Why Forex Regulation Matters for Traders

When selecting a forex broker, there are many factors to consider: the spreads offered, the currency pairs available, and whether it is regulated. But what is it about regulation that matters so much to so many traders? Brokers subject to strict regulatory rules are often regarded as providing the highest quality of security, service, and status for traders. With extra protections and higher operational standards provided by a broker who is regulated, the decision can be an easy one once you know why regulation matters. 

In this article, we’ll look at why you should consider regulated brokers over unregulated ones, as well as which regulators are regarded as the top-tier quality, and finally, why European regulators are regarded in an almost-uniform way due to the laws that brokers operate under across the majority of the region. 

A regulated broker has to engage in fair and ethical business practices

Forex brokers look at regulation as a way of showing their customers that they have the traders’ best interests at heart. Ultimately, regulation ensures both fair and ethical business behaviours. Brokers usually choose to be regulated in the territories in which they operate, as they are subject to evaluations and audits by the financial regulators they abide by.

The main requirements for a broker to adhere to the regulations often include having minimal capital requirements, with client funds separate from operational funds, so that traders can withdraw their funds at any time (including if a broker goes bankrupt). Another common regulation is that brokers are not allowed to make misleading claims or promises, nor advise traders to enter positions that are not in their best interests. 

Regulated brokers are periodically audited to ensure there is both no misappropriation of funds and that the financial risk for the broker itself remains tolerable. Brokers must submit regular accounts and capital declarations to the financial regulators under which they are registered.

All of this means that choosing a regulated forex broker ensures the safety of your funds, the fair execution of your chosen trades, and protects you against fraudulent activities. But one question remains: which regulators should you look for brokers to operate under?

Top-tier regulators exist around the world

When people talk about top-tier financial regulatory authorities, they often regard the FCA of the United Kingdom, ASIC of Australia, NFA/CFTC of the United States, MAS in Singapore, IIROC in Canada, and the assorted regulators in the European Union as the very best agencies. This is because the top regulators also require their brokers to limit the leverage they offer to traders, whilst providing negative balance protection too. This is an effective risk-management regulation that gives traders the best possible chance of success by not allowing for too much risk to be taken and guaranteeing that no trader will ever owe debts to their broker if they lose their entire deposit in their trades. 

All the regulators that make up this top-tier group are also extremely strict on enforcing their rules, meaning that no broker will get away with not meeting all the criteria satisfactorily, which once again offers traders the confidence that they are trading in the most secure environment possible.

You may also find that any broker that is registered with an agency in this top-tier group also takes their time to open new accounts for new customers, as they are usually also required to do their due diligence on their customers before offering them their platform. This is not to stop the average person from opening an account, but rather to protect the platform by passing on the details of previously known-to-be nefarious operators from now using a new platform after being shut out of another.

CySEC is the choice for most European brokers

In the European Union, brokers only need to be licensed by one regulator in one member state for it to apply across the entire continent. This is due to the European financial directives that relate to trading instruments. Most brokers, therefore, select CySEC as their broker because the controls they require platforms to operate under are beneficial to the brokers, whilst remaining protective for the users. Since 2012, with the introduction of the MiFID laws, all European brokers have had to operate under exacting standards, including CySEC, which made the guidelines fairly easy to understand and welcomed brokers who wished to register with it.

That is to say that you can pick any broker who is regulated by a member state of the EU, as they all have to operate under the same conditions. It is just that most brokers pick the Cypriot-based authority CySEC to be regulated under due to the favourable conditions compared to those offered by other brokers in other countries. But as a customer, any broker that is regulated by CySEC is a top-tier broker, offering you the required protections that lead to a decent trading environment. 

Choosing a trusted European forex broker has never been easier, either, with so many platforms now operating under these industry-leading standards, giving traders a real wealth of options to select from. By taking a demo of any platforms you’re interested in, you can assess their trading tools as well as the spreads on your chosen currency pairs, whilst also becoming familiar with the broker and the way in which they operate.

Get started with a European-regulated broker

Now that you understand both the benefits of regulation and which agencies are the most highly regarded, you can make an informed choice about which brokers you should shortlist for getting started in forex trading. You know that picking a top-tier regulated broker protects your funds, gives you the most optimal conditions under which to trade, and ensures the broker conforms to strict operational standards at all times.

For European traders, picking any broker that is regulated by a country which falls under EU laws and regulations will ensure you have chosen a top-tier broker. It is more likely than not that these brokers choose to be regulated by CySEC, based in Cyprus, which is a regulator that makes its strict rules easy to understand for the platform operators. This means that traders can feel confident that any broker operating under these rules will provide them with the best chance of success.