Corporate regulators the world over are getting stricter in a bid to reduce the losses sustained by retail Forex & CFDs traders. How are they doing this? Below we discuss 3 main ways they are protecting the deposits of retail traders.
Imposing Leverage Caps
Imposing leverage caps on the amounts of leverage brokers can offer retail traders is certainly in vogue. The Euro Zone regulator, ESMA, followed the United States’ lead and imposed leverage caps on the amounts of leverage locally regulated brokers could offer their clients. Historically, traders in the USA and Europe were able to access leverage up to 500:1 like their peers in countries such as South Africa, Singapore and Australia can. However, without providing clear proof a trader qualifying as ‘sophisticated’ the maximum retail traders can access now is 25:1 or 30:1 depending on the jurisdiction.
Seeing as leverage amplifies the size of trader losses (and gains), the theory behind these caps is that less leverage results in smaller trading volumes and in turn reduces the dollar value of trader losses. While it has its criticisms financial authorities and regulators the world over are considering following the US & EU’s lead. In fact the Australian financial regulator, ASIC, has announced plans to cap leverage at similar levels to those seen in Europe and America.
Ensuring Brokers Use Segregated Bank Accounts For Trader Deposits
Another step financial regulators have taken in recent times (longer in some jurisdictions) is ensuring that Forex & CFDs brokers keep trader deposits in segregated accounts. Forex and CFDs markets are not as volatile as the share market. Very rarely do currency pairs fluctuate by more than 1% a day which is why brokers are prepared to offer traders, both retail and professional, significant leverage to enhance their profits. The problem is, every so often there’s an economic or political event that causes significant volatility and if a broker doesn’t take the requisite steps to protect their company they could bankrupt themselves.
The most famous example of this was with a broker called Alpari. They were declared insolvent in January 2015 following the Swiss National Bank removing the Franc’s ceiling against the Euro. This resulted in many traders losing their money. As a result regulators such as the FCA and ASIC now require brokers to keep trader funds in a segregated account in case they experience a similar fate, ensuring client deposits are not exposed to this risk.
Cracking Down on Unregulated Brokers
Unfortunately, given the amount of money that can be made, there is no shortage of wannabe Forex and CFDs brokers. A quick Google search will yield hundreds of names of Forex brokers, many of whom do not hold a legitimate licence with a well-known financial regulator. ASIC, FMA, FCA, FSB, CySEC (among others) are well regarded synonyms of some reputable financial authorities from around the world.
Make sure that before you select a Forex Broker you ensure they hold a requisite licence with a trusted authority.
If you’re on the hunt for a reliable and trusted Forex Brokers, have a browse of Compare Forex Brokers. Not only to do they review and critique hundreds of brokers from around the world, they also have a devoted section for brokers that service traders in Nigeria: https://www.compareforexbrokers.com/best-forex-broker/nigeria/