Who is a Regulator and How Do I Choose One?

This is a brief look at regulators and how traders can decide which jurisdiction is best for them.

In the world of trade and finance, various regulatory bodies exist with the aim of protecting the interest of investors and market participants and making sure that the playing field is level for all market participants. They play a very important role as without the rules, regulations and oversight functions of regulators, sharp practices in the financial markets would be the order of the day. We only need to look at the Madoff-style fraud cases as a reminder.

We can thus define a regulator as an institution (government or non-governmental) charged with the job of protecting investors through enforcing applicable financial laws, prevent sharp market practices such as insider trading, and carry out actions that will maintain confidence in the financial system of the home country.

The commodities markets as well as the stock markets have well defined regulators who exert regulatory function on the market participants and brokers. In the forex market, this is a bit fuzzy as market activity is largely unregulated. However, forex brokers are subject to the oversight functions of regulators in the countries in which they operate, though this is not a general rule.

The United States and United Kingdom have well established financial regulators. In the US, agencies like the Securities and Exchange Commission, the Commodities and Futures Trading Commission (CFTC), FINRA and FDIC are regulatory agencies that regulate the stock market, commodities market, pension funds administration and various money markets. In the UK, the Financial Services Authority (FSA) regulates forex brokers and operators in the financial services. Similar agencies exist in Japan, Singapore and several European countries.

The hard truth is that while almost every country has a regulator of some sort, financial regulation in many countries is particularly weak. The situation is compounded when dealing with the forex market which is largely unregulated.

Choosing a Regulatory Jurisdiction

Choosing a jurisdiction to domicile your forex account can be problematic. The US has a very strong regulatory environment, but this environment is also a restrictive one. The Office of Foreign Assets and Control (OFAC) prohibit US brokers from accepting forex trading accounts from nationals of certain blacklisted countries. This list changes by the day and the risk of getting your forex account frozen if your country pops up on the OFAC blacklist is very real. The United Kingdom has a strong regulatory policy which is a bit more accommodating, although traders have to present a plethora of identifying documents before they can be allowed to open forex accounts. Many US-domiciled brokers are now opening branches in the UK and in Europe to be able to attend to a wider market.

Regulators in countries of the Eurozone are supposed to abide by MiFID, the Markets in Financial Instruments Directive, which is supposed to be a standard for regulatory practices in the Eurozone to which all member states must align. It is still not well defined how MiFID affects forex traders. This is typified in a country like Cyprus, where the presence of a MiFID-compliant regulatory body (CySEC) has not been able to fully address the deluge of complaints against brokers located in that country.

Ultimately, the choice of a regulatory jurisdiction in which trading accounts can be domiciled to allow for a relaxed and secure trading environment will rest with the trader. It is up to him to use some of the guidelines mentioned above to determine which country is best for him to keep his trading account.

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