Update 2019-09-12: An in-depth update has been performed to bring the regulatory information presented in this guide to reflect the current state of affairs (especially, the post-ESMA regime changes in Europe) and to add two important regulators — the FSCA (South Africa) and the IIROC (Canada).
While all transactions in a stock or futures markets are carried out under the supervision of an exchange, Forex is an over-the-counter market where the transacting parties can be from different corners of the globe. Thus, in the interest of investors, it becomes all the more important for the regulatory authorities to closely monitor the brokers facilitating the trades. But who regulates the Forex market and who regulates Forex brokers? Here is an attempt to describe the most popular regulatory authorities around the world that uphold legal and ethical standards in the industry.
Forex regulation is a hot topic for many traders. Unfortunately, there is little concrete information available on the subject outside the official websites of the government institutions. This post aims to provide such information to help traders understand the implication of this or that regulatory environment on their rights and trading conditions.
For each organization, a list of responsibilities, requirements, and powers is provided. Whenever possible, we provide examples of the regulatory actions committed by the given agency.
CFTC (Commodities Futures Trading Commission)
The CFTC was established in 1974 as an independent agency to supervise futures trading and to protect investors by taking legal action against fraudsters. The CFTC was also granted more powers than its predecessor, the Commodity Exchange Authority. The CFTC is made up of four divisions: clearing and risk, enforcement, market oversight, and swap dealer and intermediary oversight. The objective of the CFTC as the Federal government’s regulator is as follows:
- Encourage transparency in the financial market.
- Protect investors’ funds from fraud.
- Prevent market manipulation.
- Aid the creation of financially sound and competitive market.
The CFTC initially regulated the markets of agricultural commodities such as wheat, corn, and cotton. However, in the course of time, the CFTC took charge of supervising the contracts of energy, metals, crude oil, heating oil, gasoline, precious metals, and even financial products (interest rates, stock indices, and currencies). The 2008 credit crisis led to the inclusion of the $400 trillion swap market, dominated by large firms and financial institutions, under its supervision.
The CFTC does not involve itself in the day-to-day operations of an exchange. The organization usually uses the Chicago-basedCME Group and the NFA (National Futures Association) for registering and monitoring activities. The CFTC has a complete control over the exchanges (CME, Intercontinental exchange, etc.) and the NFA. The CFTC has powers to even take the NFA to court if the monitoring activities of the latter are not satisfactory.
Irrespective of whether an individual or organization is an NFA member or not, the CFTC has the right to get involved in case of non-compliance of rules. However, the disciplinary action is usually centered on non-NFA members.
Who should register?
Any individual or organization willing to do business as futures professionals should compulsorily register themselves with the CFTC. Registration process enables a clear assessment the financial health of the individual or organization. Furthermore, subject to federal regulations, the activities of a registered individual or entity can be tracked quite easily.
The term futures professional refers to an individual or organization with any of the following status:
- Futures Commission Merchant (FCM)
- Swap Dealer (SD)
- Major Swap Participant (MSP)
- Retail Foreign Exchange Dealer (RFED) — Forex brokers, who are the counterparty to a trade, come under this category even if they only offer spot FX trading and do not involve themselves in futures trading.
- Introducing Broker (IB) – an individual receives commission for bringing new clients to a retail Forex broker. However, an IB will refrain from handling the client’s money and trade executions.
- Commodity Pool Operator (CPO) — an individual or entity, which receives money from multiple investors, pools it into a single trading account, and executes trades on behalf of them. Hedge funds come under this category.
- Commodity Trading Advisor (CTA) – an individual or organization providing trading advice to customers.
- Associated Person (AP)
- Floor Broker (FB)
- Floor Trader (FT)
- Notice registered Futures Commission Merchant and Introducing Broker.
It should be noted that any individual or entity willing to pursue futures-related business with the public should compulsorily have NFA membership or associate status.
What are registration and compliance requirements?
Using the NFA’s online registration system (ORS), an individual or entity can register with the CFTC and apply for the NFA membership. The rules governing a Forex broker are as follows:
- Risk disclosure statement should be given to clients compulsorily. The statement should be similar to the one provided in futures trading.
- A Forex broker should disclose the number of non-discretionary trading accounts. Furthermore, it is a must for the broker to reveal the number of accounts that were profitable during each of the four preceding quarters.
- A broker must maintain a capital of $20 million plus 5% of customer liabilities in excess of $10 million.
- It is necessary to hold enough liquid assets to cover the total amount of the broker’s obligation to its traders.
- The leverage is limited to 1:50 for major currency pairs and 1:20 for minor currency pairs on trading accounts.
- All records of communications concerning possible violations of regulations should be maintained and reported to the division of enforcement.
- Individuals and entities acting as IBs should compulsorily enter into a guarantee agreement with the Forex broker.
- All RFEDs/FCMs should compulsorily designate a compliance officer who should make annual certification (stating that the RFED/FCM acts as per regulations) to the Commission and the NFA.
- Pending legal matters, if any, should be disclosed to the CFTC without any delay.
How CFTC monitors for frauds?
The CFTC identifies fraud by administering the activities of designated contract markets, swap execution facilities, derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, and commodity pool operators. Furthermore, the agency immediately acts on individuals or entities who fail to comply with the regulations discussed above. The CFTC also relies heavily on its whistleblower program, incentivizing information submission regarding regulatory breaches in companies.
The CFTC also acts on complaints received from the public and other market participants. In this regard, the online CFTC SmartCheck facility enables an individual to check whether a Forex broker is registered with the CFTC in any capacity. The CFTC also publishes the Red list, which includes the list of Forex brokers who accept the US clients illegally, without being authorized by the Commission.
What powers are at CFTC’s disposal?
In June 2019, the CFTC fined Eagle Market Makers $150,000 for noncompetitive transactions conducted on the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME).
File complaint in the US District Court
In June 2017, the CFTC filed a civil enforcement action in the Utah District Court against Estonian company Tallinex for failure to register as a RFED and accepting US Forex traders.
Ban from trading
In August 2019, the CFTC banned a Forex fraudster Kevin Andre Perry from registering with CFTC and trading in any of the CFTC-regulated markets for soliciting and misappropriating clients’ funds in an illegal scheme. Kevin A. Perry has also been fined $2.7 million for the same case.
Issue cease-and-desist orders
In August 2018, BNP Paribas was ordered to cease and desist from further violations in attempted manipulation of the ISDAFIX benchmark by the CFTC in addition to a hefty fine of $90 million.
Refer cases to the Department of Justice for prosecution
Back in 2011, the CFTC charged Lyndon Lydell Parrilla and Green Tree Capital for a fraud in a multi-million dollar Forex scheme in cooperation with the US Department of Justice (DOJ) and the FBI.
