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Introduction to Forex Regulation

Let’s face it: in today’s world, with a myriad of websites and brokers to choose from, looking for the right broker that suits your needs can be challenging and quite time consuming. When it comes to the regulation of forex and CFD brokers, it’s usually fairly easy to figure out which licenses these entities hold. But is it really a seal of approval and of significance if a broker is licensed and regulated with certain industry watchdogs?

For many novice traders who are looking to enter the world of online trading the answer is probably “yes”, and they believe that not holding one of those licenses means that the broker is operating illegally. However, this is not the case for the forex market, as it is an OTC (over-the-counter) market with no specific regulations overseeing it.

There are various regulators and industry watchdogs, but they only cover a specific jurisdiction and do not apply to the entire industry on a global scale. Regulations, unlike legislation, are not written by lawmakers but instead are crafted by bureaucrats based on their understanding of what the market needs in order to function with as little friction as possible. This means that regulations are never fixed and applicable to the whole forex market. Instead they are flexible and can change according to circumstances unlike legislation, which requires amendments before any changes can take effect.

An ever-growing number of retail forex and binary options brokers are licensed and regulated by the Cyprus Securities and Exchange Commission (CySEC). But why? Who is CySEC, what is CySEC regulation, and why do many brokers choose it as a regulatory body?

Who and why CySEC?

CySEC is the financial regulatory agency of Cyprus and was formed in the year 2001. When Cyprus became a European Union member state in 2004, all regulations, processes, and operations of CySEC had to comply with the European MiFID (Markets in Financial Instruments Directive) financial harmonization law. MiFID gave regulated entities in Cyprus access to other markets all over Europe, thus putting a lot of responsibility on CySEC in ensuring these entities met the required standards.

As the official website of CySEC’s details, the main aims and responsibilities are as follows:

  • Effective monitoring and supervision of the local stock exchange and related companies and brokers.
  • To distribute licenses allowing for investment and brokerage firms to operate in the stock, forex, and CFD markets.
  • Effectively collating all necessary information on regulated forex companies and other broker lists.
  • To understand the meaning and advanced trading benefits of new products, such as the cryptocurrency Bitcoin and other virtual currencies.
  • To accurately review and amend when necessary new forex regulations, license certificates, and investment advice.
  • Undertaking training to tackle money laundering and other threats to regulatory systems.
  • To inspect the list of regulated brokers and companies, including checking they are meeting reporting requirements and operating a fair remuneration policy.
  • To ask questions and impose sanctions on any registered companies that breach regulations.

Many firms that offer spread betting, CFDs, binary options, or forex trading have chosen to become a Cypriot company and apply for a CySEC license. However, before a forex broker can be issued a Cyprus Investment Firm (CIF) by CySEC, it must first be able to meet certain guidelines. Some of these guidelines include:

  • Having more than one individual involved in the administration of the forex brokerage.
  • Under its CySEC license application, the broker must list all the services and products which they plan to offer.
  • Must have an initial share capital of at least €200,000 if they handle their clients’ funds.
  • Must have an insurance coverage of at least 1 million euros for individual loss and a total coverage of 1.5 million euros annually for losses resulting from inactions or negligence.
  • CySEC forex brokers should maintain at least €750,000 in operating capital.

What are the benefits of using CySEC licensed brokers?

As mentioned before, forex traders looking to invest in Forex trading or participate in financial markets shouldn’t confuse regulation with legislation when it comes to forex brokers and the financial services industry.

Apart from CySEC there are some other strong regulatory bodies out there with strict rules and decent consumer protection. These entities include the Australian Securities and Investments Commission (ASIC) of Australia, the Financial Conduct Authority (FCA) of the UK, the National Futures Association (NFA) of the USA, and the Financial Services Board (FSA) of South Africa.

Who are the best CySEC regulated brokers?

The best forex brokers are typically those that are registered with strong regulators and industry watchdogs such as the CySEC (Cyprus Securities and Exchange Commission) of Cyprus.

ForexTime Limited (FXTM) is a leading CFD broker that is regulated by the Cyprus Securities and Exchange Commission (CySEC), but is also licensed by the Financial Services Board (FSB) of South Africa and registered with the Financial Conduct Authority (FCA) of the UK. They are a true ECN broker that allow trading forex and CFDs on the popular trading platforms MT4 and MT5. The overall trading conditions are very decent with ForexTime, but forex traders should always be cautious when dealing with high risk products such as CFDs, binary options, etc.

Other excellent brokers that hold licenses with CySEC are, for example, the social trading giant, or Exness.

Find The Best CySEC licensed Forex Brokers for your needs

To help you find the Forex broker that is best suited to your needs, take a look at our comparison table and ranking of best CySEC regulated Forex brokers above. If you require more in-depth information or are looking for more brokers to choose from, check out our detailed individual broker reviews and additional comparison tables.