A Brief Look At The Operating Standards Of CFTC Forex Brokers

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CFTC, or the Commodities and Futures Trading Commission, is an independent agency of the United States Government that is responsible for monitoring and regulating the many futures as well as options contracts in the US financial markets. The CFTC works along the lines of the rules set forward by the Commodities Exchange Act, which stipulates several strict guidelines for ensuring the transparency and integrity of the markets by avoiding systemic risks such as market manipulation, financial fraud, and consumer abuse. Ever since the market turmoil of the 2007-08 financial crisis, the CFTC has been reforming its operating protocols to set more severe guidelines for CFTC regulated brokers as well as member firms, which aims to improve the overall trust and confidence among investors regarding the protection of their funds and trading capital.

How Is The CFTC & The NFA Related?

The NFA, or National Futures Association, is an independent arm of the US Government that works on the rules and guidelines outlined by the CFTC from time to time. CFTC does not regulate brokers or financial companies directly. Instead, the NFA is the sole agency responsible for regulating businesses and individuals that seek to carry out any financial activities in the US. The CFTC and NFA work together towards eradicating all types of financial crime and investor abuse through constant monitoring of activities by member firms.


Nevertheless, every Forex broker that operates out of the US should be registered with the CFTC, even if the NFA oversees the regulation of such companies. Therefore, the operations of a CFTC Forex broker are properly regulated by the NFA. Such a type of dual regulation not only increases the transparency of broker operations but also renders more security against financial malpractice.

What Is The Role Of CFTC In Broker Regulation?

CFTC is responsible for continuous improvement of the financial regulations and for amending rules that govern broker operations. Although the CFTC has a good track record of maintaining a transparent financial marketplace, the financial crisis of 2007-08 put a severe strain on the US markets, which forced the CFTC further to reform its statutory guidelines for better broker regulation. Here are a few regulatory guidelines that are imposed on CFTC regulated brokers for catering to traders and investors in the US market:

  • Every broker that operates in the US should be an NFA regulated member and should be registered with the CFTC. Forex brokers are provided unique identifying numbers by both the CFTC as well as the NFA that should be made public for potential investors as well as market participants. CFTC makes it easy for the general public to verify the authenticity of CFTC brokers by offering a full-fledged online resource for performing adequate research on a company before investing money with them.
  • Forex brokers should provide periodic audit reports and financial statements to the CFTC outlining the fine print of how a company manages its finances, including the way in which a company handles its clients’ funds. The CFTC directs the NFA to ensure that all CFTC regulated brokers hold their client funds in segregated accounts and that no firm can misuse any part of the investor’s capital for any broker related expenses.
  • CFTC makes it mandatory for all types of financial firms, including affiliates, introducing brokers, hedge funds, fund managers, and other types of companies to be registered with the CFTC if they wish to cater to clients in the US.
  • Forex brokers should maintain at least $20 million in operating capital, which is the highest amount enforced by any regulatory organization in the world. The CFTC rules state that brokers should be able to maintain their clients’ positions without going bankrupt in the event of unexpected market volatility.
  • CFTC has one of the toughest guidelines for regulation, which deters a majority of Forex brokers from setting up shop in the US. The higher taxation, stringent CFTC and NFA rules, and higher capital requirements are some of the major deterrents for small brokers. However, CFTC does promote better competition by following fair and ethical standards in Forex dealings without resorting to any false advertisements.

CFTC’s Restrictions On Forex Trading

CFTC is more proactive and highly concerned about trader welfare by tweaking the Forex trading conditions on the pretext of saving investors from losses and the high-risk nature of Forex trading. Tweaking the trading conditions can mostly be considered as a double-edged sword, as it can both work for and against a trader. The following are several trading rules enforced by the CFTC on Forex brokers that severely hinders a trader’s freedom:

First In First Out – The FIFO rule only allows a trader to close or liquidate their open positions in a single currency pair according to the order in which the positions were opened.

For instance, if a trader opens two positions in the EUR/USD currency pair, traders should close the first position to close the second position.

CFTC Forex brokers should factor in such a rule into their trading program to disallow any traders from deviating from such a law. Therefore, if a trader attempts to close the second position, the first position will be closed automatically.
The Hedge – The CFTC has banned the concept of hedging on a single currency pair. Hedging is the process of buying and selling the same currency pair, which helps protect a trader against highly volatile market situations. The CFTC believes that traders are at a loss by opening a hedged position, as they have to account for double the spread and would eventually suffer from added trading costs as a result of hedging.


The Leverage – CFTC enforces a maximum leverage of only 1:50 for Forex trading. Although a lower leverage is ideal for minimizing the risk of Forex trading, scalpers and high-frequency traders might feel left out due to the lowered leverage and higher margin requirements.

How Does CFTC Work With The General Public To Eradicate Investor Abuse?

CFTC updates its online scam watch and the RED List (Registration Deficient List) on a consistent basis to offer investors with better insight into the highly rated and reliable CFTC regulated brokers that are guaranteed to provide safety of client funds. CFTC is also quick to get involved in broker scams or malpractice, especially if they are regulated by the CFTC and NFA. CFTC has imposed heavy fines and sanctions on multiple mainstream Forex brokers for alleged financial misconduct, which has helped in increasing investor trust and confidence.


The CFTC has outlined a detailed procedure for tackling client abuse and has a well-defined process for taking up a complaint against a financial company. CFTC Forex brokers should try to resolve every consumer complaints through the proper channels, failing which; the CFTC will take necessary actions to protect an investor. CFTC has indeed become one of the most preferred regulatory organizations in the world, albeit, they do have some ridiculous Forex trading conditions that might alienate a significant proportion of genuine investors.

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