Regulatory Agencies That Help Prevent Forex Fraud

Chris Lee

Trading in the forex market takes place in one of the last largely unregulated capital markets in the world. Surprisingly, the forex market does not have a physical address or location like a stock or commodity exchange and trades round the clock, Monday thru Friday, 24 hours a day.

Furthermore, unless you are trading currency futures or options on the Chicago Mercantile Exchange or currency options on the Philadelphia Options Exchange, the bulk of all foreign exchange trading happens over telephone and electronic communications networks or ECNs in a completely decentralized manner.

Despite the massive size and volume of trades in the forex market, it remains largely unregulated with no international organization or agency to oversee the trading activity in the Interbank which is ongoing and spans the globe.

What this lack of regulation means to traders is that they can benefit from a number of strategies which can no longer be implemented in other more highly regulated markets such as the stock and commodity markets.

Nevertheless, the relatively unregulated nature of the forex market also makes it a fertile ground for a number of forex scams and frauds which some organizations in several countries are committed to exposing and prosecuting.

Active Forex Regulatory Agencies

While a central organization to oversee the forex market does not yet exist, some countries have strict rules about running forex operations and specifically forex brokers. They also have organizations that regulate companies which do business in their countries.

These regulating organizations in many cases also prosecute and penalize fraudulent behavior within their borders, the most prominent of these forex fraud busting agencies originate in the United States:

  • U.S. Commodity Futures Trading Commission – the CFTC consists of an independent U.S. government agency which oversees all forex brokerage companies based and doing business in the United States. In addition to regulating U.S. commodity and futures exchanges, the agency enforces its regulations and prosecutes and punishes fraudulent conduct in the forex market.
  • U.S. National Futures Association – the NFA consists of a self regulating organization for the U.S. futures industry. The NFA’s primary objective is to protect the integrity of U.S. markets and to protect investors from fraudulent activities. Basically, because spot currency transactions consist of two day delivery rather than cash, it can be treated as a futures contract. As a result, brokers executing transactions for clients in the forex market must register as a Commodity Trading Advisor, a Futures Commission Merchant, an Introducing Broker or a Commodity Pool Operator with one or more U.S. agencies in order to execute forex transactions for U.S. based customers.

Regulating Organizations in Other Countries

  • U.K. Financial Services Authority – the FSA is the United Kingdom’s principal regulator of the financial services industry and much like the U.S. CFTC, enforces its regulations in the U.K. financial services industry and prosecutes and punishes violations of its rules and fraudulent behavior.
  • Australian Securities & Investments Commission – the ASIC is the Australian version of both the CFTC and the British FSA. The Commission regulates the Australian capital markets, corporations and financial services. The ASIC combines the regulating authority of both the CFTC and its U.S. securities counterpart, the Securities and Exchange Commission or SEC.
  • Swiss PolyReg – is a self-regulatory body similar to the U.S. NFA. The agency is recognized by the Swiss Federal Money Laundering Control Authority which regulates all persons, businesses and legal entities which act as financial intermediaries with their domicile in Switzerland.

Swiss Federal Department of Finance – a Swiss government agency which qregulates and oversees financial institutions in Switzerland.

In addition to the above regulatory agencies, the European Union obligates each member to be responsible for the regulation of its financial markets in conformance with the E.U.’s Markets in Financial Instruments Directive or MiFID. This “passport” allows for companies regulated in one E.U. member country to service customers in other E.U. member nations.

Regulation and Forex Brokers

A forex broker registered and in good standing with the NFA, CFTC or any of the regulating agencies mentioned above, or a similar organization in another E.U. country is a positive indication. It indicates that the broker has been in business for a period of time and that a certain amount of legal recourse exists if the company runs into a problem or if a dispute arises.

Regardless of the location of the company and the regulating authority, fraud in the forex market can occur in such well regulated places such as Switzerland or the United States. Some companies claim to have their base in a regulated country while in reality the companies domicile is elsewhere.

While the presence of some form of regulation may deter a certain amount of forex fraud, fraud in places where money circulates is a fact of life and the forex market is no exception. Make sure you carefully research any broker you plan on giving money to trade to.

Chris Lee

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