US Regulations for Forex Brokers
The forex market is the most significant market worldwide with transaction on the trillions dollars, and participation of traders and forex brokers from all around the globe with operation almost 24/7. It has experience a notorious reduction on the USA forex brokers number after the 2010 adoption of the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Wall Street Reform Act’’), which imposes several strong regulation to forex brokers and forex retailers. The Wall Street Reform Act produces that more than the 90% of USA located forex broker move their business overseas.
The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) and the National Futures Association (NFA) which are the agencies who oversee and regulate the USA forex market have established several rules and mechanism to protect the American people from schemes and higher risk associated with the forex trading. They require that USA forex broker comply with the following regulations:
- Persons offering to be or acting as a counterparty to retail forex transactions to be registered as retail foreign exchange dealers (RFEDs) or futures commission merchants (FCMs) with the CFTC, unless another Federal regulatory agency regulates them.
- Forex brokers offering retail forex trading in the United States must maintain minimum capital of at least $20 million, plus 5 percent of the amount by which liabilities to retail forex customers exceed $10 million.
- The maximum leverage offered for forex market is 50:1 and it is only available for majors and Scandinavians’ currencies. It enforces a deposit as margin or collateral of the 2% of the trading value from traders.
- The leverage for minor currencies is 20:1
- A 10-to-1 leverage limitation on retail forex customers.
- Hedging is not allow for forex trading. Therefore it cannot be offered
- Forex brokers must held their costumers or traders money deposited on a particular Bank account and visible for regular inspections from the regulatory agencies, Forex broker must maintain liquid assets equal to or more than the total amount of the firm’s obligation to retail forex customers in bank accounts,
- USA retail forex counterparties and intermediaries are required to disclosure, deliver and distribute any forex trading specific risk to their clients and potential costumer before any transaction or account opening.
- Each forex transaction must be recorded and reported; Forex brokers must maintain a comprehensive transaction recordkeeping. Forex brokers shall keep full, complete, and systematic records, together with all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity futures, retail forex transactions, commodity options, and cash commodities (including currencies).
The excessive regulation on the American forex market and forex broker activity is aimed to protect the uneducated traders and public from the risks associated with this market. Unfortunately, the comprehensive recordkeeping and the reporting cost, as well as the excessive liquidity required in addition to the 20 MM deposit requirements, have decreased the number of forex traders located in USA. These regulations might be change soon as president Trump is proposing to the congress some changes to this legislation to increase public access to the forex market.