Focus on the Forex: Global Watchdogs Monitor for Manipulation

Actimize FMC Product Team, Financial Markets Compliance

Trading in the Forex market takes place in one of the last largely unregulated capital markets in the world. The Forex market does not have a physical address or location like a stock or commodity exchange and trades round the clock, Monday thru Friday, 24 hours a day. The vast amount of all foreign exchange trading happens via the telephone and through electronic communications networks (ECN’s) in a decentralized manner.

A lot of negative press has come out in the last few years connected to the Forex market regarding certain types of manipulation, giving the industry a negative reputation and attracting greater attention from foreign exchange regulation agencies.

These watch dogs set out to regulate the market and eliminate those brokers and service providers that do not come through on their obligations and/or are conducting illegal and manipulative behavior in the market. One of the largest of these Forex regulation agencies is the Commodity Futures Trading Commission (CFTC).

When the CFTC was originally founded in 1974, the vast majority of activity in the futures market was in the agricultural sector. Since then, it has transformed and been widely adapted across industries with the financial sector dominating the futures trading arena. The CFTC, as foreign exchange regulation agencies go, states that its mission is to “assure the economic utility of the futures markets by encouraging competitiveness and efficiency, protecting investors from fraud, manipulation, and abusive trading practices.” The CFTC also explains that they ensure financial integrity of the licensing process when it comes to futures service providers.

The other primary U.S. regulatory body in charge of oversight in this market is the National Futures Association (NFA). The NFA consists of a self-regulating organization for the U.S. futures industry. The NFA’s primary objectives are to protect the integrity of U.S. markets and to protect investors from fraudulent activities. Basically, because spot currency transactions consist of two-day delivery rather than cash, it can be treated as a futures contract. As a result, a broker must register as a Commodity Trading Advisor, a Futures Commission Merchant, an Introducing Broker or a Commodity Pool Operator with one or more U.S. agencies in order to execute Forex transactions for U.S. based customers.

There are watchdogs across the globe, too – among the three high-profile organizations are:

  • Financial Conduct Authority (FCA) – Much like the US CFTC, the FCA, formerly known as the Financial Services Authority (FSA), is the UK’s principal regulator of the financial services industry, enforcing its regulations in the financial services industry and prosecuting and punishing violations of its rules and fraudulent behavior.
  • Australian Securities & Investments Commission (ASIC) – The ASIC regulates Australian capital markets, corporations, and financial services, combining the regulating authority of both the CFTC and its U.S. securities counterpart, the Securities and Exchange Commission or SEC.
  • Swiss PolyReg – A self-regulatory body similar to the U.S. NFA, recognized by the Swiss Federal Money Laundering Control Authority, which regulates all persons, businesses and legal entities, which act as financial intermediaries with their domicile in Switzerland.

Regardless of the location of the company and the regulating authority, market manipulation in the Forex market can occur in regulated places such as Switzerland or in the United States. Some companies claim to have their base in a regulated country while in reality the companies domicile is elsewhere.

In the United States, the CFTC has noted a huge increase in the amount of market manipulation cases in the Forex market. There is no doubt, with a market riddled with manipulation and deceit; that this will be an area to watch as it evolves and the rules and regulations get tougher while higher fines are issued.

When firms are being held accountable for their actions, and disrupting the marketplace, regulators have an obligation to ensure a fair market for all types of investors large and small. In the Forex market, there are plenty of regulators on patrol looking for disruption.

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