Regulation in the United States
Regulation of the foreign exchange market in the USA is considered to be one of the toughest, but at the same time the most reliable in the world. Its mechanism is built on the principle of maximum protection of clients from fraudulent actions, although some peculiarities of regulation are still a topic for active discussions. Today we will consider the functioning of regulation in the USA.
Financial regulatory tandem
Regulation of the foreign exchange market in the United States is the responsibility of the two most authoritative financial regulators: CFTC Commodity Futures Trading Commission and the National Futures Association NFA.
The CFTC was created in 1974 with the original function of regulating the futures market. In 2010, the U.S. Congress passed the Dodd-Frank Act (Dodd-Franc Act of 2010) on Wall Street reform. This law gave the CFTC sweeping regulatory powers.
In 2000 and 2008, a series of laws were passed that labeled the types of companies in the foreign exchange market:
- companies acting as the second party to the transaction (dealers);
- fund managers;
- trading advisors;
- representing brokers.
Under these laws, it is mandatory for a company to be registered with the CFTC and also be a member of the NFA.
National Futures Association NFA - is a self-regulatory organization (SRO) whose field of action is not only the foreign exchange market, but also exchange-traded futures, swaps and derivatives.
A company that is not a member of the NFA is not authorized to operate in the markets that lie within the Association's field of responsibility.
Main requirements of US regulators to a broker
In order to operate on the foreign exchange market in the USA, a company must obtain a RFED (Retail Foreign Exchange Dealer) license, the issuance of which is accompanied by a number of examinations for all management personnel of the company, verification of sources of capital and personal data of the owners, etc. The period of obtaining a RFED license takes a long time. At the same time, the period of obtaining a RFED license lasts from 1 to 2 years.
- The broker must have a minimum equity capital of 20 million dollars. At that, the early warning level is 150%. It means that the broker is obliged to maintain the level of capitalization not lower than 30 million dollars. In case of its decrease, the broker must notify NFA each time.
- The company is required to pay annual membership dues of $125,000 to the NFA.
- All reporting must be transparent, which obliges the broker to make publicly available almost all information, such as client profitability and company account data.
- Maximum permitted leverage is 1:50.
Peculiarities of currency regulation in the USA
As mentioned above, currency regulation in the US is one of the most stringent in the world:
- brokers who do not have an RFED license may not offer their services to U.S. citizens. U.S. citizens are allowed to use the services of RFED-licensed brokers only.
- All company personnel are checked, down to physical addresses. The regulators pay the closest attention to accounts and capital flows, which practically excludes any shadow management of the broker through front persons.
- A broker in the USA is obliged to submit a huge amount of reports in a timely manner. Regulators, in turn, are obliged to carry out sudden inspections of companies without warning.
- One of the main differences from regulation in other countries is that there is no compensation for customer deposits in case of bankruptcy of the company.
- Continuous reporting - from weekly to annual - allows regulators to respond in a timely manner to any violations of client rights. Even the most insignificant manipulations on the part of the broker are strictly suppressed, and the company is fined.
In general, it should be understood that CFTC and NFA activities are traditionally oriented to the stock market, that is why rules and requirements of maximum strictness are applied for currency brokers. Therefore, regulation in the USA cannot be called comfortable for currency market brokers.