NFA (National Futures Association)
The NFA is a self-regulatory body, which complements the actions of the CFTC. The CFTC bill, which was passed in 1974, allowed the creation of such an organization. However, it took about eight years for the formation of NFA. The NFA enforces the rules created by the CFTC. The NFA also implements additional rules, as and when required, for the protection of investors. Considering the stringent standards, both the CFTC and the NFA are categorized as level 1 or level A jurisdictions according to Principles for Financial Market Infrastructure by the Bank for International Settlements.
Additional rules for Forex brokers
- Detailed risk disclosure (as advised by the CFTC) should be provided. The section should categorically state that the trading platform is not an exchange and there is no protection for the invested amount. Furthermore, the section should explain that the broker is a counterparty to the trade and there may be differences in prices offered to different customers. The NFA rules also demand that the IB should disclose that he earns a commission for introducing a client to the broker.
- A Forex broker should not claim that the client’s funds are segregated or have any special protection.
- Claims of ‘no slippage’ or ‘guaranteed filling’ is not allowed, unless it can be proven.
- Claims of hypothetical profit should also be accompanied by a statement of risk of loss.
- The marketing materials should never claim that Forex trading is suitable for everyone.
- Cancellation or adjustments to price should be done within 15 minutes of order execution. If changes are made at a later stage, then such a change should be in favor of the client.
- Rules governing slippage should be described clearly to the client.
- A Forex broker should have a net capital of $20 million plus 5% of the liabilities owed to clients in excess of $10 million. The annual membership fee is currently at $125,000.
- NFA has banned the use of credit cards for funding the trading account. So, a Forex broker accepting a US client should not accept funding via a credit card (debit cards are still allowed though). Furthermore, the FIFO (first in — first out) order execution rule should be strictly followed.
How NFA monitors for frauds?
Apart from supervision, the NFA also conducts regular audits. If necessary, the NFA can bring enforcement actions against its member for violation of the rules. For minor violations, the NFA penalizes the concerned member straight away. For example, on August 7, 2019, the NFA ordered Gain Capital Group LLC to pay a fine of $50,000 due to a complaint alleging that the company failed to compensate its customers for losses incurred due to malfunctioning of its trading platform.
If the infraction is large, the NFA should seek the involvement of the CFTC, which would pursue civil actions against the individual or entity for the infringement of rules. The NFA is allowed to assist the CFTC but cannot file a case on its own.
The NFA has a power to bar persons and companies from membership, effectively banning them from professional participation in the industry. For example, on January 12, 2018, the Association barred BCD Forex Investments from membership due to providing false and misleading information to the NFA, using misleading and deceptive promotional content, and a failure to observe standards of conduct in doing its Forex business.
FCA (Financial Conduct Authority)
The FCA is a UK based independent financial regulatory body funded by the firms it regulates. The organization is accountable to the Treasury and the Parliament. The FCA came into existence in 2013. Following the Financial Services Act 2012, the FSA (Financial Services Authority), a quasi-judicial body in charge of the regulation of the financial services industry between 2001 and 2013, was split into two separate regulatory authorities, namely, the FCA and the PRA (Prudential Regulation Authority).
The FCA regulates both retail and wholesale financial firms, including banks, mutual societies, and financial advisers. The main objective of the FCA is to protect consumer interests, to enhance market integrity, and to promote competition. The FCA also provides EEA (European Economic Area) authorization to European companies. The authorization allows the companies to do business with the citizens of the UK, according to MiFID (Markets in Financial Instruments Directive) rules. The EEA (or passport holders) companies are regulated in their home country (as per the EEA standards) and not by the FCA.
Who should register?
The FCA requires financial companies to be either authorized or registered with it (or both authorized and registered). Registration is a much simpler process than authorization. Retail Forex brokers need to be both authorized and regulated by the FCA. The following types of companies need to be registered or authorized:
- Banks, credit unions, and insurance firms
- Consumer credit firms
- Investment firms (UK Forex brokers belong here)
- Benchmark administrators
- Payment services and e-money firms
- Innovative firms
Registration and compliance requirements
- It would take approximately 6 months for a Forex broker to get licensed.
- Authorization fee is up to £25,000, depending on the complexity of the case.
- Depending on the business model (STP, dealing desk, mixed, etc.), the initial capital requirement would be either £125,000 (for STP) or £730,000 (for market makers).
- It is a must for companies to maintain sufficient liquid capital to cover client’s deposits, expenses, and probable negative impact from the company’s positions. Capital adequacy is regularly monitored.
- The company should not have any outstanding debt. A detailed annual audit by an independent financial auditor is a must. Additionally, there should be a comprehensive audit of the clients’ money as well.
- A broker should maintain clients’ funds in extremely reputed financial institutions (safe top-tier banks).
- The company should adhere to the anti-money laundering regulations, while following well-defined risk management procedures.
- The company’s office has to be located in the United Kingdom.
- The directors should possess strong professional background in the financial and investment industry.
- Leverage is limited up to 1:30 on Forex pairs.
- Brokers need to implement negative balance protection.
- Margin call level should be set to not less than 50%.
- Brokers should provide standardized risk warning about their service and also provide the percentage ratio of accounts that were unprofitable during the last 12 months.
- Bonuses, trading contests, and referral fees cannot be used to lure in new or retain old traders.
Powers at FCA’s disposal
- Impose penalty for small violations. In September 2018, the FCA imposed a fine of £584,700 on Linear Investments Limited for failure to monitor for potential market abuse via its DMA trading platform.
- Order investigation of individuals and entities. In April 2019, the FCA ordered an investigation by an independent person into the issues raised by the failure of London Capital & Finance, a UK investment company.
- Ban any kind of financial products for up to a year or even permanently. In March 2019, the FCA confirmed its permanent ban on binary options for retail traders. Before that, binary options in the UK had been outlawed since 2018 by the pan-European regulator ESMA.
- Order firms to take back or modify promotions, which it considers to be misleading.
- For serious violations, the FCA can cancel license and even imprison individuals (by taking them to court). In September 2018, the Southwark Crown Court sentenced Michael Nascimento to 11 years imprisonment in an FCA-led prosecution of a £2.8 million fraudulent investment scheme.
- In case a Forex broker goes bankrupt, the clients are covered under the FSCS (Financial Services Compensation Scheme). Traders can claim up to £85,000 invested with a regulated broker. The case of AFX Markets Limited can serve as a good example the FSCS plan working.
