Forex Markets Need Regulation

Regulation. To some, it’s a dirty word, something that should never be spoken aloud in polite company. But regulation is an extremely important tool in financial markets, and the benefits it brings for all players far outweigh the inconveniences it might create. Educated traders know this, and while they might expect to face some additional hurdles when new regulations are applied, they also recognize that regulation helps stabilize markets and helps investors better manage risk. Experienced traders can often sense that when someone complains about a new regulation, they’re probably getting away with something at the expense of others or the market as a whole.

Massive Market, Little Oversight

Forex markets are so huge that it’s difficult to get a complete handle on them, but by 2014 forex transactions were known to average around $5.3 trillion per day, making this the largest financial market in the world—larger than all other financial markets combined.

Yet this enormous market, which runs twenty-four hours a day, seven days a week, 365 days a year, has little regulation. It’s believed that only about 5 percent of brokers operate under a regulatory authority, and there is no global regulator. Clients face a market where honesty and transparency are delivered at the discretion of their brokers.

Speculation a Major Driver

Speculation happens in every market, but it’s especially common in forex markets. One estimate, already several years old, suggests that speculative transactions account for as much as 87 percent of the market.

Retail investors have become much more involved in forex speculation, and that has prompted both more scrutiny and calls for more regulation within the market. One reason is an oft-cited statistic suggesting that fraud or illegal activity by forex traders cheated close to 26,000 US investors out of $460 million between 2001 and 2007.

A Regulation Sampler

In the United States, which does regulate forex, most of the monitoring burden falls to the Commodities Futures Trading Commission (CFTC) while transactions initiated by banks are overseen by the Office of the Comptroller of the Currency (OCC). A self-regulated industry watchdog, the National Futures Association (NFA), also polices its own members (which includes all retail forex brokers, excluding banks).  

It speaks volumes about the state of the market that since the Dodd-Frank financial reforms of 2010, which included much stronger financial consumer protections, retail forex trading firms essentially pulled out of the US market, choosing to give up US business in favor of operating in places with lax regulation.

Low Regulation Brings High Risk

The extremely high level of speculation in the global forex market makes regulation especially important. In some forex markets, leverage limits are only 50:1 or 25:1, but brokers with less oversight have been known to offer up to 1,000:1 leverage. High leverage levels have long concerned industry observers, who worry that they allow not only the possibility of large losses to individual investors, but that they can also lead to runaway losses across large sections of the market.

In 2011, Japan (perhaps the world’s most active forex market) tightened its forex regulations, including the leverage ratio. European markets, which have in general been lightly regulated, are slated to make numerous changes under the MiFID II framework in 2018. There will be more reporting of trades, centralized trading for certain kinds of transactions, better quote and report publishing requirements, and more monitoring of leverage levels. The new rules are also aimed at streamlining trades and improving transparency.

Insiders Make a Difference

You wouldn’t feel safe buying your groceries in a marketplace that had no consumer safety regulations and allowed manufacturers to use any ingredients they chose, no matter how potentially dangerous. Unregulated financial products offer the same potential risks, but instead of harming your body, they injure your financial health.

When those on the inside witness fraud and illegal activity, they have not only a moral right to act but also a legal incentive: US law allows employees who report certain kinds of financial fraud to receive large awards if the information they provide to regulators leads to a successful prosecution.

If you have knowledge of a financial misdeed, it’s important to get help from an SEC whistleblower lawyer who specializes in this kind of case and understands exactly how to proceed in this situation. Keeping the markets clear of fraud is beneficial for everyone, both here in the United States and in foreign markets.