Search

How to Choose the Right Forex Broker (Check Their Regulatory License)

Not all Forex Broker regulatory licenses are made equal. Some are way better to ensure maximum protection of its traders in case something terrible happens. Let's talk about it.

Before we go any further, I'd like you to check your current or prospective Forex broker's regulatory license or permission papers. Type it into your Google search and you can find out a great deal about the license without digging deep into it yet.

Now let's get to the meaty stuff.


Note that the purpose of this article is to inform forex traders about the difference in regulatory licenses and the pros and cons of each. This will provide traders with better information and background before they decide which broker to place their hard-earned cash. I have indicated references/links below for your private reading.


The benchmark in which brokers are categorized can be ear-marked as follows: regulatory license which explains the countries of operation, leverage limits, negative balance protection, Investor Compensation Fund, Net operating Capital, KYC requirement strictness, Separate client bank accounts, Emphasis on Trader education, Commission and Fees, Platform and tools, Trust Score and Endorsement by Professional Trading Body.


Background:

Forex trading is characterized by high liquidity, which also equates to frequent trading opportunities. This has made Forex trading popular among traders. On the negative side, this fact also attracts scammers and money launderers, who can damage the overall market integrity. All the more, there is a need for regulatory bodies to ensure that the traders and their investments remain protected.


Forex brokers are then under supervisory bodies to ensure they adhere to fair trading practices and comply with local laws and regulations. These organizations are responsible to overseeing forex brokers and supervise that their services are compliant and protect investor interests. The aim of this structure is to build investor confidence in the financial markets.


Brokers opt for multiple regulatory licenses to establish credibility across different regions in the world. Here below are the 5 best and most coveted Forex licenses in the world. You can check if your broker has any of these licenses. If they have more than one of any below then that makes them even better!


  1. UK Financial Authority (FCA)

  2. Cyprus Securities and Exchange Commission (CySEC)

  3. United States National Futures Association (NFA)

  4. Australian Securities and Investment Commission (ASIC)

  5. The Swiss Financial Market Supervisory Authority (FINMA)

(Reference link at the end of this article)


I urge you to watch this video below from Anton Kreil. He is a former Goldman-Sachs trader and is now the Managing Partner of the Institute of Trading and Portfolio Management. In this video he explains how and why traders constantly lose money, how brokers operate and a whole lot of information to open your eyes. This will help you become more meticulous in choosing your broker.


Beware of brokers with licenses coming from countries such as St. Vincent and the Grenadines, Vanuatu, British Virgin Islands, Cayman Islands, Turks & Caicos Islands or pretty much any country considered a tax haven for most hedge funds. Most but not all of these licenses do not require the broker to have a local office, public access to data on beneficiaries and shareholders and directors are not freely accessible, no capital gains or inheritance tax, and only with a net capital requirement of anywhere from $20,000 to $50,000. Are you seriously going to put your money on a broker who could shut down anytime since they can probably make 5,000 times their net capital in traders' deposits in no time? Think about it before you jump in.


What it means if your broker has a license from the TOP 5 regulatory above. Here below in detail


UK (FCA)

The FC is the financial regulatory body of the United Kingdom, responsible for the legal framework for financial service providers within. It is responsible for investigating, regulating and enforcing these laws in the FX market. Once a broker obtains a license from the FCA, it is permitted to operate and establish branches in the UK and all EU member states, provided it obtains a regulatory passport to do so. To acquire a license, brokers need to fulfill stipulated capital requirements.


The minimum capital requirement for a broker is €730,000. Apart from capital adequacy requirements, broker firms also need to adhere to the strictest guidelines for KYC requirements, a sound business plan, appointment of educated and experienced top management professionals, statutory audit reports, interim financial statements, separate client bank accounts and more.


The UK FCA license is one of the most coveted licenses, as it supports free market access to customers in the EU.


Cyprus Securities and Exchange Commission (CySEC)

Cyprus offers a favorable destination for major forex brokers looking to enter the European markets and enjoy its lighter tax regulatory environment. CySEC operates under the umbrella of MiFID regulations, providing sound investor protection reforms like leverage limits on risky trading instruments, negative balance protection and presence of an Investor Compensation Fund (ICF).


Brokers need to maintain certain standards and abide by tough ESMA-issued guidelines to get licenses. To get a license, a forex broker needs to possess a minimum of €750,000 in operating capital, in order to compensate clients adequately in times of market volatility.

Licensed brokers are required to maintain audited financial reports and segregate client funds in separate bank accounts. CySEC is one of the few regulatory agencies with a positive stance on crypto trading.


United States National Futures Association (NFA)

The United States has the strictest regulations for forex market players.


The National Futures Association (NFA) is an independent regulatory body, responsible for overseeing transactions made in the derivatives market, including that of forex and some leveraged foreign currency transactions offered to or entered into by retail traders.


The Commodity Exchange Act (CEA) requires firms to register themselves with the Commodities and Futures Trading Commission (CFTC), to be able to provide forex products to customers. Rules regarding license acquisition differ according to broker-dealers, investment banks, introducing brokers and so on. Minimum net capital of $20,000,000 is required to become a Forex Dealer Member (FDM).

Apart from granting the necessary licenses to eligible brokers, the NFA is also responsible for combating fraudulent activities, enforcing necessary capital requirements and ensuring sound trading practices. For instance, leverage limits on forex products are as low as 50:1 on major currencies, drastically lower than those allowed by European regulatory bodies.