CySEC (Cyprus Securities and Exchange Commission)
The financial regulatory authority of the Republic of Cyprus is called the Cyprus Securities and Exchange Commission (CySEC). The Central Bank of Cyprus was the regulating authority before the formation of CySEC in 2001. The geographical advantages and cost (tax) savings brought a huge inflow of retail Forex brokers. This prompted the creation of the CySEC, a licensing organization for Forex brokers and similar firms. The CySEC regulates some of the biggest brands in the retail Forex brokerage industry.
Responsibilities of CySEC
- Manage licensing of investment firms, finance consultants, and brokerage companies.
- Supervise and control the Cyprus Stock Exchange.
- Monitor and supervise operations of licensed investment services companies, investment consultants, collective investment schemes, and mutual fund management companies.
- Carry out investigation processes on behalf of foreign competent authorities in the financial sphere.
- Request and collect information from people and companies if that information is necessary to perform CySEC’s duties.
- Penalize brokers for regulatory non-compliance and impose administrative sanctions.
- Issue cease and desist orders to stop any practice, which is against the regulatory legislation.
- Control regulation by issuing relevant Directives and Decisions.
- Exchange information with other Cyprus authorities and with competent foreign authorities.
Who should register?
- Cyprus Investment Firms (CIFs) — this is what Cyprus Forex brokers register as.
- Cyprus branches of investment firms of other EU states.
- Agents of CIFs.
- Undertakings for Collective Investment in Transferable Securities (UCITS).
- Agents of UCITS.
- UCITS management companies.
- Cyprus branches of UCITS companies from other EU countries.
- Administrative services companies — trustee and fiduciary service providers.
- Variable Capital Investment Companies.
- Alternative Investment Fund Managers (AIFMs).
- Regulated markets.
- Trade depositories of over-the-counter derivatives.
- Central Counterparty Clearing House (CCPs) of OTC derivatives.
Registration and compliance requirements
- As is the case with the rest of the European Union, a broker can be acting as an STP and then require at least €125,000 in regulatory capital, or as a market maker, which would require €730,000 capital.
- Authorization fees start from €7,000.
- The review process for licensing applications can take up to several months.
- Detailed daily, weekly, and monthly reporting is a must. In this regard, CySEC has begun to enforce EMIR (European Market Infrastructure Regulation) standards.
- A Forex broker should have an office in Cyprus. The nominated employees should reside in the country. If the company is outsourcing any brokerage related work, it should inform CySEC about it.
- Bonuses and promotions are not allowed.
- The Forex brokers should continue to monitor and evaluate their own funds level and capital adequacy ratio and ensure that it stays above the limit specified by the CySEC at all times. A Forex broker should also submit a capital adequacy report prepared by an external auditor within four months of the end of a financial year.
- The employees of a Forex broker should not provide any kind of investment advice unless the Forex broker has the necessary authorization to do so. Even then, only qualified employees, as stipulated by the CySEC, should offer investment advice to clients.
- A Forex broker should also provide regular training to the staff providing investment advices such that they possess up to date knowledge and competence. Additionally, the staff employed by the Forex broker should not be bankrupt or have any criminal record. In this regard, a Forex broker should provide the necessary certificates from the competent authorities to the CySEC.
- The staff should communicate with the clients in their original name and provide their true credentials.
- Frequent phone calls to clients should be avoided. The staff should not use aggressive language or employ any kind of tactics to receive additional deposits from the clients. A Forex broker should have a credible internal assessment mechanism to evaluate staff. If a staff member gets dismissed for serious violation of rules, CySEC should be informed immediately. If necessary, CySEC may take further legal action against the dismissed employee.
- A Forex broker should not outsource investment advice, client support, and back office functions outside Cyprus. These critical functions should be provided from the headquarters or from the branch office situated in the Cyprus or another EU member state.
- Withdrawal charges should be comparable to the regular commercial charges applied by major financial institutions.
- The Forex broker should also have a proper system to prevent money laundering and terrorist financing. An annual statement, as prescribed, should be submitted by the board of directors of the Forex brokerage company to the CySEC.
- A Forex broker should have an adequately trained risk management department.
- Unless specifically requested by elected professional traders, the maximum leverage offered to any retail trader should not exceed 1:30.
- The Forex brokers are also prohibited from offering their services to non-EU countries without permission from the CySEC. Additionally, the Forex broker should also have the necessary permission from the concerned authority in the territory in which they offer their services.
- The companies should also act on complaints/grievances from clients in a prompt, effective, and transparent manner. The broker should also maintain a detailed verifiable record of the complaint and the measures taken to resolve the issue.
Some of the Forex brokers were taking undue advantage of the supportive CySEC authority. However, things have changed a lot in the recent past. After joining the EU, Cyprus is taking all the necessary precautions to shed its “easy” regulator image.
Considering the fact that Cyprus is a full member of the European Union since 2004, the CySEC follows the MiFID guidelines for the market. If a Cyprus broker becomes insolvent, then the retail clients can claim up to €20,000 (or 90% of funds, whichever is lower) from the Investor Compensation Fund.
Powers at CySEC’s disposal
On August 27, 2019, the CySEC issued a warning regarding epoxtrade.com website illegally using the license number of another (regulated) company while being unauthorized to carry out any investment activities by the CySEC.
In July 2018, the CySEC imposed a €50,000 penalty on LQD Markets Ltd for non-compliance with regulations in relation to the maintenance of its internal records.
In October 2018, the CySEC suspended the CIF license of PFX Financial Professionals Ltd due to numerous breaches of the regulatory legislation (Investment Services and Activities and Regulated Markets Law of 2007 to 2016).
If the violation is huge, the CySEC can even file a case in court to receive an order of detention or to freeze assets.
ASIC (Australian Securities & Investments Commission)
Before 2001, the Forex business was self-regulated in Australia. The brokers only had to register themselves with the Reserve Bank of Australia (RBA). Following the enactment of the Financial Services Reform Act and the Australian Corporations Act, the retail foreign exchange dealers are now required an Australian Financial Services (AFS) license from the ASIC (Australian Securities and Investments Commission) to conduct business in Australia.
Note: There is an active proposal from the ASIC, which, if made into a law, would completely ban binary options and severely restrict CFD/Forex trading offered to Australian retail traders. The consultation period will last until October 2019.
Role of ASIC
Being the country’s financial services regulator, the ASIC has the following responsibilities:
- Facilitate the improvement of the financial system and ensure market transparency.
- Promote investors’ confidence.
- Administer the law with minimum enforcement requirements.
- Receive, store, process, and make available information provided to the ASIC by regulated entities.
- Enforce the law through variety of actions.
Who should register?
- People and businesses engaging in consumer credit activities (including banks, credit unions, finance companies, and mortgage and finance brokers).
