Who regulates the forex markets?

[John Naronha]

[Ignatius Bose]

According to the Triennial Central bank survey, the average daily turnover in the global forex exchange market in 2016 was approximately $5.067 trillion, slightly below the $5.345 trillion in 2013

With the forex markets growing rapidly, there are numerous complaints of customer accounts being churned, brokers reneging after promising large returns, lack of transparency, targeting vulnerable entities with phony advertising being just a few of them.

Between 2001- 2007, the Commodities Futures Trading Commission (CFTC) has prosecuted a number of forex firms with fraudulent cases involving more than 20,000 clients and losses exceeding USD 450 million.

Although forex markets are the single largest in trading volumes, they are mostly unregulated or under- regulated as no regulatory authority is completely overseeing the trading activities of brokers in these markets when compared to the regulations that brokers have to follow in exchange traded markets.

The Dodd- Frank Wall Street reform and consumer protection Act passed by the US Congress in 2010 has laid down stringent registration guidelines for forex dealers in addition to restricting them on the amount of leverage they can offer clients.

 

Country wise Regulators-

 In the US, the OTC markets and broker-dealer activities are regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) along with securities regulators within the State. Any complaints with respect to forex brokers can be directed to the SEC while the FINRA accepts complaints related to broker- dealers and other investment professionals.

 

In addition to the above two regulators, there are numerous other regulatory agencies supervising off-exchange forex operations globally.  

Beginning with the United States, the regulatory authorities are

Commodity Futures Trading Commission (CFTC)-

The CFTC is an independent agency established in 1974 and is authorized to regulate commodities and currencies traded on the US exchanges. The agency has a special task force to recognize and indict firms involved in defrauding foreign exchange customers.

National Futures Association (NFA)-

NFA governs the US futures industry and oversees all activity of forex brokerage firms operating in the US. Being a self-regulatory, industry wide organization, it has the authority to audit, enforce minimum financial requirements for its members who comprise of Future Commission Merchants, Forex Dealer Member and Introducing Brokers, and scrutinize financial reports in addition to arriving at a fair and speedy settlement of customer grievances as and when a demand for arbitration is filed.

 

The primary regulator in the UK is the

Financial Services Authority (FSA)-

This is an independent body which largely regulates the financial services’ industry and defines a set of policies that are to be followed by them. If firms do not meet the pre-defined benchmarks, the FSA is authorized to penalize or indict them in extreme circumstances. The FSA regulation authority encompasses the primary and secondary markets and the role of the regulator includes administration, surveillance, policing and enforcement.

 

In Switzerland, the financial markets are governed by

Swiss PolyReg-

PolyReg is again a self- regulatory agency acknowledged by the Swiss Federal money laundering control authority. The regulator governs the financial intermediaries based out of Switzerland.

 

In the European Union, each member country has an individual responsibility to regulate the financial markets. The basis for regulation is the guidelines issued by the Markets in Financial Instruments Directive (MiFID) in 2007.

In Australia, the financial markets are structured by the

Australian Securities and Investments Commission (ASIC)-

ASIC is an independent government agency established under the ASIC Act to protect customers, investors and creditors by administering the financial services’ law.