Understanding Forex regulations – Here’s what you need to know

Forex trading can be a lucrative income stream if executed efficiently, but there are many things one needs to understand before delving into this industry.

One of the chief considerations when choosing the right forex broker is to understand the regulations that govern them.

Different brokers will operate under different regulations – each of which changes how these brokers work with your money.

In South Africa, local forex brokers are regulated by the Financial Sector Conduct Authority (FSCA). However, forex traders can choose brokers regulated overseas or not regulated at all which can be a risky option as discussed below.

Justin Grossbard from Compare Forex Brokers provided some insights of the main regulators that govern the most popular forex brokers that South African traders choose.

Financial Sector Conduct Authority (FSCA) – South Africa

The FSCA is the local regulator that is most likely to be encountered by South African forex traders.

Brokers who fall under these regulations must have a local presence with a local office and at least one director residing in South Africa. Professional indemnity insurance is also required.

You can view this FSCA licence requirement page for more information on the regulator.

Australian Securities and Investments Commission (ASIC) – Australia

Australian forex brokers regulated by ASIC are another popular option for South African forex traders. These include forex brokers from Pepperstone, IC Markets and AxiTrader.

Australian forex brokers have a strong reputation within South Africa due to ASIC requirements including the requirement to segregate clients’ deposits and offer training levels, as well as reporting requirements.

In 2020 further regulation changes are expected that may impact leverage, joining bonuses and more as discussed in this ABC article.

Financial Conduct Authority (FCA) – United Kingdom

UK forex brokers have historically been popular with South Africa traders but due to European Union restrictions, the FCA has enforced strict rules on firms in recent years. The main restriction includes a maximum leverage of just 30:1.

You can view the full list of FCA restrictions with two other key factors been that traders’ positions are closed out when their funds fall to 50% of the margin needed to maintain their open positions, and prevention of traders having a negative balance.

No regulations

A few new players in the forex broker market, including Hugosway, are not governed by any regulations. This means they can offer unlimited leverage and offer promotional bonuses and other benefits that at face value may make them appealing to South African traders.

Choosing such brokers can be highly risky. There are no safeguards with these brokers and many historical forex scams have been linked to unregulated brokers.

It is strongly recommended not to choose such brokers.

What forex broker is right for you?

South African traders should choose a forex broker that is regulated.

You can find such brokers by going to each regulators website or by visiting www.compareforexbrokers.com – which has regulated forex broker lists.

These lists are compiled for numerous regions – from South Africa to Singapore – and focus on key categories from spreads and forex trading platforms to high leverage forex brokers.

It is important to note that forex trading involving leverage carries a high level of risk. Traders should understand these risks – such as losses exceeding your deposit – prior to commencing trading and should consider free tools such as demo accounts to see if CFDs are right for you.