Australian Securities and Investment Commission (ASIC)

The ASIC license very attractive for brokers and customers. ASIC-licensed brokers are required to maintain operating capital of a minimum of AUD$1 million, to be able to meet their financial obligations. Apart from this, broker firms need to set up physical offices in Australia, maintain separate client accounts in top-tier banks and get financial statements audited by external bodies to ensure fair practices and due diligence.


Unlike many other regulatory agencies, the ASIC has not imposed leverage limits on forex products. It also does not restrict any trading practices. The ASIC places strong emphasis on investor education and has a portal, called “MoneySmart,” to impart information to traders for free.


Swiss Financial Market Supervisory Authority (FINMA)

FIMNA regulates a wide range of financial companies, including forex derivatives providers. Although Switzerland is not a member of the EU, it is a part of the EU single market, which means that FINMA license holders can provide services in EU member nations. All forex providers are required to register themselves as banks under the body, which is why the minimum operating capital requirement is higher. Participating firms are also required to maintain an average liquidity ratio of 120%, to reduce liquidity risks for investors.


FINMA has a strict audit compliance regime for financial institutions, which involves less frequent but more intensive audit procedure requirements. The licensing process is tough too and costs are high, which means only reputed and large institutions qualify for the FINMA license.


To ensure secure trading practices, forex traders prefer to open accounts with licensed brokers. This gives them peace of mind that their interests will be protected, even if the brokerage were to go bankrupt.


Here are the things you need to check when choosing a Forex Broker
  1. Regulatory License (FCA, CySEC, ASIC, NFA, FINMA...)

  2. Trading Assets / Instruments available (Stocks, Indices, Forex, Crypto, Bonds, ETFs, Commodities, etc.)

  3. Trading Platforms / tools (MT4, MT5, cTrader, Webtrader, Lot-sizing calculator, COT...)

  4. Trust Score (Trust Pilot, Forexbrokers.com, Wikifx...)

  5. Spreads, Commissions, Swaps and other fees

  6. Deposit and Withdrawal procedure, speed and fees

  7. Segregated Client Funds in separate bank accounts

  8. Leverage limits (Beware of brokers who offer anything above 1:400)

  9. Availability of Investor Compensation Fund (ICF)

  10. Negative Balance Protection

  11. Education and Research focus


Here is a list of the regulatory licenses that are currently tracked and factored into Trust Score (ordering by tier, alphabetical by Country):


Tier-1 Jurisdictions (High Trust):

  • Australian Securities & Investment Commission (ASIC) - Australia

  • Investment Industry Regulatory Organization of Canada (IIROC) - Canada

  • Securities Futures Commission (SFC) - Hong Kong

  • Japanese Financial Services Authority (JFSA) - Japan

  • Monetary Authority of Singapore (MAS) - Singapore

  • Swiss Financial Market Supervisory Authority (FINMA) - Switzerland

  • Financial Conduct Authority (FCA) - United Kingdom (UK)

  • Commodity Futures Trading Commission (CFTC) - United States

Tier-2 Jurisdictions (Average Trust):

  • China Banking Regulatory Commission (CBRC) - China

  • Cyprus Securities & Exchange Commission (CySEC) - Cyprus

  • Central Bank of Ireland (CBI) - Ireland

  • Israel Securities Authority (ISA) - Israel

  • Financial Markets Authority (FMA) - New Zealand

  • Central Bank of Russia (CBR) - Russia

  • Financial Services Board in South Africa (FSB) - South Africa

  • Securities and Exchange Commission (Thailand) - Thailand

  • Dubai Financial Services Authority (DFSA) - United Arab Emirates

Tier-3 Jurisdictions (Low Trust):

  • Securities Commission of the Bahamas (SCB) - Bahamas

  • International Financial Services Commission (IFSC) - Belize

  • Bermuda Monetary Authority (BMA) - Bermuda

  • BVI Financial Services Commission (FSC) - British Virgin Islands

  • Cayman Islands Monetary Authority (CIMA) - Cayman Islands

  • Mauritius' Financial Services Commission (FSC) - Mauritius

If your broker has a license that belongs to Tier 3 or did not even make it into Tier 3, that is an indication that you ought to have second thoughts about signing up for their service. Your money is simply not safe.


References:

https://blackwellglobal.com/best-forex-broker-licenses/

https://forex-licence.com/uk-fca

https://www.nfa.futures.org/members/member-resources/files/forex-regulatory-guide.html

https://www.cysec.gov.cy/en-GB/entities/

https://www.finma.ch/en/news/2018/07/20180713-mm-kleinbanken-pruefwesen/

https://www.financial-licenses.com/vanuatu-fx-licenses

https://www.forexbrokers.com/trust-score

https://www.sec.gov/divisions/marketreg/bdnetcapital.htm

https://55brokers.com/forex-brokers-st-vincent-the-grenadines/

https://www.globallawexperts.com/NewsArticle.aspx?PID=2287

https://asic.gov.au/regulatory-resources/markets/market-structure/licensed-and-exempt-markets/licensed-overseas-financial-markets-operating-in-australia/

https://fx-list.com/forex-brokers-vanuatu


This article represents the opinion of the author and is based on references that are deemed helpful for forex traders in the selection of brokers. There are risks involved in the FX market. Only trade with capital that you are willing to lose.
68 views0 comments

Recent Posts

See All