Is the Forex Market Regulated?

by Jennifer Perrier of Online Trading Academy

This is a question that many people find confusing. To get to the heart of the matter, we need to differentiate between the market participants and the market itself. We’ll clear the air on this topic, and tackle a few others as well. Let’s get started…

The National Futures Association (NFA) is soliciting opinions from broker/dealers about a proposal to increase the minimum adjusted net capital requirement for Forex brokers to $5 million USD. While I’m a big believer in free markets and capitalism in general, I applaud the NFA for this action. Under current regulations, some Forex Dealer Members (FDMs) are allowed to operate with less than $1,000,000 in net capital. Think about that for a second; do you really want to send your money to a broker who has less capital than you do? It’s time to ‘thin the herd’ so to speak and require some of the marginal players to step up or pack up. Firms are required by law to report their adjusted net capital, and that information is available to the trading public. Here is the most recent list published by the CFTC (Commodities Futures Trading Commission), which reveals the net capital requirement (the amount that the firm must have to stay compliant), the excess net capital (the amount by which the firm exceeds the requirement), and the adjusted net capital (net capital requirement plus excess net capital) for many individual Forex broker/dealers:
http://www.cftc.gov/files/tm/fcm/tmfcmdata0704.pdf

But wait a minute! You may have heard that the Forex market is unregulated. How is it possible that these FDMs must meet capital requirements – and report their outstanding capital on a constant basis - if the Forex market is unregulated?
The statement that Forex is unregulated is misleading, because the individual players in this market certainly are regulated by the CFTC and the NFA. These firms must comply with the reporting requirements as listed above, and meet other guidelines as well. The firms are regulated but the overall market is not. How can this be? To make sense of this, compare the currency markets to the equity markets. The U.S. equities markets are certainly regulated, and fall under the auspices of the U.S. Securities and Exchange Commission. This is perfectly reasonable, since the SEC has the right to regulate stock exchanges that are located within U.S. borders.
But where is the Forex market located? There is no central geographic location for currency trading, and there is no “floor of the exchange”. Currency trading occurs everywhere around the world, twenty-four hours per day. Governments can and do regulate Forex firms that do business within their borders, but the overall market is so vast – with an estimated turnover of about $2 Trillion per day – that it is impossible to record and track every transaction. To attempt to regulate a behemoth like the Forex market would be akin to trying to count the grains of sand on a beach, or measure the amount of water in an ocean. However, the individual companies that do business in Forex are regulated and must comply with regulatory guidelines. As we can see, those guidelines are getting tougher for Forex brokers doing business within the U.S. That’s good news for everyone who is considering Forex as a trading vehicle.

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