- Financial services businesses that deal and advise in investments, superannuation, and insurance.
- Australian companies, which are involved in managed investment schemes.
- Auditors and liquidators.
Registration and compliance requirements
- According to the ASIC regulation, only a Forex broker who has at least 10% of its revenue (or a minimum of A$1 million) as net tangible assets (NTA), of which at least 50% in cash or cash equivalent is allowed to operate in Australia. The requirement was 5% of revenue (minimum of A$500,000; 50% cash or cash equivalent) before February 2014. Before 2013, a Forex broker with a capital of A$50,000 could apply for the ASIC regulation. The tough measures were imposed after the regulators started following Basel III norms for revenue and capital. However, it has deterred many brokers from setting up a business in Australia.
- The 50% cash or cash equivalent rule ensures that unexpected losses can be met quickly.
- At the end of every year, the NTA details should be provided to ASIC along with other financial statements.
- If the licensee does not have the requisite NTA for a minimum of two months, then within three days the ASIC should be informed about the matter. In such a case, the licensee is forbidden to enter into new transactions, which could potentially create liabilities for the company.
- As soon as a broker becomes aware that its NTA had fallen below 110% of the stipulated NTA requirement, the ASIC should be informed. A report on the NTA level should be submitted at the beginning of every month as long as the NTA level remains below the 110% threshold.
- A fall below 110% of the stipulated NTA serves as a caution to the clients. The ASIC, on their part, would start monitoring (risk-based surveillance) the activities of the Forex broker closely. On the other hand, if the NTA falls below 10% (minimum A$1 million) of the revenue, then the broker will be issued a cease and desist order by the ASIC.
- A broker should compulsorily have a physical office in Australia.
- Forex brokers that have an AFS license and operate from Australia should have Australian citizens as majority clients.
- In case a Forex broker accepts clients from some other country, a license from the regulating authority in the client’s jurisdiction is a must. Forex broker Pepperstone is a classic example of this rule. Nearly 40% of Pepperstone’s revenue in 2014 was earned from the Japanese clients. When the rule was enforced, Pepperstone, which did not have a license from the Japanese regulatory authority, stopped accepting Japanese clients after a warning from the ASIC.
- Client’s money cannot be used as working capital. This means that Forex brokers should hedge risk with their own capital. Furthermore, clients’ funds should be held in a trust.
- In addition to the internal dispute resolution scheme, a broker must become a member of the Australian Financial Complaints Authority (AFCA).
- A Responsible Manager who meets the experience and qualifications criteria should be assigned by a company. The company should also implement all the appropriate policies and procedures to comply with the ASIC requirements.
- Normally, once all the requirements are met, it takes about 60–120 days for a broker to receive the ASIC license. The fees range from A$3,721 to A$7,537.
Powers at ASIC’s disposal
- Grant licenses to companies that must be regulated.
- Grant relief from some parts of the legislation on a case-by-case basis.
- Amend or create rules to ensure the integrity of the financial markets.
- Halt the issue of financial products under the rule of defective disclosure documents.
- Conduct investigation into breaches of regulation. In November 2018, the ASIC canceled the AFS license of Berndale Capital Securities Pty Ltd for multiple failures in its compliance with the ASIC regulations.
- Issue infringement notice in case of breach of the law. In November 2017, Interactive Brokers LLC (a multi-asset brokerage company) has been served an infringement notice and made to pay A$250,000 due to a failure to monitor its client’s activity for market manipulation in equities trading.
- Ban people from providing financial services. In November 2018, the ASIC banned a former director of AGM Markets Pty Ltd because he had a key role in AGM’s numerous shortcomings regarding the regulatory law.
- Commence civil penalty proceedings in the court. For example, in February 2019, the ASIC commenced civil penalty proceedings against GetSwift Limited and its directors due to a failure to monitor its traders’ activity on market manipulation attempts.
- Conduct prosecutions in minor criminal matters.
The ASIC isn’t shy of using its enforcement powers. In January-June 2019, the regulator charged 10 individuals in criminal proceedings, achieved 7 custodial sentences, prosecuted 191 individuals for strict liability offenses, banned 103 persons, served 5 infringement notices (restoring A$19.2 million in compensation and remediation), and commenced 77 investigations.
FMA (Financial Markets Authority)
The FMA, established under the FMA Act 2011, regulates the capital markets and financial services in New Zealand. The FMA principally regulates only domestic firms. On the other hand, foreign firms can register as FSP (Financial Service Providers). However, derivative issuers (including Forex brokers) need to be fully regulated by the FMA to be able to deal with the New Zealand residents and be considered regulated in New Zealand.
Who should register under FMA?
The firms and individuals who should register under the FMA are:
- Derivatives issuers (this category includes CFD/Forex brokers and binary options brokers)
- Managed investment scheme managers
- Discretionary investment management service providers
- Authorized financial advisers and qualifying financial entities
- Licensed financial product markets
- Designated settlement systems
- Crowdfunding platforms.
- Peer-to-peer lenders.
- Licensed independent trustees
- Accredited audit bodies
- NZX (registered exchange) including NZSX (main board), NZAX (alternative market), NZDX (debt market), FSM (Fonterra shareholders market), and NZCX (derivatives market)
Most of these categories need to register with FSP (which means getting an FSP number) before applying for the FMA license.
Registration and compliance requirements
Forex brokers seeking to be licensed by the FMA as derivative issuers would need to meet the following requirements:
- Should register as an FSP.
- Should register as a member of the Financial Dispute Resolution Service (FDRS).
- Minimum net tangible assets of 1 million NZD or 10% of average revenue (measured using last 3 years), with half of the NTA being held as cash or other highly liquid assets.
- Must have a physical office in New Zealand.
- A Compliance Director should be present in the office.
- Client handling, KYC and AML procedures should be performed from the New Zealand office and not from elsewhere.
- The Forex broker should be a registered corporation and comply with the business law within the New Zealand jurisdiction.
- Forex brokers should subject themselves to periodical audits and comply with the industry standards.
- Maintain sufficient liquidity to pay customers without delay.
- Should not misrepresent facts and should disclose risks to customers.
- Should honor each and every executed trade.
- Must demonstrate how conflicts of interest are eliminated within its business model.
How does FDRS settle disputes?
- Whenever there is a problem with a Forex broker, a client can file the complaint with the FDRS by phone, web form, email, or postal mail.
- If the client has not yet made a formal complaint to the FSP, the FDRS will guide the client to file it.
- The FDRS will then try to facilitate the complaint resolution between two parties. If both parties are satisfied, they sign a binding settlement agreement.
