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The US forex market is probably the most heavily regulated one. US Forex brokers must be regulated by the National Futures Association (NFA) or the Commodity Futures Trading Commission (CFTC) and must meet strict requirements designed to protect local investors. Needless to say, the CFTC and NFA are quite strict in enforcing their regulations and guidelines. If a regulated company fails to comply with any of the legal requirements, the fines are pretty heavy.
The NFA’s main duties include making sure that capital requirements are met, and reporting requirements and procedures are followed. This regulator is the one keeping a record of licensed forex brokers and providing licenses. The CFTC, on the other hand, oversees derivates markets – futures, options, etc. – and mostly regulates exchanges where such assets are traded.
Let’s take a look at some of the more specific requirements US brokers have to meet in order to obtain a license to operate.
First of all, US brokers are subject to one of the highest capital requirements for financial services providers worldwide. Such brokerages must maintain net capital of at least $20 million to make sure that they are well-capitalized to protect investors from unfavorable events. For comparison, the minimum net capital requirement for Australian brokers is AUD 1 00 000, and for those in UK and Cyprus – EUR 730 000. The US market, however, does not tolerate small players.
Secondly, forex brokers in the USA are allowed to provide leverage up to 1:50 for majors and up to 1:20 for minor currencies. A number of financial regulators have introduced similar leverage caps due to the high risk of significant loss when using high leverage ratios, including those in Japan, Turkey, the European financial authority, ESMA, and most recently Australia. However, many traders are tempted by the opportunity of quick profit that higher leverage offers, and search for brokers that provide leverage up to 1:100 or more. On the other hand, the leverage restriction also results in lower trading volumes, and, respectively, smaller profit for the brokerages.
Another restriction US brokers are subjected to is the so-called FIFO (first in, first out) rule. Simply put, this rule prevents traders from going long and short on the same pair at the same time. Where there are several open trades on the same pair and of the same size, a trader is required to close the oldest trades first. This also means that hedging is not allowed.
US brokers, like brokers in other jurisdictions, have to meet certain reporting requirements. In addition to CFTC’s recordkeeping and reporting guidelines, they are required to provide their customers with access to certain transaction execution data (under the NFA’s rules on disclosure of transaction data).
According to US law, brokers should preferably hold their books and securities separate from those of the clients in segregated accounts. This means that client securities would not be lost in case the broker becomes insolvent and can be quickly returned. It also means that the broker is using its own funds when doing business not those of its clients.
Most of the restrictions mentioned above for forex brokers in the US were introduced by the Dodd-Frank Act of 2010. What’s more, this law practically prohibited foreign forex brokers, even big, legitimate ones, from accepting US clients without having a local license. According to the Dodd-Frank, forex brokers that are allowed to deal with US forex traders must be registered with NFA (and regulated by CFTC). Both US regulators keep threatening any broker that accepts US clients without US regulation and have spread their tentacles inside many foreign governments through a series of Memoranda of Understanding agreements. Thus, NFA and CFTC have effectively extended US regulation to cover US residents in countries that are parties to these agreements.
One popular payment method US brokers accept that is not widely known outside the country is the electronic payment solution Automated Clearing House (ACH). It is mostly used for transactions within the US and handles about half the electronic transactions in the country when it comes to trading volume.
Considering the heavily regulated environment in the US, no wonder there are only a few forex brokers left legally operating there.
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