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Why Does Regulation Matter to Me?

13 Years ago | November 15, 2013 1/28/23, 12:00 AM

I was speaking to someone from a regulatory agency and I asked the question, “How do you enforce regulations if someone opens a forex trading account with a non-regulated firm?” His answer was why would someone open an account with a unregulated firm in the first place and if so, that person would essentially get what he/she deserved.

This got me to thinking whether regulation matters given the collapse of U.S. firms like MF Global and PFG. If the U.S., where regulation is said to be fairly stringent, could not police its firms properly, why should anyone care about regulation?

Before I try to answer this question I need to make it clear that I am in favor of forex regulation as long as it provides a level playing field for the individual I am not a fan of regulation that makes an industry uncompetitive, drives business elsewhere and encourages some to look for ways to skirt the law. This is for another discussion as this one is focused on whether regulation matters.

Beware of What You See

One characteristic about the web is anyone can create a professional looking website that makes a company look like a top tier firm. This is especially true of the global trading industry where a forex broker can open its doors with minimal capital, create a professional looking website and offer enticements (e.g. bonuses, etc.) to open an account. Look closely beyond the bells and whistles when looking through a broker website.

This Is Where Regulation Comes In

There are generally minimum net capital requirements and rules that need to be followed for a registered forex broker to be compliant. In the U.S., for example, the net capital requirement is $20,000,000. I remember when a broker could open its doors in the U.S. with $250,000 in capital. Net capital requirement vary from country to country and as we have seen with the collapse of MF Global and PFG, fraud and abuse of power can wipe out capital very quickly so there is no assurance of solvency.  However, at least there are minimum capital requirements and regulations, if followed, designed to keep brokers solvent. One thing an individual trader should not have to worry about is getting his/her capital back when requested. In addition, there are financial penalties for brokers who do not comply, which is one incentive to follow the rules. I am on the CFTC enforcement email list and it seems I get a notice almost daily of a firm being assessed a financial penalty for violation of a regulation.

Why Regulation Matters to the Individual Trader

This brings me to the point that is most relevant for the individual trader. The point is why regulation matters.

  • When dealing with a non-regulated firm you have no recourse.
  • There is no regulatory body to lodge a complaint.
  • There is no set of regulations designed to provide the trader with a level playing field.
  • There is nowhere to go other than the local legal system if the broker does something you consider unscrupulous or does not return your capital when requested.

In other words, an unregulated forex broker can do what it wishes and you have no recourse. This does not mean that all unregulated brokers are the same. There may be some who provide a level playing field. However, what they have in common is there is no regulatory body to encourage them to do so.

Regulation Is Not a Panacea

On the other hand, it does not mean that all regulatory bodies are the same. There are different levels of forex regulation that offer different levels of protection to the individual trader depending on the country of jurisdiction involved. Just because a broker says it is regulated does not mean that the individual trader is adequately protected.  Regulation by itself is not a panacea and much depends on where the broker is located and the extent of regulation in that country. .

Regulation Is Better Than No Regulation

To sum up, regulation is better than no regulation as it gives the individual trader recourse if a dispute arises. It also provides a level of protection in the form of regulation, the degree of which depends on where the broker is registered. In other words, one can assume that a broker located in the U.S. or U.K. will be better regulated than one registered in an emerging market country.

Join the Global Traders Association

This also brings up a goal of the Global Traders Association, which is to be the advocate for the global trader with both brokers and regulators. The larger our membership, the greater our leverage will be with brokers and regulators as we work on your behalf. If you have not registered, please do so now and support our effort to be the global trading industry advocate, JOIN NOW. It’s Free!

 

Jay Meisler, founder

Global Traders Association

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