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Who Regulates Your Forex Broker?

November 4, 2019 by

Forex regulation is a hot topic among traders and when it comes to a discussion about whether to prefer a regulated or an unregulated broker, the word battles get especially bloody. Proponents of unregulated brokers are usually fond of unrestricted trading conditions (mainly, high leverage) and lower spreads (brokers don’t need to spend money on compliance). Advocates for broker regulation cite increased funds safety and trading conditions transparency.

From how our list of FX brokers looks like, it is easy to draw a conclusion that unregulated — or very loosely regulated — companies outnumber those that acquired some form of credible authorization from a government or government-sponsored institution. It is also evident that trading conditions are much more favorable at unregulated brokers than at regulated ones. Generally, even offshore branches of solid regulated companies offer much higher leverage, wider spectrum of trading instruments, accept more payment methods, and offer all sorts of bonuses that are absent in regulated entities. This might lead a prospective customer to wonder — why should I even bother going with a regulated Forex broker?

As the forum discussions focus mainly on the restricting side of the regulatory interventions, it is difficult to notice any advantage offered by regulation. Also, when government agencies increase the number and strictness of compliance requirements for brokers, they make it more expensive for brokers to operate — brokers’ outlays rise while the overall level of competition falls as fewer companies become able to afford to play by the rules. Both factors — higher costs and lower competition worsen trading conditions even further (higher spreads and commission, poor customer support service, and so on).

But such view omits the main advantage of opening an account at a regulated broker — reliability. You might disagree that high leverage is inherently bad for retail traders, you might be inclined to think that strict KYC/AML policies and risk disclaimers are excessive, but there is no denying that the last thing a trader wants is to see their money gone without risking them in a trade. There are two main possibilities for failure here — a broker becomes insolvent or a broker runs with the funds. Both of them mean no refund to a customer — a total loss of all trading funds. Of course, the first possibility is also present with regulated companies. However, the chance of a regulated company going under is much lower (due to significant capital requirements), and, most importantly, the deposits made with regulated brokers are normally guaranteed by some compensation scheme. Other ways an unregulated broker can make a trader’s life harder is by meddling with their trades, secretly selling their order flow information, or use vaguely defined terms of service to delay withdrawals. Although these options are also open to regulated brokers, they usually get punished for trying something like that, whereas unregulated brokers don’t suffer any penalty at all.

One partially valid point raised by defenders of the unregulated brokers is that the most important quality a trader should look at with a broker is its reputation. They say that even a broker without any government oversight won’t mess with its customers due to reputational risks — after all, it is their only asset of trustworthiness. Still, even a reputable broker may undergo negative changes and become bankrupt or resort to blatant fraud.

A Forex trader decides whether to go with a regulated or unregulated broker

In my opinion trading with an unregulated broker is akin to trading Forex without stop-loss — it looks profitable, advantageous, and it seems to be reducing the risks, but in the end, it brings the potential for unlimited loss at an unexpected time. It surely feels good (and also gets reflected on the account balance) trading under more favorable conditions, but losing everything because of the company deciding to be not so good or due to some rogue employee helping to steal your funds is terrible.

There are many jurisdictions available for brokers to get regulated — some are stricter others are less. And there are many offshore places for brokers to just register and do business without much or with no supervision at all. Do you know who and how regulates your broker? If it is regulated, are you sure that your account is opened via its regulated entity and not via its offshore division?

Who regulates your Forex broker(s)?

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If you want to specify in more detail who and how authorizes the FX company you trade with, please use the commentary form below to do it.

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