Regulation of the Forex market delivers transparent expectations to all market participants who take part in trading agreements on a daily basis. Different regulatory bodies were established to protect the interests of both financial institutions (for example, banks) and the global capital exchange.
Initially, financial regulations and changes in Forex rules shaped the process of handling deals between individuals and collectives. Laws can be provided either in the form of authoritarian enforcement or collective decisions. The main goal is to prevent market participants from fraud and shift the burden of responsibilities between all parties involved.
In this article, we will discuss the importance of international legislation and Forex market processing. We will also look back at the trading regulations’ history and the way they evolved over the years.
Some time ago, the Forex market appeared to be an uncontrolled environment. It often led to unconscious behavior. To prevent its development, regulators decided to tighten their grip on the major financial parties involved (banks and Forex brokers).
Today, numerous regulatory bodies provide their guidelines depending on the country and specific rules applied to financial operations in the region. Despite some differences in those guidelines, they all have one common feature. Any broker must obtain an official license. Besides, it must be registered in an underlying country to operate in accordance with relevant legislation.
The main idea is to build trust between traders and brokers. What’s more, regulations protect clients from fake service providers and trading scams.
Currency trading can be quite risky. At some point, the market can be extremely volatile. On the one hand, it can be a good chance to make some good cash. On the other hand, the risk of slipping into loss is also huge.
So, when evaluating the asset to invest in, one should consider the currency stability as well as the financial health of the issuing country. This is where market regulations may help. For instance, if you trade something different from major currency pairs, you should note that exchange rates are probably fixed to the US dollar as one of the strongest fiat currencies.
In these circumstances, it is vital to look at the local central bank’s policy implemented to sustain enough reserves to handle the fixed exchange rate. If the currency crisis happens, it may have a substantial impact on the Forex market and the asset price.
While investing is based on speculative concepts, all traders expect their assets to stay liquid enough. However, market turbulence and unexpected price moves can turn the market liquidity into potential risks. This is where regulations may help to keep the situation under control.
The Forex market has evolved into a global decentralized environment where anyone can buy and sell different currencies. Year by year we can see the decreasing threshold for entry. Everyone has a chance to start trading currencies right at once.
Thanks to new technologies, traders can benefit from bits and AI-based solutions that help them handle financial strategies on autopilot. However, a few decades ago things were a bit different.
People started freely trading currencies 500 years ago. Introduced in 1875, the gold standard appeared to be one of the first official steps to regulate the purchase. This is when the yellow metal officially introduced a fixed monetary regime. From that moment, the price of paper money could be linked to gold. However, the Forex market was mainly limited to big financial institutions.
Since the 1990s, new technologies have boosted the capital flow between different countries across the globe. Individual traders got a chance and tools to speculate on currencies. Then, the Black Wednesday crisis came back in 1992. Some market participants lost everything. They included even such big players as the Bank of England. It had to remove the pound from the global monetary system.
Nevertheless, the FX market kept evolving. In 1995, people were able to buy and sell currencies in real-time. The year 2022 determined a new explosion in FX trading. The daily turnover exceeded $5.1 trillion. The technical progress made authorities improve the legislative framework.
Generally, all international agreements follow the same progression. Different exceptions depend on the particular type of agreement. See the major stages of development below:
The Forex market has evolved. Most market participants have gone online to complete transactions via web and mobile applications. This fact has forced regulation bodies to establish new requirements for Forex traders. Meanwhile, speculative trading keeps growing.
Today, we can see more and more intermediaries who want to engage in the trading process. Sometimes, they involve scam brokers that establish extremely high fees, hidden charges, and exorbitant risks through high-leverage levels.
In simpler words, the situation with the changing market forces regulatory bodies to adopt and look for technologically appropriate ways of keeping a decent level of stability between Forex trading and global law. This is where cooperation between international organizations plays a vital role.
Earlier, obtaining regulatory approval was not a tough challenge. However, the process of adapting to changes in Forex regulation changes the situation drastically. Today, brokers face stricter regulations and jurisdiction depending on the country where they try to obtain a license.
To make things a bit simpler, trading service providers try to get approval in one country first. In case of success, they head for more regulatory certifications in other countries. Sometimes, they get permission in regions where they are not physically present. It does not mean they are scams. Instead, it means they have to meet more new rules applied to brokers and international regulation authorities.
The list of major and well-established regulators includes NFA (the United States), CySec (Cyprus), FCA (the United Kingdom), and some other well-established regulatory bodies in Asia.
We have seen several crucial regulatory restrictions introduced over the last decade. For instance, the new penalty system was implemented. Additionally, stricter measures were applied to ensure the transactions’ integrity between all parties involved in the agreement.
Today, the evolution of rules in the Forex market resulted in enhanced safety guarantees for traders and their funds. Brokers now need to follow stricter regulation procedures that were introduced to avoid money laundering and ensure fast and accurate order execution.
Changing Forex regulations can hardly be a huge problem for individual traders. They are actually the ones to benefit from new regulations. Clients can benefit from safer trading along with a chance to avoid fraud and scam brokers. As for the service providers, they can face some challenges because of the limited leverage, for example. In the end, they will have nothing to do but accept new rules.
As stated earlier, traders can do nothing about new regulations. The main idea of those changes is to make the trading process as transparent and safe as possible.
Of course, big players will have to cope with limited leverage options. For instance, in the United States, the available leverage is limited to 50:1 for major currencies. For minor currencies, the available leverage is 20:1. It means traders will not be able to open bigger positions. That might be a challenge for some of the market participants used to trading big.
Brokers may find it harder to meet renewed regulations. Some rules have become stricter. It is harder for companies to obtain licenses and permissions to provide services in a specific region.
On the one hand, it may increase the number of scam sites. On the other hand, selecting an authorized broker will mean 100% fund security and trading transparency.
The FX retail market accounts for only 5% of daily currency turnover across the globe. So, we should not expect new rules for retail traders to change the game drastically. However, analysts believe, they can expect stricter limitations in the near future.
Experts say regulation can become stricter in the near future. This is mainly due to an increasing number of scams. Despite the fact that traders can feel safe, some countries are still lacking legislation.
According to some forecasts, the FX market needs more rules in terms of:
Those might be the main trends in terms of new trading regulations.
Forex is one of the most volatile markets out there. On the other hand, it is one of the most accessible sectors. What’s more, it provides good earning opportunities for retail traders. The main challenge here is to find a safe and transparent broker that delivers an essential technological tool kit along with good trading conditions.
While the market keeps changing due to technological improvements, some of the current regulations should also be improved. First of all, clients need to be 100% sure their funds are safe. Secondly, new rules must be forwarded to keep the currency flow under control. Last but not least, new rules should keep scams and fake companies away from the market.
Every day, retail traders face obvious risks of runway losses due to limited leverage. On the other hand, trading with non-regulated brokers comes with even bigger risks of data asymmetry and increased currency volatility.
With a growing number of frauds in the FX trading sector, market participants have nothing to do but accept new rules. The modern Forex market is about a transparent and well-organized partnership between a broker and a trader. New rules on buying and selling assets, entry, operation, and servicing transactions must shape the new regulatory framework to grow accountability.
