Forex Market Regulations

Unlike the stocks and commodity futures markets, the foreign exchange market has no central clearinghouse. It is also not based out of any one specific country. The Forex market is a complex, yet loosely woven worldwide network of banks.

This is referred to as the Interbank system, in which retail brokers tap into this network to fill their customer orders. Since this permeates pretty much every aspect of currency trading, especially the regulatory environment, it is almost impossible to get a strict regulation on such an entity. This is something that you as a trader need to accept about this market if you want to continue to invest.

For the first 10 years or so of retail Forex the CFTC (Commodity Futures Trading Commission) and the NFA (National Futures Association) did very little. A lot of this probably had a lot to do with the fact that it took time to understand how to control this kind of freewheeling market.

In 2008 and 2009 however, these two agencies began to pour out new regulations very consistently. This usually happened without them requesting much feedback from market participants. The economic meltdown of 2008 has been attributed to the reason why these agencies took such a fast-track approach.

The new NFA Compliance Rule 2-43 is one that has brought about a lot of havoc for both brokers and traders. This rule mainly deals with the two issues of Anti-Hedging and FIFO (First In First Out). These new regulations that have been put into place have caused many U.S.-based brokers to find affiliates oversea that are beyond the reach of the NFA and CFTC. Traders also don’t like the new regulations being put into place, which has caused many to move their accounts and money overseas. This has been a big incentive for many of these brokers.

Since then in early 2009, brokers found that they had to rapidly make major changes to their trading platforms to accommodate both of these regulations. To many, it seemed like these new regulations were made without any regard to what was making them work. The time period of 2009 when all of these changes were taking place could have been considered a time of chaos among both brokers and traders.

Requirements of Capital for Retail Broker-Dealers

The Broker-dealers involved with retail Forex continually must meet higher and higher capital requirements. Mergers in retail Forex continue to get more common and smaller firms, both good and bad, are being shut out. In 2008, the CFTC Reauthorization Act increased the adjusted net capital requirement for certain counterparty FCM’s to $20 million. This standard was phased in over time since it was such a huge leap from the previous $5 million requirement.

A counterparty FCM is generally considered to be a market maker who would actually be a broker-dealer who trades as counterparty to their customers. Many believe that this whole counterparty paradigm will soon be revised by the CFTC and NFA. Even IB’s (Introducing Brokers) who actually coattail on an FCM’s capital base, are also now required to meet minimal capital requirements of their own.  The one thing that has happened and always seems to happen along the way is that we find regulations having unintended consequences, especially for the smaller broker-dealer.

Future of FOREX Regulations

Even though no one can actually know where the future of these regulations may lead us to, there are many who believe that we have only seen the beginning. Of course, only time will tell to what extent these regulations could have, but there are rumors floating around that some in the CFTC want to force retail Forex into an exchange environment similar to commodity futures. Like we said it is something that only time will reveal but it is always good to keep up to date on regulatory information in the Forex market.