Over the past 20 years, regulation of leveraged FX trading has gone through a major progression. Being in the industry for the past 15 years and working for both US and European firms, I have witnessed these regulatory changes firsthand. While there are many regulatory bodies throughout the world, we will discuss the most popular destinations that companies have decided to establish themselves over the years.
The US, now one of the most highly regulated markets for leveraged FX, with only a handful of licensed firms, used to be the wild west in the early 2000s. There were hundreds of companies registered with the National Futures Association (NFA) offering FX trading. Many of these firms were small “bucket shops” filled with brokers aggressively pressuring clients to open trading accounts. There was very loose oversight from regulators as the industry was still new. Regulators like the NFA and CFTC were only familiar in dealing with future brokers who would offer lower leverage and pass all trades through an exchange. As popularity in over the counter FX grew, the CFTC stepped in to increase regulation. In 2006, the CFTC classified this new breed of firms calling them Forex Dealer Members (FDMs). They increased capital requirements to be classified as an FDM and as a result, eliminated a big portion of FX firms.
As firms were starting to get pushed out of the US market, licensed firms in Cyprus, a small Mediterranean island known for offshore jurisdiction, began to appear. Licensing requirements were easier to obtain as CySec, the regulatory body, were just beginning to learn about how to manage this industry. Being part of the EU, combined with low requirements made Cyprus a popular destination for brokers to establish themselves. Eventually, hundreds of FX companies started to become registered on this small Mediterranean island.
Meanwhile in the UK, FX trading and spread betting had been a mature market for quite some time. However, the UK regulator (FCA), mostly oversaw local firms who were managing accounts for UK residents. FCA regulation was still mostly unknown to the majority of traders outside of the UK.
In 2008, the world went through a major financial crisis, sparked by the collapse of the global banking system. In the US, this “great recession” led to a major overhaul by lawmakers to tighten regulation on the US financial system. The legislation was passed, and the Dodd Frank Act included additional oversight for all FDMs. By 2010, all requirements were enforced including lowered leverage, a further increase in capital requirements, and limitations on order execution (FIFO). This regulatory change essentially eliminated the leveraged FX industry in the United States, leaving only a handful of firms in operation.
Due to these changes, a massive migration took place as firms started to establish themselves in the UK. A collaborative effort of firms heavily marketed the appeal of trading with a UK regulated firm to the public. Millions of marketing dollars were spent to convince traders that trading with a UK based firm was the safest destination. The FCA became the gold standard of regulation. This led to more and more overseas owners creating UK regulated companies to market themselves globally and this was often their primary selling point.
2010 also saw the emergence of another globally recognized regulatory body, the Australian Securities and Investments Commission or ASIC. ASIC provided an FX license from a widely recognized and developed country. Popularity for ASIC licenses also grew for foreign owners wanting to establish FX companies as they are considered to be of the same standard as the FCA and NFA, having stringent audits and compliance procedures in place to ensure the efficient and effective operation of financial markets. One of their criteria for brokers to register under them is that they should have a representative office in Australia to improve accountability and confidence among traders. ASIC takes pride in being the only consumer-friendly regulatory body. To promote trust and informed participation of investors in the financial market, ASIC offers several online resources and guidelines for the consumer to ensure that the broker they are dealing with is correctly regulated and regularly audited by ASIC.
Ever since Malta joined the European Union as a full member in 2004, it became a strong player in the world of financial trading. The watchdog in charge of regulating its financial industry is the Malta Financial Services Authority (MFSA). The MFSA is an independent financial regulatory agency that comes under the MiFID — or Markets in Financial Instruments Directive — a European Union body that regulates investment services across all members of the European Economic Area (EEA). The MFSA was formed in 1988 and have gone through a few sweeping reforms over the years. Once Malta joined the EEA, it became a very attractive proposal for brokers and international financial services. Being registered under the MFSA has given brokers the opportunity to offer their services to all EU member states without opening up secondary establishments in individual countries. Besides its location in the middle of Europe, its fast-growing infrastructure and reliable regulatory framework aid businesses to grow in a positive environment.
With the advancement of technology, FX trading has grown dramatically. But with this growth comes regulatory enforcement, mainly because large amounts of money are constantly changing hands. Regulation has become more stringent in Europe, US and the same is expected of the Australian regulator too. Offshore brokerage has become increasingly popular in the past few years. Hence opening an offshore forex account is no longer a daunting task.
Well-known offshore brokerage destinations include Belize, Mauritius, Seychelles, and many more. eToro and ForexTime are regulated in Belize, AvaTrade has an office in the British Virgin Islands. Vanuatu is the up and coming country for offshore companies, and Juno Markets is one of only 140 brokers lucky enough to be registered there. Many of these offshore destinations are also tax havens, and brokers prefer to be registered there as it will benefit their clients. Trading under an FX offshore account gives a trader the opportunity to benefit from unrestricted leverage and volatility to make attractive returns from huge trade.
Mauritius is an independent exotic island in the Indian Ocean, acknowledged as being at the forefront of driving quality investments into Africa. It has become one of the fastest-growing company registries in the world due to its economic structure, innovation and its broad range of offshore services. Its regulator is the Financial Service Commission (FSC), though established in 2001, the body only came into operation on the 28th September 2007. It has recognition as a “white-listed” jurisdiction by the Organisation for Economic Co-operation and Development (OECD). With their robust regulatory framework, FSC is quite strict and ensure all brokers under their license adhere to protocol, which adds to their reliability. Though Mauritius has always been at the forefront of encouraging crypto-backed assets in Africa, it has an incomplete legal framework for FX and securities dealers. Hence there are not many restrictions on types of assets to be traded.
The Vanuatu Financial Services Commission (VFSC) was established in 1993. It was traditionally well known for having lax regulation and as a popular tax haven for Australian and New Zealand based brokers. However, since 2017, VFSC has made significant enhancements in tightening its licensing requirements through legislation to ensure client protection. This has led to a strengthening of the reliability of both banking, and financial services industries.
Vanuatu, in many ways, reflects the tightening regulation on the retail trading industry around the world. For example, the leverage restriction throughout Europe and the US has pushed ever more new and established brokers to Vanuatu. Vanuatu is popular among both FX and binary options brokers, as the higher trading leverage can be a huge benefit for traders without much capital to start with. Besides, this island nation has a competent financial regulator which grants passage to banking solutions, this addresses the needs of brokerages and improves the global acceptance of the Vanuatu financial system. Hence VFSC is one of the most sought after jurisdiction among brokers.
While an unregulated broker may appear to offer impressive propositions, there will be nothing to support you if things go wrong. The purpose of regulation is to protect you, the investor, from financial risk and fraud. The FX market is the largest and most liquid in the world, with an average $5.1 trillion traded daily. FX is more prone to fraud and has been less well-regulated than other financial instruments. Therefore, it is always better to safeguard your trades.
Regulation is a necessity for a broker. Having a regulator improves broker reputation and traders trust will increase significantly. The Vanuatu Financial Services Commission regulates Juno Markets with a principal’s license to deal in securities and foreign exchange. We pride ourselves on providing the best trading environment and a professional, yet personal, service to our clients.