Is the Global Forex Market Regulated?
Unlike stocks or commodities traded on recognized exchanges, the forex market is an unregulated over-the-counter market where banks, brokers, funds, corporations, individual traders and governments (central banks and monetary authorities) all jostle to speculate for profit, hedge against currency risks or manage exchange rates.
Most financial markets are no longer only physical in nature. Although some of them may maintain a nominal physical presence, most trading takes place not on the exchange floor but electronically. The global forex market is no exception with almost all of its daily trading volumes changing hands in cyberspace.
The important characteristics of a regulated market are:
1) centralized clearing,
2) product standardization,
3) registration, solvency and proficiency requirements on dealers.
The global forex market, having no singular physical presence, is unlikely to achieve the uniformity necessary to become a regulated market in the truest sense. Consequently, some national and sub-national securities administrators or self-regulatory organizations have imposed varying degrees of registration and regulatory requirements on forex dealers to protect investors.
Is the Forex Market in Canada Regulated?
In 2009, the Canadian Securities Administrators (CSA) introduced harmonized registration requirements for financial industry participants across all CSA jurisdictions. Separately, securities regulators in Quebec and Ontario addressed the registration requirements of dealers and advisors trading in Contracts for Difference (CFDs) and forex contracts.
On February 1st the Derivatives Act (QDA) came into force in Quebec. Under the Act, a broad definition of "derivative" captures online forex trading as trading in over-the-counter (OTC) derivatives, which requires dealers trading such products with Quebec clients to seek registration, or the appropriate exemption.
Under National Instrument 31-103 (NI 31-103) that took effect on September 28th, firms and individuals who deal in securities, provide investment advice or manage investment funds face a streamlined process for dealer and adviser registration in multiple jurisdictions. Although NI 31-103 does not make specific mention of the forex market, one provision that applies to all dealers who offer leveraged trading to Canadian clients is that only dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) are permitted to provide margin.1
On October 27th the Ontario Securities Commission (OSC) issued Staff Notice 91-702 and concluded that offerings of CFDs, forex contracts and other similar products in Ontario constitute "securities" for the purposes of Ontario securities law. Unless an exemption is granted, these products are subject to securities law and other regulatory requirements, including registration and prospectus requirements.
Pursuant to these regulatory developments, only registered investment dealers who are IIROC members are permitted to trade forex on margin with retail or accredited investors. In Quebec, Ontario and B.C., there are additional qualifying requirements, and requirements related to prospectus and reporting issuer status, among others. Regulators are prepared to exempt these requirements under certain conditions, including IIROC membership, compliance with the terms of registration, provision of a risk disclosure document, etc.
In the 3 largest provinces, securities regulators have now published formal positions that trading forex contracts with investors on margin is a registrable activity.
How are Forex Traders Protected in Canada?
Eligible client accounts held at IIROC members are insured against dealer insolvency, within specified limits, by the Canadian Investor Protection Fund (CIPF). Membership in the CIPF is automatic for investment dealers who are IIROC members. This protection covers your eligible MF Global FX Trading Account which is subject to IIROC margin requirements. For the specific conditions governing client eligibility, determination of covered losses and the limits of coverage, please visit www.cipf.ca.
MF Global FX is the online foreign currency trading division of MF Global Canada Co. MF Global Canada Co. is an IIROC regulated broker and investment dealer registered in all Canadian jurisdictions.
What advice does the NFA have for Forex Traders?
NFA President, Dan Roth, offers advice to traders new to the forex market. In the first video, he explains how regulations have changed in the forex market, the organizations involved in regulation, and names key considerations that traders must be aware of.
In the second video, Mr. Roth provides some key questions that beginners must consider before they open their first forex trading account.
1Notice 31-103 Registration Requirements and Exemptions, page 11, Margins
