In short, the regulation is very loose. It is not like Forex trading is completely unregulated, but there is no such thing as SEC (Securities and Exchange Commission) for the Forex market. There is no central trading location, and there is no company that would own the market (like NYSE Euronext owns New York Stock Exchange). Decentralization of the modern foreign exchange market is its greatest advantage and one of its biggest problems. And while the market itself remains unregulated, the market participants are, in fact, regulated by various authorities, depending on the country where they reside or do their business.
The NFA (National Futures Association) and CFTC (Commodity Futures Trading Commission) are obligatory regulating organizations for the Forex brokers that are based in the United States or want to legally deal with the US residents. While spot Forex trading has nothing to do with the futures or commodities, these organizations set the rules for how the retail Forex market should work in the United States. Some of the rules protect the traders (e.g., by setting high own capital requirements for the brokers) and some just make traders' life harder (e.g. the tons of documentations required to register with a broker and the
The FCA (Financial Conduct Authority) regulates the Forex brokers that are based in the UK or are dealing with the British traders. The UK regulation is much lighter than the one in the USA, so traders usually find no difference when they are dealing with the
The SFBC (Swiss Federal Banking Commission) requires all the FX brokers that are based in Switzerland to obtain a real Swiss banking license and thus become a regulated banking institution. That is a good thing for those traders who are dealing with brokers that got such license because Swiss banking regulation is one of the best in the world, and those institutions that fulfill all the requirements can be certainly considered reliable. On the other hand, obtaining such a license is a long and expensive way; this fact is making some of the Forex companies move out of Switzerland.
Some Forex brokers are regulated by the European and other banking laws as they are registered as the banking institutions in the respective countries. Such brokers can be considered very reliable, but for a common retail trader, dealing with them is not easy as they usually require high minimum account deposit and a lot of account-related paperwork.
Whatever your opinion on Forex regulation might be, it is nonetheless useful to know the current situation with the market regulation. Some regulatory bodies do not impose any strict requirements on Forex brokers and thus are plainly nominal. If you see a broker registered in Seychelles or British Virgin Islands, or some other "offshore zone" it does not mean that it is thoroughly checked and audited. Of course, it neither means that the company is a scam. Some Forex brokers prefer to stay offshore for a lot of advantages and some traders prefer those brokers for their own reasons. It is important to know whether your broker is regulated, and who performs its supervision. When you choose a new broker, be sure to select the one with the appropriate type of regulation that fully fits your trading requirements.
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