- If facilitation isn’t effective, the FDRS will employ a conciliation with the direct involvement of a resolution practitioner (with formal training). This too can end in a binding settlement agreement.
- If neither facilitation nor conciliation help to reach the settlement, the FDRS uses the formal adjudication process. The adjudicator performs thorough investigation, asks parties for comments, and uses best judgment and industry’s best practices to issue the final decision.
Powers at FMA’s disposal
- Deregister or suspend licenses of those Forex brokers that do not comply with regulations. In August 2019, the FMA suspended AxiCorp’s derivatives issuer license due to a failure to provide necessary disclosures and troubles with audit.
- Seek criminal prosecution or civil proceedings against a market participant. In July 2018, two individuals were sentenced by the Serious Fraud Office (SFO) in connection with a multi-million dollar Ponzi scheme, which has been referred to the SFO by the FMA.
- Issue warnings against unauthorized Forex brokers. In July 2018, the FMA issued a warning against Olympus Markets, which isn’t registered with the FMA.
- Impose conditions on licensed companies.
- Give directions on correcting the company’s behavior or processes.
- The FMA can stop promotion or distribution of a financial product or service.
The FMA received 3211 complaints and published 70 alerts during 2017/2018 financial year.
FINMA (Swiss Financial Market Supervisory Authority)
The FINMA was created by a merger of the SFBC (Swiss Federal Banking Commission), FOPI (Federal Office of Private Insurance), and AMLCA (Anti-Money Laundering Control Authority) on January 1, 2009. The principal aim of the merger was to create an integrated authority to supervise the activities of the financial market. As an institution serving the public interest, FINMA is financially and functionally independent.
The role of FINMA
Any individual or entity interested in doing business in the financial sector need a license from the FINMA. The organization provides a variety of licenses, depending on the nature of business. Furthermore, considering the quantum of financial risk involved, varying degree of strictness is applied while processing an application for the license.
The intensity or supervision increases in areas where there is a considerable risk to creditors, investors and policy holders. If the risk profile is low, then the FINMA would monitor the activities of the entity or organization in a superficial manner.
The process involves judging whether there is a genuine violation of law. If so, the FINMA will use its powers to penalize the concerned individual or authority and ensure that such a happening does not repeat again. Individuals or entities who are not satisfied with the actions of the FINMA can challenge the decision in court.
The FINMA employs principle-based regulation with as little market interference as possible. The FINMA follows domestic and international laws in regulating the financial industry of Switzerland.
The FINMA cooperates with foreign regulators and international standard setting institutions to enhance the regime in Switzerland and to provide help to its colleagues abroad.
Who should get authorized by FINMA?
The FINMA provides four types of authorization — licensing, recognition, approval, and registration. Of these four, only the first one, licensing, is of interest to retail traders. The following entities should be licensed by the FINMA in Switzerland:
Licensing and compliance requirements
- To set up a Forex broking business in Switzerland, an entity should have a banking license as per Swiss Federal Act on Banks and Savings Banks.
- To offer trading in other securities (futures, options, bonds, CFDs, etc.), a Forex broker should additionally apply for a securities dealer license.
- An entity should have 10 million CHF as net capital to apply for a banking license. Furthermore, as a bank, the institution should maintain a total capital ratio of between 10.5% and 12.5% (depending on bank’s tier).
- A detailed business plan showing that the firm can maintain capital adequacy and risk management rules at all times.
- The Forex broker should manage business from an office in Switzerland.
- An internal audit function, independent of the Forex broker’s management, should be established.
- A recognized audit firm for regular supervision should be appointed.
- It will take about six months to receive a securities dealer license. The time period does not include the response time from the concerned authorities.
- Clients’ funds cannot be used for operating expenses.
- The organization responsible for protecting the clients’ deposits is esisuisse. In case a Forex broker goes bankrupt, the client can claim up to 100,000 CHF.
Powers at FINMA’s disposal
- Issue warnings. In August 2019, the FINMA added an unregulated Forex broker SwissCapital to its warning list as the company failed to get proper authorization from the regulator.
- Ensure compliance. In September 2018, the FINMA concluded its enforcement proceedings against Credit Suisse AG, which have been initiated in 2017 due to the found deficiencies in anti-money laundering processes and shortcomings in control mechanisms & risk management. The regulator issued a list of conditions to be implemented by Credit Suisse.
- Reprimand a company. In September 2018, the FINMA reprimanded Jungfraubahn Holding AG due to the company manipulating the market price of its shares.
- Ban a company or individual from exercising certain market activities. In February 2018, the FINMA banned Gazprombank (Switzerland) Ltd from accepting new retail clients until further notice because of serious shortcomings in anti-money laundering processes at this bank. The investigation was initiated following the Panama Papers release.
- Issue cease and desist orders to stop unlawful behavior. According to the organization’s 2018 annual report, the FINMA issued 7 cease and desist orders against companies and 14 cease and desist orders against individuals that year.
- Publish final rulings. In December 2017, the FINMA announced a final ruling against J.P. Morgan (Switzerland) Ltd regarding the company’s involvement in the money laundering scheme with the Malaysian sovereign wealth fund 1MDB.
- Order disgorgement of unlawful profit. In February 2018, the FINMA concluded enforcement proceedings against PKB Privatbank SA Lugano and ordered it to disgorge 1.3 million CHF of illegally obtained profits.
- Withdraw authorization or liquidate a company. In September 2017, the FINMA announced a liquidation of three companies that offered a fake cryptocurrency called E-Coin to the public, accepting deposits, but have never obtained a Swiss banking license.
FSA (Financial Services Agency)
The Tokyo-basedFSA (Financial Services Agency) is a government body which oversees the operations of banks, securities exchanges, and insurance sector in Japan. The organization ensures stability of the country’s financial services sector. This integrated financial regulator reports to the Minister of State for Financial Services.
To streamline the operations of the FSA, there is a Commissioner, Securities and Exchange Surveillance Commission, and Certified Public Accountants and Auditing Oversight Board.
The FSA has its own Vice Minister for International Affairs whose job is to promote effective negotiations with foreign authorities and regulators. The Commissioner works with the strategy and management bureau, policy and markets bureau, supervision bureau, and administrative law judges.
It is the Securities and Exchange Surveillance Commission, which through its divisions regulates and supervises the retail trading brokerage companies working in Japan.
The role of the FSA
The FSA aims to achieve financial stability and effective intermediation, consumer protection and benefit, and market integrity & vigor.
