When it comes to choosing a Forex broker to take care of your execution requirements, there are a number of criteria on which you could base your decision. However before you start looking deeper into what they provide you should first identify its regulatory status.
Trading with a regulated Forex broker is essential if you want to safeguard your capital and minimise your risks when trading.
What is Regulation?
Financial regulation is a prerequisite for many financial companies around the globe. It sets out their purpose as a company and their willingness to play by the rules.
In order to operate a business in many jurisdictions, a Forex brokers must sign up to a code of conduct. This is put in place by the local financial regulator. This will set out how the broker must run their business through a set of operational guidelines.
These guidelines determine both the financial and ethical contact that a broker will have with their clients.
Typically stipulations will include regular financial monitoring such as requiring the company to submit regular financial reports. These will include their operational accounts so that the regulator can audit them.
Companies are also required to ensure sufficient capital liquidity to ensure uninterrupted operation. The best regulated Forex brokers will also be keen to uphold any operational standards or procedures laid out by the regulator.
A failure to comply with guidelines can lead to financial penalties. In some instances they can be as severe as a loss or regularity status or even forced closure.
It is of course in the best interest of most companies to play by the rule book from a business perspective.
Why It’s Important
Trading with a regulated Forex broker provides a valuable safety net for traders. While the specifics will vary according to the particular regulator, the minimum that a trader can expect is that an official body is overseeing the operation on their behalf.
This is important as it also provides a point of escalation should you have a complaint that is not resolved by your broker.
The guidelines set out by the regulator extends to various areas of the brokers operation. They will determine both the use and security of personal client data and account monitoring.
Guidelines are also put in place which seek to combat fraud. They also aim to set standards for agreed levels of customer service and support.
One of the most important aspects of regulation from the clients’ perspective is that regulators require that client funds are held in segregated accounts. This protects the client if the broker was to run into finical difficulty. This money cannot be used by the company to pay creditors as it is essentially ‘ring fenced’. In this scenario the money is on hand to be returned to the client.
How to Check for a Regulated Forex Broker
Most brokers these days are regulated. It is however it is still worthwhile to confirm the regulatory status when choosing a Forex broker. Remember to do this before you part with your deposit.
Most regulated Forex brokers are keen to display their regulatory status in their literature and on their website.
Many are members of multiple bodies due to their operations around the globe. While this is not a requirement of a good broker you can assume that more scrutiny of a brokers operation the better. It should provide more protection against fraud and manipulative trade practices.
If is not essential to seek a broker that is regulated in your own country. However most traders will elect to use a Forex broker that is regulated in the region where they are domiciled.
UK Traders – Financial Conduct Authority (FSC)
US Traders – National Futures Association (NFA)