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Review: EU Forex Regulation vs US Forex Regulation

Over the last few years, we’ve seen the daily Forex trading volume skyrocketing, now standing at $6.6 trillion, data from the Bank for International Settlements showed in September last year. This figure is way higher than the $3.3 daily volume recorded three year prior. 

With such a massive increase, we could say that a lot of market players have seen the potential of earning huge profit from trading Forex. As participants continue to fill in the world’s largest financial market, this has opened a huge opportunity for startup companies to enter the industry. Having said this, it has also become a difficult task to regulate all activities concerning Forex. 

Each country has its own agencies responsible for regulating its financial markets and protecting its citizens against fraud of any kind. Even Forex brokers with high leverages are being strictly prohibited at some countries.  In this blog article, we are going to focus our discussion on the EU Forex regulation vs US Forex regulation.

EU Forex Regulation

Markets in Financial Instruments Directive or MiFID bears the responsibility of overseeing the financial services being offered in Europe. The agency’s main goal is to promote a competitive landscape among Forex brokers, as well as to ensure the protection of consumers from abuse. FX trading shall be subject to the law and regulations of MiFID. Forex brokers which have their sights on the EU should comply with MiFID’s requirements.

Forex brokers intending to acquire a license from MiFID are supposed to categorize their clients into two: individual traders and experienced traders or investors. This aims at providing clients with investment and trading tools that are customized to their needs. In addition, this prevents less experienced traders from getting risky services or products. You ‘d notice that when you sign up with an EU-based Forex broker for a trading account, there’s a section where you’ll be asked about your revenue and your experience as a trader.

Also, the MiFID strictly requires all Forex companies to offer a segregation feature to the funds. This means that client funds should be held in accounts different from the company’s. This legislation offers insurance for client funds should the broker encounter financial strain. Separation of funds is very strictly implemented in EU countries such as the UK and Germany. But there are countries like Cyprus that are less strict too.

Some of Europe’s leading financial regulators include the FCA and BaFin.

US Forex Regulation

Forex brokers looking to enter the U.S. market will be confronted with more stringent regulations. This Trump-led country has different agencies each tasked with creating and implementing laws and guidelines designed to protect its people. Brokers must first obtain a license from the National Futures Association, as well as a registration with the Commodity Futures Trading Commission. The two agencies are working together to combat fraud and abuse on this large financial market. Each broker must therefore comply with the laws of these agencies.

With over 300 million people, it’s only logical to put up a brokerage company in the U.S. But it’s easier said than done. With a lot of scams going on around the Forex market and many are falling victims, the NFA and CFTC had to do something. The agencies have become stricter and have implemented rules that many brokers consider difficult to comply with.

To receive the US Forex Law, brokers must have ample funds to ensure that they can cover their operational expenses. The FCA requires that Forex companies have an operating capital of at least $1 million, but the NFA requires a stunning $20 million in locked-in capital. For startup brokers, that is too expensive. That’s why only a few brokers are able to obtain a license from the NFA.

When it comes to leverage allowed, U.S. regulators have set the maximum at 1:50 for major major currencies. This is significantly below the normal maximum leverage brokers outside the U.S. provide their clients, which goes as high as 1:1000. The low leverage brings Forex brokers at disadvantage because it drives clients away. Low leverage limits their trading capacity. 

Important decision

From the above, we have seen that the US Forex Regulation is much stricter than the EU. As a result, more Forex brokers are regulated in EU countries. You therefore have more EU-regulated brokers to choose from. If you are in the middle of choosing a broker, this article should be able to help you determine which one to deal with as far as regulation is concerned.

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