Monitor and supervise
The FSA comprehensively monitors each stage of funds flow in the investment chain. Furthermore, the organization constantly reviews whether an independent or entity, which buys/sells or manages financial products, follows their fiduciary duties properly by putting customers’ interest before everything else. The FSA also establishes measures to maintain the credibility of accounting and auditing. The FSA regularly interviews regulated companies, including Forex brokers, to assess the manner in which they deal with their customers. Furthermore, the organization regularly reviews corporate governance practices of financial institutions. Apart from reviewing the sustainability of a financial organization, the FSA also evaluates the risk management procedures.
Investigate and inspect
In case, the FSA has reasonable suspicion that some company acts in breach of the regulating laws, the FSA may conduct investigations and inspect the violator’s activity. The agency can either act on its own or with the help of other government bodies who can assist with investigation of criminal activity.
Considering the fact that electronic and algorithmic trading has reached widespread prominence in the financial sector, the FSA has assigned cyber security as one of its top priorities.
The FSA cooperates with overseas financial service regulators in the case of complex cross border transactions. Furthermore, the FSA performs real-time monitoring of global economic trends and changes in the operational behavior of financial market participants.
Who should register?
The following is the list of organizations who should register with the FSA:
- Foreign banks’ agent banks
- Financial instruments business operators (this includes Forex brokers, which are classified as Type I FIB)
- Insurance companies
- Trust companies
- Financial market infrastructures
- Foreign audit firms
Registration and compliance requirements
- A Forex broker who wishes to register as a Financial Instruments Business Operator should have a net asset value of at least ¥50 million.
- The Forex broker should have specific procedures to avoid conflict of interest.
- Client money should be held in a trust bank accounts. It cannot be used as collateral by the Forex broker in any manner.
- The maximum leverage that can be allowed for clients is 1:25.
- There should be established internal rules for running the company.
- An acceptable external audit of financial statements and internal control is a must. In this regard, a Forex broker should prove that they have made arrangements for a proper external audit.
- Employees should have sufficient knowledge about compliance and risk management procedures.
- None of the employees should have any past history of involvement in organized crime.
- Advertisements should not exaggerate the services provided. If the broker’s website provides details in Japanese language, then it is a must for the broker to register with the FSA in Japan.
- The company should have a clear decision-making body.
- There should be a physical office in Japan from where the business should be conducted. Additionally, there should be a minimum of two officers who have at least three years of experience in running a similar business.
- The staff should have adequate training in processing complaints and resolving disputes.
Powers at FSA’s disposal
Impose fine or administrative restrictions
In June 2019, Citigroup Global Markets Japan Inc. has been ordered to make significant improvements in its business operation processes and to supply a report on the changes made to the FSA in a month’s time. This followed the detection of serious failures in Citigroup’s trade surveillance system.
Based on an on-site inspection conducted at the FSHO and Bit Station cryptocurrency exchanges in March 2018, the FSA has suspended the licenses of both companies.
In August 2019, the FSA has warned the public about an offshore Titan FX broker soliciting Japanese traders while being unlicensed by the regulator.
IFSC (International Financial Services Commission)
The IFSC of Belize, a Central American country, was established in 1999 with a main objective of regulating the non-banking finance sector. The organization consists of members from both public and private sectors. Prominent people include the Governor of Central Bank of Belize, Director of the Financial Intelligence Unit, and the Commissioner of Income Tax Authority. The IFSC expects concerned individuals and entities to comply with the enacted rules. Being a member of the Caribbean Financial Action Task Force (CFATF), the country is committed to anti-money laundering principles.
Role of IFSC
- Promote Belize as a prime international financial center.
- Maintain the reputation of Belize as a responsible offshore financial center.
- Supervise and regulate firms involved providing financial services. However, the supervision is not as rigorous as in developed countries. The IFSC promotes self-regulation.
- Assist the government in formulating policies, as and when necessary, to regulate the firms effectively.
- Collecting and providing timely information to the public.
Who should register?
An individual or entity involved in any of the below-mentioned financial services should register compulsorily with IFSC:
- Services for international business corporations (IBC’s).
- Trustee services.
- International insurance services.
- International collective investment schemes and mutual funds.
- International asset protection and management.
- Securities trading services (List F). Many Forex brokers use this license, however, there is a separate type of license for FX brokers — List J.
- International money lending.
- Brokerage, consultancy, and advisory.
- International safe custody services.
- Foreign exchange trading services (List J). This is what retail Forex broker need.
- Money transmission, brokering, and exchange services.
- Payment processing.
- International accounting.
Registration and compliance requirements
- The application fee for a foreign exchange trading business license is $1,000. The annual license fee is $25,000. If a Forex broker offers derivative instruments in commodities or stocks (CFDs, futures, options, etc.), then it will cost another $25,000 as an annual license fee.
- The non-refundable application fee should accompany every application. The annual license fee is payable upon the grant of license by the Commission.
- A Forex broker should have a minimum paid-up capital of $500,000. The same requirement suffices for non-FX derivative trading.
- The currency of Belize should not be used to conduct the Forex brokerage business.
- The Forex broker should send monthly statement clearly indicating the amount due to the customer. The broker should also include a statement saying that the payment will be made on demand without delay.
- Should compulsorily keep the customers’ funds segregated.
- Should not encourage a customer to increase trading volumes with an ambition to earn more commission.
- There should not be any unauthorized use of customers’ funds.
- The Forex broker should disclose the trading commission size and other charges beforehand to a customer. Furthermore, all customers should be treated equally.
- If a client makes a written complaint to the Forex broker alleging misappropriation of funds or any other kind of fraud, then the Forex broker should inform those details to the IFSC within five days of receipt of the letter.
- Any civil proceedings exceeding $25,000 against the Forex broker, in Belize or abroad, should be immediately informed about.
- A Forex broker should sign a margin agreement with a customer before allowing trade executions. Furthermore, the Forex broker should compulsorily receive $2,000 as a margin deposit from the client.
- The Forex broker will have a right to conduct business only in the OTC market.
- By the 10th day of every month, a Forex brokers should compulsorily send the details regarding the paid-up and unimpaired capital. Additionally, the Forex broker should inform the number, volume, and value of all the transactions executed in the previous month.
- In the event of bankruptcy, the Forex broker should immediately inform the IFSC. The appointment of a trustee, admission to insolvency, or prolonged inability to maintain the net capital as per the licensing agreement is considered as bankruptcy.
- The Forex broker should not enter into any kind of mergers without permission from the IFSC. No changes in the Memorandum of Articles of Association should be made. The Forex broker is not allowed to implement any change in address or transfer a portion or the whole of the liabilities to any other entity.
- Residents of Belize are not allowed to become customers to the Forex brokerage trading services.
- Cash deposits of $10,000 or above should be properly checked by the Forex broker for money laundering related crimes.
