk of unrecognised sites that could shut down without warning and steal users' money. Regulations make sure that such behaviour is prohibited. Regulations are designed to preserve the interests of clients and protect individual investors by ensuring fair operations.

 

The regulatory approval status of the broker and its regulating body are the most crucial factors to consider when choosing a forex broker.

What rules apply to forex brokers in the US?



How U.S. Authorities Regulate Forex Brokerage Accounts

The "primary independent provider of effective and creative regulatory initiatives that guarantee the integrity of the derivatives markets" is the National Futures Association (NFA) (including forex). The following describes the scope of NFA activities:

 

  1. To ensure that essential capital requirements are adhered to
  2. to grant the required licences to qualified forex brokers in order for them to engage in forex trading (after due diligence)
  3. to enforce comprehensive record-keeping and reporting standards for all company activities and related transactions

 

Important American Regulations Provisions

Customers are described as "individuals with assets of less than $10 million and most small enterprises," highlighting the fact that these rules are designed to safeguard small investors. High-net-worth people might not be protected by typical regulated forex brokerage accounts. The following additional clauses are included:

 

  • To prevent uninformed investors from taking extreme risks, the available leverage is capped at 50:1 (or a deposit of just 2% of the notional value of a forex transaction). The U.S. dollar, British pound, Swiss franc, Canadian dollar, Japanese yen, euro, Australian dollar, New Zealand dollar, Swedish krona, Norwegian krone, and Danish krone are considered major currencies.

  

  • On minor currencies, the maximum permissible leverage is 20:1 (or 5% of the notional transaction value).

 

  • The notional transaction value amount plus the option premium received should be kept as a security deposit for short forex options.

 

  • The entire option premium is required as collateral for long forex options.

 

  • The first-in-first-out (FIFO) rule prohibits holding concurrent positions in the same foreign exchange asset, meaning that any open trade positions (buy/sell) in a given currency pair will be squared off for the corresponding positions (sell/buy) in the same currency pair. This suggests that there is no way to hedge while dealing foreign exchange.

   

Before opening a trading account, caution should be taken to confirm the ownership, status, and location of each forex trading company, website, or app. There are a lot of websites that advertise low brokerage fees and high leverage, some of which go as high as 1000:1 (allowing more trading exposure with less capital).

 

However, practically all websites are hosted and run from countries other than the United States and might not have received the necessary approval from the host nation's regulatory body. Even those that are permitted locally might not have rules that apply to those living in the United States. The laws governing provided leverage, necessary deposits, reporting obligations, and investor protections will differ from one nation to the next.

  

The following is a list of the nations' respective forex brokerage regulators:

 

United States: Securities and Exchange Commission (ASIC)

Securities and Exchange Commission of Cyprus (CySEC)

Federal Financial Markets Service of Russia (FFMS)

Financial Sector Conduct Authority of South Africa (FSCA)

Switzerland: Federal Banking Commission of Switzerland (SFBC)

Financial Services Authority, United Kingdom (FSA)

  

Financial rules are intricate and frequently alter as markets grow. They also try to maintain equilibrium. While excessive regulation can impair global competitiveness and stifle economic growth, it can also result in poor investor protection.

  

Source:

  • https://www.investopedia.com/

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