The foreign exchange market is an unusual one in that it is completely decentralised. There is no one central clearing house or exchange that dictates prices or manages the market. There are, however, several independent bodies that work to protect investors and serve as some form of regulation for the market. Those bodies include the National Futures Association, the Commodity Futures Trading Commission, the Financial Conduct Authority and the Australian Securities and Investments Commission.
Protecting investor funds
There are many different money exchange services, and the goal of each regulatory body or independent supervisory body is to ensure that each of those exchanges operates within the same set of standards. All brokers, signal sellers and IBs that operate under the banner of a regulatory body are bound by the same set of rules. They must be registered and licensed in the region where they are based, and they must hold enough funds in available balance to ensure that they can complete all of the transactions that they operate. There are some distinctions here, however.
Small brokers in the UK can be FCA ‘Registered’, which simply means that they are known to the organisation and agree to a code of conduct. There is another level of regulation for bigger brokers, and it is only at that higher level that the brokers are required to hold client funds in a separate account, ensuring that in the event of bankruptcy the trader will get their money back.
Governments considering stricter controls on the markets
The lack of strict, central controls on foreign currency trading is something that makes many traders nervous, but it does have benefits. There is a huge number of brokers to choose from, including banks, independent brokers and peer-to-peer currency exchanges. The fierce competition in the sector is good for consumers, and keeps trading prices low. Most brokers now provide warnings about the way that the investment market works, so that novice investors do not over-leverage themselves or invest money that they cannot afford to lose.
In spite of this voluntary self-regulation, there is an ongoing debate about the possibility of introducing stricter regulations. This debate came after the recent forex rigging scandal, which saw several major banks accused of allowing their traders to manipulate market rates by timing large trades to coincide with the moment that the spot rate is set. The investigation into this alleged manipulation is still ongoing and several traders have been suspended pending the completion of the investigation.
The manipulation affected both large traders and individuals. Many pension funds and other investments track exchange rates, so individuals who put their faith in those funds could have been adversely affected by market manipulation. The manipulation has allegedly been going on for many years, and spanned many banks, including the Bank of England, Citi, and several others around the world. Many analysts have called the forex rate fixing scandal “bigger than the LIBOR scandal”, and it has shattered investor faith at a time when the markets were just beginning to recover.
Cover photo credit: Images_of_Money
