– Forex is a decentralized market in which it operates globally. Each country has its own regulations.
– Many brokers have their main offices in tax havens or low-tax countries. This does not mean that the company is not reliable and/or legitimate, but you must be careful that at least it is regulated and registered with some body that supervises its activity and acts as a mediator in the event of a conflict.
– Part of your task is to investigate the companies to whom you intend to entrust your money.
Given the extremely high volume of transactions that take place every day in Forex – some estimate it to be over two trillion dollars – and the huge number of brokers that reside and operate around the world, it becomes increasingly difficult for a central organization to impose definitive regulations that are valid and acceptable to the majority of participants.
For this and other reasons, there is no central regulatory body for this business (Forex is an OTC (Over The Counter) market, i.e. it is not centrally regulated).
Think for a moment about all that money that moves day by day; there is not a single central authority on which anyone can rely. There is no set of rules on a global scale that any broker has to follow to operate in this market. There are only the regulations established by each country individually, where the degree of restrictions varies.
The case of the United States
In the United States, the regulatory entity for any activity related to the foreign exchange market is the CFTC (Commodity Futures Trading Commission). We invite you to explore its page, especially the section on warnings and fraud in Forex, which you can find here. It contains general but useful information that can help you distinguish between responsible and fraudulent companies that only want to keep your money.
A Forex broker trading in the United States should be registered as a Futures Commission Merchant (FCM) with the CFTC, and should also be a member of the NFA (National Futures Association). Our recommendation is to stay away from unregulated companies if you are going to trade from the USA. You can check if a firm is a member of the NFA.
Tax Havens and the Importance of Knowing Where Your Forex Broker Opens
For the reasons explained above, it is extremely important, when you are considering investing your money in a particular broker, to take into account the country in which it is headquartered. Knowing that your broker operates in a country such as Switzerland, the United States or the European Union can generally be seen as a kind of guarantee – not definitive, but one worth observing – of legislation with a solid background, which means that your money is less likely to “disappear” suddenly.
Information about each broker should be present on the company’s website, and if not, you should be able to contact their support staff via email or online chat and ask them for definitive proof. If for some reason you can’t access this information, or they don’t give it to you, you will have a strong argument not to risk your money with them.
Living in a tax haven does not mean that the company is not reliable and/or legitimate. In these cases, the least you can do to protect your investment is to do a little research on the web, looking for the name of the company and the opinions that other users have to say about them.