When starting in forex trading, you hear a lot about regulators and regulation, but what exactly are regulated trading platforms? Any forex broker that is listed with a financial regulator means they have agreed to a set of rules and standards that aim to protect traders from poor business practices and unexpected financial mishandling.
Different financial agencies apply varying levels of rules, so it can also be useful to understand which regulators are regarded as top-tier and what exactly brokers commit to doing by being regulated by one of these highly-regarded agencies. In this article, we’ll outline which financial regulators apply the most stringent rules to protect traders, as well as actually detailing the specific standards that these top-tier regulators ensure all brokers who adhere to them have to comply with as a business.
Ultimately, this will give you all the information you need to realize why this is good for you, as a trader, too, so that you can make your choice of broker with confidence and a complete understanding of the marketplace.
Who are the top-tier regulators?
As we said earlier, different financial regulators apply different sets of rules to any institutions or organisations that want to be recognised and affiliated with them. The world’s top regulators operate the most detailed and strict oversight on the businesses listed underneath them. These regulators appeal to forex brokers because traders have the utmost confidence that the market conditions are the fairest and most balanced, giving the best opportunities for success – without other outside factors interfering with a trading strategy.
The top global regulators are often regarded as the FCA (United Kingdom), ASIC (Australia), CFTC/NFA (United States), MAC (Singapore), IIROC (Canada) and any regulator located in a European Union member state, with the most commonly used being CySEC (Cyprus).
As the European Union implemented a financial directive, referred to as MiFID, which regulates the financial markets of all its member states, every single regulator which is based in one of the EU27 is subject to these exacting standards. The Cypriot agency has become one of the leading regulators in the bloc thanks to making its rules extremely easy to understand for trading platforms, leading to a large number of CySEC regulated forex brokers now being available on the market for European based traders.
What standards do these regulators uphold?
Several legal requirements are placed on any brokers that are listed as part of any of these regulatory financial agencies. The foremost standard is that top-tier agencies require any broker to segregate the business’s operational funds from their client’s trading funds. What this is mean in practice is that your money that you’re investing into the platform to make your trades cannot be used or accessed by the platform for their own means and purposes. This also protects you in the case that your chosen platform goes bankrupt, as another guarantee for any top-tier regulator is the ability for traders to withdraw their funds at any time.
What marks out the top-tier agencies ahead of other decent agencies is the stringency they apply to leverage limits, which in effect protects traders from making too large a risk with a single trade, as well as the requirement for negative balance protection being offered as a standard to all traders. This means that not only are you protected from making too large a risky trade, you also will never owe your platform money, with your account only being wiped out to $0.00 with no debts being held by your choice of forex broker if a bad trade ends up leaving you with nothing.
The very best regulators, those in this top-tier, enforce their rules firmly and consistently, and require every broker to regularly submit balance sheets and be subject to audits on their business operations. The sheer fact of this should give every trader the confidence that a broker which operates under the standards of a top-tier regulator is providing the most ethical and balanced trading conditions.
Why are these regulations good for traders?
The first encounter that a trader will have with these top-tier regulators having such strict rules is when they suffer a slight delay in the opening of their trading account on a platform subject to the regulations. This is because the brokers are subject to Know Your Customer (KYC) rules, ensuring that they do their due diligence on any new client and forward any concerns they may have to the relevant financial ombudsman – effectively stopping known rogue traders jumping from platform to platform as they have accounts closed for suspect activity.
All of this adds up to paint a picture that gives traders confidence in the ethical operations of a trader subject to top-tier regulation. Platforms now have to be designed to benefit the trader, rather than the operator, when complying with such regulations. Forex isn’t the easiest trading marketplace in the first place, so having rules in place to eliminate the risks that aren’t associated with your trades is the best possible environment for any trader to aim for success.
By choosing a broker that complies with such top-tier regulations, you are removing risk before you even attempt to cultivate a strong trading strategy. The last thing you want to do is invest a huge sum of capital into a platform that does not segregate your funds from their own operational funds because you would risk losing all of it if the business suddenly declared bankruptcy and closed. This one simple situation is the reason to choose a broker that is registered with one of the agencies we listed earlier.
Many brokers now choose to be regulated
Now you have all the knowledge you need to be able to make a sensible and safe choice for which type of forex broker you should go with in order to give you the fairest market conditions for trading currency pairs. When there’s enough risk in your choice of trading instruments and real-world economic factors, by choosing a platform that subscribes to a regulator’s strict conditions, you begin to eliminate risk that sits outside the concerns of your trades.
Choosing a regulated broker has arguably never been easier, with so many platforms now ensuring that they comply with conditions laid out by the FCA, CySEC or even CFTC/NFA, and whilst you can pick any platform that operates under these conditions with confidence, it is even better to pick one regulated by the region in which you live as this can offer extra securities to citizens of the member state too.
