Throughout the years, the global increase in Forex trading has provided many opportunities for individual investors and companies alike. With a global daily trading volume of over $6 trillion, the Forex market comfortably beats stock, commodity, and index markets. The amount of money that comes into this industry is so massive that businesses are starting to notice.
You probably know by now that you will need a Forex broker to be able to begin trading in the Forex market. A broker is essentially your gateway to the market, giving you free access to trading platforms where transactions are carried out.
The number of Forex brokers available in the market is massive, and it continues to rise! When you do a quick search on Google, you’ll be overwhelmed by lots of information about brokers. These companies maintain several offices across the globe, but Asia is probably the hottest destination for brokers because of the ease of doing business.
Some brokers also operate business in European countries like the UK, Russia, Switzerland, Germany, and Cyprus.
You’d notice that we didn’t mention the USA. With a population of over 330 million, and with the US dollar regarded as the most powerful currency in the world, it only makes sense to do business in the country right? Well, there are Forex companies operating in the US, but only a few. And in the past, several US-registered brokers had relocated to other countries.
Why is that? In this blog, let’s discuss some concerns faced by brokers in the US.
NATIONAL FUTURES ASSOCIATION (NFA) & COMMODITY FUTURES TRADING COMMODITIES (CFTC)
Every country has government agencies whose main responsibility is to protect the public against fraud. When it comes to the financial markets of the US, several agencies implement measures and guidelines to ensure a safe and fair financial system.
The NFA and CFTC are responsible for regulating Forex brokers that accept US customers. But it's quite a struggle to get a license from these agencies. It is partly due to expectations that are hard to fulfill.
For example, the NFA needs FX brokers to have locked capital of at least $20 million to ensure it remains afloat, and to be able to fund its operations. This amount is way higher than the $1 million locked capital required by other regulatory bodies like the Financial Conduct Authority and Cyprus Securities and Exchange Commission.
Big, established Forex companies can afford it, but how about the smaller ones? This criteria is difficult to satisfy, and that is why many brokers are not doing business in the United States. And there were also cases where already licensed brokers in the country moved to other countries with more flexible laws and regulations.
As stated, there are more than 330 million people residing in the United States, which means Forex brokers have the opportunity to get a big share of this gigantic market. But aside from a huge requirement for locked money, another hindrance faced by brokers is that they might not find it lucrative to do business in the country.
Forex brokers’ income is dependent on the trade volumes made by clients. If clients are able to trade in higher volumes, it also means higher profit for brokers. However, the issue is that the NFA is putting a cap on the leverage brokers can offer their customers. Only a maximum leverage of 1:50 for major currency pairs and 1:20 for minor currencies can be given by US-regulated brokers. It is far below the leverage provided by EU-regulated FX brokers, which can go up to 1:1000.
You see, leverage is important for traders, especially for those with limited trading capital. Leverage allows them to trade in higher volumes from which brokers benefit from. The more trades they make, the more they can be profitable.
US financial authorities are quite strict, and Forex brokers must adhere to their guidelines. The NFA won’t let any brokers get away with any kind of malpractice. In the past, many brokers were penalized by the regulator. And mind you, the penalties range from $200,000 to $2 million, which is high.
Brokers may be working hard to be profitable, but any wrong move they make, they can lose everything!