- The Forex broker should provide IFSC with a detailed operating manual of the business. No new branches should be established without the IFSC’s approval.
- There will be a compulsory annual meeting with the IFSC. Previous year’s performance and future prospects would be discussed.
- No bearer shares should be issued by the Forex broker.
Powers at IFSC’s disposal
ISA (Israel Securities Authority)
Established in 1968, the national securities regulator of Israel — the ISA (Israel Securities Authority) — ensures efficient and transparent capital market. The agency’s rules are mostly similar to that of the US securities laws and primarily intended to protect the interests of investors.
- Issues licenses to financial institutions, investment advisors, and portfolio managers.
- Supervises operations of financial institutions, including Forex brokers.
- Reviews quarterly and annual reports filed by financial institutions.
- Oversees operation of the stock exchange.
- Monitors and ensures fair operation of trading platforms.
- Conducts investigations of violation of rules by license holders.
- If a financial institution is found to have violated the law, administrative enforcement proceedings are carried out by the ISA Enforcement Committee, at the behest of the ISA Chair.
- Before 2014, Israel-based Forex brokers carried out business without any kind of supervision. All that changed when legislation for the regulation of Forex brokers was passed on August 3, 2014, and became active in 2015. Only those Forex brokers having a trading platform license are allowed to operate in Israel.
Who should register?
- Forex and stock market brokers
- Financial institutions providing investment advice
- Investment and portfolio managers
- Mutual funds
The ISA prohibits licensed brokers to offer binary options to both domestic and foreign traders.
Registration and compliance requirements
For a limited license, which involves stringent rules and supervision by the authorities, a Forex broker should have a starting capital of about $200,000. A capital of about $380,000 would enable a Forex broker to receive a full market maker license with the condition that the company properly manages its risks.
- A starting capital of $1 million would enable a Forex broker to receive the highest degree of license. The Forex broker must maintain the amount as reserves. Annual checks would be conducted and re-categorization would be done if necessary. Additional charges for restricted and unrestricted license would be approximately $7,000 and $14,000 respectively.
- Forex brokers should remain insured at all times. Furthermore, a minimum of 10% of capital should be set aside for managing unexpected risks.
- Forex brokers should also determine the spread based on the profile of a retail trader. Even the age of a retail trader should be taken into account while determining the spread.
- A retail trader should sign a legal agreement with the broker before making a deposit. Client’s deposit should be maintained in a segregated account.
- Under no circumstances, a Forex broker is allowed to withdraw funds from the segregated account and deposit in their business account when a client makes a losing making trade. There should not be any delay in processing withdrawal requests.
- Conflict of interest, if any, should be disclosed in details to a retail trader. Additionally, it is the duty of the Forex broker to explain the measures taken to mitigate risk.
- The ISA has also proposed a list of documents that have to be kept safely for future verification if required. Safekeeping period varies from one document to another. The ISA obliged Forex brokers to safeguard certain documents for up to 7 years. Various reports should be sent regularly to the ISA on a biweekly, monthly, quarterly, annual, and biannual basis. Additionally, any significant event in the trader’s account should be reported immediately.
- Forex brokers should also send detailed biweekly and monthly statements to clients.
- Forex brokers should refrain from providing any kind of investment advice to traders. Forex brokers should comply with American FATCA (Foreign Account Tax Compliance Act) and report US citizens’ earnings to the IRS.
- Forex brokers are expected to hold multiple insurance policies to protect the company from clients’ lawsuits, employee malpractice, and hacking related incidents.
- Forex bonuses in any form aren’t allowed. Along with each advertisement, there should be at least three disclaimers. Furthermore, all ads should be approved by the regulator before becoming available online.
- The ISA also sanctions hard ceiling for trading leverage. Forex brokers are allowed to offer a maximum leverage of 1:100 for low-risk instruments. For medium- and high-risk assets, the maximum leverage that should be allowed is 1:40 and 1:20, respectively.
Powers at the ISA’s disposal
As of today, only four Forex brokers possess the trading platform license issued by the ISA.
MFSA (Malta Financial Services Authority)
The MFSA (Malta Financial Services Authority) is the sole regulator for financial service providers in Malta. Before the establishment of MFSA in July 2002, the financial institutions in Malta were supervised by the Central Bank of Malta, Malta Stock Exchange, and the Malta Financial Services Centre. This autonomous body is a member of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), to name a few.
- Regulate, monitor, and supervise financial services.
- Promote financial market integrity.
- Review financial services provided to retail customers.
- Advise the government on necessary legislation.
- Investigate bad practices and act on complaints.
- Ensure high standards of management conduct in the financial industry.
Who should register?
The following should be authorized by the MFSA to carry out their activities in Malta:
- Credit institutions (banks)
- Financial institutions
- Insurance and reinsurance undertakings
- Insurance intermediaries
- Investment firms (this category includes Forex brokers)
- Collective investment schemes
- Company service providers
- Retirement scheme administrators
Registration and compliance requirements
- Forex brokers must get category 2 (white label entities) or category 3 (own account dealers with multilateral trading facility) investment services licenses from the MFSA.
- At least one of the qualifying shareholders should be regulated in the provision of financial services. Additionally, the shareholder should also be involved in active management of the company.
- Forex brokers acting as an STP would need a minimum capital of €125,000. A minimum capital of €730,000 is required to operate a market maker model.
- A fee of €7,000 should be paid while applying for a category 3 license. Annual supervisory fee is €6,000 + €400 per each €250,000 of revenue above €250,000. Category 2 license is somewhat cheaper — €5,000 application fee, €4,500 annual fee + €400 per each €250,000 of revenue above €250,000. The annual fee stops rising after €5 million revenue.
- Forex brokers should not offer a leverage higher than 1:33 on Forex instruments to retail clients.
- An annual audit of the IT systems of Forex brokers has been proposed but the decision stands pending.
- Forex brokers can only use liquidity providers that are authorized by officials in the European Union or some other reputed jurisdiction.
- Monitoring of clients transactions, setting pricing policies, establishing limits, and client agreement conclusion should be carried out from Malta.
- Offering Forex bonuses and rewards is not permitted.
- Brokers should inform the public about the risks of CFD/Forex trading and display a percentage of retail traders that lost their money during the last 12 months at this platform.
- Negative balance protection and cautionary margin calls should be implemented for retail traders.
- Traders’ capital of up to €100,000 per person is protected by the Investor Compensation Scheme of Malta in case of a broker’s bankruptcy.
