Best CFTC regulated Forex Brokers

A brief history of CFTC

Unlike most countries where Forex trading has only been recently introduced, trading in the USA is an old concept that started about 150 years ago. Initially, there was little trading and this only involved the trading of agricultural commodities. Over the years, other financial instruments have been introduced in the American industry and this prompted the need for a regulatory authority that would help address some of the unique challenges that the industry faced. The CFTC (Commodity Futures Trading Commission) was formed in 1974 by the US Congress to be in charge of investments and futures trading.

The CFTC was formed to improve the financial protection of the US Forex traders while also safeguarding the interests of USA Forex brokers. The authority took the roles of the previous organizations that were set and brought about the implementation of new regulations that catered to the changing financial markets. The regulatory body has, however, changed and increased its responsibilities and powers. For example, the Commodity Futures Modernization Act (2000) required the CFTC and the securities exchange commission to regulate futures. Subsequently, the Frank-Dodd Act of 2010 allowed the CFTC to regulate the swaps market. According to this act, the CFTC could now make new guidelines for the registered Forex brokers in the country.

Composition, roles, and responsibilities of CFTC

The CFTC is made up of five members or commissioners that are duly elected by the president but the same need to be approved by the Senate. The commissioners work in the CFTC for a term of five years and one out of the five commissioners is chosen as the chairman of the regulatory authority. There are essentially four divisions in the CFTYC, which include:

1. Market oversight. This is a key role of the CFTC where the commission has to ensure that they monitor trade executions in the country, improve the strength of the derivatives markets and review if the activities in the country’s financial exchanges comply with the regulations set.
2. Enforcement. A division that mainly deals with the investigation of reported breaches of law while also ensuring the prosecution of individuals or firms that are found to manipulate or abuse swaps and even commodity derivatives. It ensures that the financial integrity of the market in the USA is intact.
3. Swap dealers and intermediary oversight. A key function of the CFTC is to evaluate the registration of intermediaries and other organizations such as the NFA in a bid to ensure that they comply with the law.
4. Clearing and risk. the primary goal of this division is to monitor the participants in the market in the clearing process while also analyzing risk in the industry. Market participants here include commission merchants, swap dealers, and even large retail traders.

The CFTC is mainly responsible for protecting all the stakeholders in the financial markets and ensuring that the integrity of these markets is upheld. It is because of this special mandate that the CFTC has a wide scope of responsibilities. One of the primary roles of the CFTC is to ensure there is healthy and strong competition among the Forex stakeholders in the country. One way that the CFTC achieves this is by making integrity a cornerstone of the currency trading process. As such,m the organization does not condone financial malpractices among CFTC Forex brokers such as price manipulation, fraudulent transactions, and any type of abusive practices in the financial markets.

Another key role of the CFTC is to review any proposed terms and conditions of futures and options contracts in a bid to ensure that there are no cases of fraud or lack of integrity in these contracts. The authority has in place some regulations for such contracts and any terms proposed should align with these regulations. Also, it ensures that the terms in futures contracts are in line with the provisions of the Commodity Exchange Act. This role has given them the responsibility of carrying out regular supervision and market surveillance.

The CFTC also regulates the professionals in the USA futures market. The organization works hand in hand with the National Futures Association, which is expected to implement the regulations set by the CFTC regarding the professionals employed in the futures trading sector. The NFA is expected to ensure there are competent individuals at the helm of companies that offer futures trading.

Since the CFTC creates and implements regulations for several entities, they must ensure that the rules created are enforced. Furthermore, the CFTC also creates guidelines that the NFA should follow on their behalf. To ensure compliance, the CTFC regularly monitors the NFA compliance program.

Requirements to be a CFTC Forex broker

Registration- Each Forex brokerage company in the US needs to register with CFTC. The organization will scrutinize each application to ensure that they comply with the set guidelines before approval is given. Each broker that applies to the CFTC will then be required to reveal their registration numbers on their website to ensure clients can easily confirm if a Forex broker is CFTC regulated. Forex brokers in the US will either be registered as retail foreign exchange dealers (RFEDs) or futures commission merchants (FCMs).

Supervision- Upon registration, each Forex broker must meet the supervisory guidelines of the CFTC. For example, Forex brokers are expected to ensure they keep proper records and report their financial statements within a certain duration. This is done to ensure that the Forex brokerage firms are following the recommended financial practices and are also not committing other financial crimes such as money laundering.

Operating capital- Another significant difference between CFTC-regulated Forex brokers and brokerage firms from other jurisdictions is the amount of operating capital that each is required to hold. In the USA, Forex brokers are required to hold at least 20 million dollars in capital for them to be allowed to operate. The amount is relatively higher than most Forex brokers are required and this shows the strictness of the CFTC in regulating the trading of currencies. As a result, there is a stronger investor protection framework and FX firms are also more liquid.

Separation of funds- Another guideline is the separation of funds between the client’s money and the brokers’ funds. To ensure there are proper business practices and accountability, the funds of the firm and the investors need to be separated.

Restrictions imposed by CFTC

The CFTC goes further by ensuring that it also determines the trading conditions in the US. This is done to save investors from incurring losses and generally minimize the risk that comes with Forex trading. Here are some of the trading rules that have been implemented by the CFTC.

FIFO. This stands for the First in First Out rule. This rule requires that traders can only liquidate their positions in the order in which they were opened when trading one currency pair. For example, if you wish to open two positions in the EUR/USD pairs, the trader is required to close the first one for them to close the second one too.

Hedging. Hedging is also outlawed in the US when trading one currency pair. Hedging is when a currency trader buys and sells the same currency pair as a way of shielding themselves against the volatility of financial markets. One of the primary reasons why the CFTC made hedging illegal is the belief that traders are likely to incur more losses due to the double spreads that they have to pay.

Leverage. The CFTC has also put a cap on the maximum leverage that Forex brokers can offer their clients. Low leverage is ideal for mitigating any risks that arise from Forex trading. While this may help to curtail the risk, experts and high-frequency traders may view it as a deterrence to their profit-making venture.