Powers at MFSA’s disposal
Depending on the level of violation of rules, the Malta Financial Services Authority can unilaterally decide the level of punishment:
Financial Sector Conduct Authority (FSCA) of South Africa
In South Africa, the financial sector is regulated by the Financial Sector Conduct Authority (FSCA). The FSCA was branched out from the Financial Services Board (FSB) on April 1, 2018, in accordance with the Financial Sector Regulation Act 2017 (FSRA). The same law delegated additional regulatory powers regarding banks, insurers, conglomerates, and market infrastructure, to another new agency — the Prudential Authority (PA). You can check whether a Forex broker has an active FSCA license, using the FSP Register search facility.
The FSCA must act in accordance with the laws of South Africa to achieve the following goals:
- Protect customers of financial services.
- Improve efficiency and integrity of financial markets.
- Promote financial stability.
- Increase financial inclusion.
Who should register?
The following types of companies and individuals fall into the FSCA’s scope of regulation:
- Managers of collective investment schemes
- Credit rating agencies
- Market infrastructures
- Pension funds administrators
- Friendly societies
- FAIS-licensed financial services providers (this is the category that includes Forex brokers)
- Retirement funds
- Debt collectors
- Providers of services related to credit
- Payment service providers
- Commercial, mutual, and cooperative banks
- Cooperative financial institutions
- Medical schemes and medical scheme administrators
- Financial benchmark providers
Registration and compliance requirements
The list of requirements for South African Forex brokers is dictated by the Financial Advisory and Intermediary Services Act 37 of 2002 and is not too harsh:
- A local company with an office should be established to receive the FSCA license.
- Professional indemnity insurance is required for directors.
- All directors must pass a regulatory examination process and have at least one year of experience in management and oversight related to investment services.
- At least one director should be a South African resident.
- The company’s current assets should exceed current liabilities at all times.
- Liquid assets should cover at least 4 out of 52 weeks of annual expenditure.
- Annual activity report should be sent to the regulator.
Powers at FSCA’s disposal
- Release statements. Statements serve to clarify the authority’s stance on some important issues. In March 2019, the FSCA released a statement regarding alleged racial discrimination cases in connection with one of its regulated banks.
- Issue public warnings. In January 2019, the FSCA has warned the public about Wig Markets — an unregistered Forex broker that claimed to be regulated the by the Financial Sector Conduct Authority.
- Impose administrative penalty. In May 2019, the FSCA imposed a fine of 10,000 ZAR on Charles Winshaw due to his failure to register as a representative of a financial service provider while acting as such.
- Initiate investigations. In May 2019, the FSCA has released an update regarding successful conviction of two contravening individuals following an investigation the authority had started back in 2014.
- Withdraw license. In July 2019, the FSCA has provisionally withdrawn the FSP license of Stringfellow Financial Services Pty Ltd in connection with a purported Ponzi scheme run by the company’s director.
Investment Industry Regulatory Organization of Canada (IIROC)
Investment Industry Regulatory Organization of Canada (IIROC) overwatches the investment and trading industry and enforces rules that protect market participants’ best interests in Canada. It is a self-regulating organization. The IIROC was created from the merger of two predecessor organizations — the Investment Dealers Association of Canada (IDA) and the Market Regulation Services Inc. (RS) in 2008. Before that, the IDA traced its history to 1916 while the RS was founded back in 2002. The IIROC acts under recognition orders from the Canadian Securities Administrators (CSA).
The IIROC has the following responsibilities in connection to its regulatory role in Canada:
- Create rules that enable high industry standards.
- Supervise investment advisors to ensure investor’s security from unethical behavior and malpractice.
- Review registered firms to check proper capitalization.
- Monitor companies to confirm that proper risk management, account handling, KYC and AML procedures are in place.
- Analyze trading firms’ trade-desk procedures for compliance.
- Investigate potential misconduct by market participants and exercise disciplinary proceedings.
Who should register?
The IIROC regulates all Canadian companies professionally engaged in the investment industry:
- Integrated companies (national firms engaged in proprietary trading, retail and institutional business, corporate finance, and research activities)
- Retail (mainly servicing individual retail clients)
- Introducing brokers (serving retail clients)
- Managed accounts
- Discount brokers (order-execution only) — this is the category Canadian retail Forex brokers work under.
- Institutional investment companies
- Corporate finance companies (mostly engaged in distribution of securities and research)
- Alternative Trading Systems (ATS)
- Proprietary trading firms
Registration and compliance requirements
Forex brokers that wish to operate with retail traders in Canada have to fulfill the following conditions to get licensed by the IIROC:
- The company must be based in Canada.
- The application fee is C$25,000 (C$10,000 of which is non-refundable) + 0.5% of the “applicant’s expected initial capital”. Annual fee is no less than C$22,500 but depends on the dealer’s revenue.
- The minimum required capital is C$250,000.
- The applicant must keep a well-organized system of books and records according to the accounting and audit standards.
- A broker should be properly insured. In case of a broker’s bankruptcy, all traders’ accounts are compensated up to C$1 million.
- A company is to have proper supervisory procedures in place to deal with its customers.
- A five-year business plan should be presented upon application to the IIROC.
- All executives, partners, and directors should be properly qualified and experienced; they have to attend a special course and pass an examination.
- The highest leverage allowed is 1:50 (for USD/CAD).
- A regulated company must display on its website a ‘regulated by’ membership logo provided by the IIROC.
Powers at IIROC’s disposal
The powers of the IIROC when it comes to enforcement of its rule and general laws are as follows:
- Reprimand a member.
- Issue a fine up to C$5 million. A fine may also include associated costs and disgorgements of unlawful profits to affected parties. In November 2018, the IIROC fined TD Waterhouse Canada Inc. C$140,000 (plus C$10,000 in costs) for a failure to supervise its employee.
- Impose conditions on membership.
- Suspend a license. In August 2019, the IIROC suspended license of Dominick Capital Corporation due to deficiency in maintaining the necessary risk-adjusted capital.
- Expel a member. In case of extreme regulatory breaches, the IIROC may expel a member, revoking their license.
Despite the variety in Forex regulatory environments around the world, traders should understand that there are licensed brokers with bad reputation and unregulated brokers with good reputation. Thus, a final decision should be made after thoroughly assessing the history of a particular Forex broker.
Update 2017-05-08: The post has been updated to reflect the most recent changes to the Forex regulation laws in Australia (ASIC), Cypris (CySEC), United Kingdom (FCA), and New Zealand (FMA). The article now also describes Israel Securities Authority and Malta Financial Services Authority as both organizations have started to play an important role in the retail FX ecosystem.
If you have any additional information about regulation services provided by the authorities in various countries or if you have any questions regarding specific regulatory jurisdictions, please let us know using the commentary form below.