The past few years have seen a significant change in the way USA Forex brokers are perceived by traders from around the world. A slew of regulatory changes by the USA was met with both approvals as well as criticism by retail traders from the US over how they can approach the Forex markets. Ultimately, the US Government’s proactive and inquisitive nature has created a highly regulated Forex trading market that has ensured the safety of trader funds, either through logic or sometimes through an illogic manner.
The profitability of Forex trading depends on a broad set of criteria, which include trading strategy, starting capital, leverage, trading costs, and ultimately, the reliability of a broker. As far as Forex trading in the US is concerned, the NFA (National Futures Association) and the CFTC (Commodities & Futures Trading Commission) has implemented a series of trading guidelines that severely limit the freedom for FX trading. The NFA and the CFTC are two regulatory organizations of the US that are responsible for regulating Forex brokers and their activities in the US. Forex brokers should be regulated by the NFA and should be registered with the CFTC before they can operate in the US.
Up until 2008, almost all mainstream brokers from throughout the world had the opportunity to provide FX trading services to US citizens without being regulated by the NFA. However, after the financial crisis, the NFA and the CFTC went on a regulatory reform spree that limited the amount of freedom enjoyed by international brokers. Under present conditions, only brokers regulated by the NFA and those that are registered with the CFTC are allowed to operate in the US. Such a move had forced most established brokers into ceasing their activities in the US and heading to other retail trading markets.
What Are The Regulatory Guidelines of NFA & CFTC?
The NFA and CFTC have created a highly stringent regulatory framework that enforces all FX brokers in the US to follow ethical market practices to safeguard the integrity of the US financial markets. Given below is a summary of all regulatory guidelines enforced by the NFA and the CFTC combined:
All Forex brokers operating in the US must be a member of the CFTC as well as be regulated under the NFA guidelines.
USA Forex brokers should hold at least $20 million in operating capital, which increases according to an increasing number of client accounts and their trading capital.
Client funds must be kept in segregated accounts to ensure that the broker does not have access to their trader’s funds for the broker’s operating expenses.
All withdrawals should be made as soon as possible, and the broker cannot withhold any payments on any inconspicuous terms unless warranted by any Federal authority.
Traders have several limitations regarding payments made through electronic processors, and all US citizens are forbidden from depositing money with any international broker. Brokers operating in the USA should also adhere to strict anti-money laundering laws.
Brokers should submit detailed financial statements and audit reports to the NFA for periodic tracking of all transactions. The NFA supervises all activities to ensure that the broker conforms to the NFA and CFTC regulatory guidelines.
Brokers should not tamper with trading platforms and price feeds, and if a broker is found to be in violation, NFA will slap heavy penalties for manipulation of the markets.
CFTC enforces several rules to FX trading such as no CFDs for trading, maximum leverage of 1:50, FIFO (First In First Out) rules, and no hedging. Such trading conditions are considered by FX traders to highly deterrent to freedom of trading.
Brokers should have a detailed procedure in place to deal with insolvency issues such as bankruptcy, lawsuits, or any other liquidation processes.
All USA regulated Forex brokers should have an effective quality control system to enhance the overall customer service experience.
How Can Traders Benefit By Trading With USA Forex Brokers?
The highly regulated trading environment is extremely beneficial for traders as it provides a secure platform for protecting an investor’s trading capital. The highly regulated framework enhances the trust and confidence among traders to ensure that the NFA and the CFTC will act in the best interest of the trader, rather than the broker. The NFA’s is an immensely powerful authority that works as an independent and autonomous agency that does not operate on taxpayer’s money. Therefore, the NFA has no conflict of interests, which makes it an excellent authority for regulating and supervising Forex brokers.
Forex brokers in the US have a good track record of facilitating timely payments, which has enabled traders to receive their withdrawals without any problems. One of the best reasons for choosing Forex brokers in the USA is due to the higher operating capitals that these companies are required to hold, which in turn help brokers to meet client withdrawals without any severe consequences on the company’s bottom line. Brokers also need to hold additional operating capital if they have larger investments from their clients, which enable the brokers to maintain their traders’ positions during extremely volatile market conditions.
USA Forex brokers are also notorious for enforcing the highly stringent trading conditions, which help traders to get rid of their gambling mentality. Several amateurs and even professional traders succumb to the risks of Forex trading such as using high leverage or piling on positions. The CFTC rules put several restrictions on how a trader can trade, which essentially gets rid of hedging, scalping, and other high-risk strategies.
What Are The Drawbacks of Choosing American Forex Brokers?
The CFTC rules that impose restrictions on trading can also act against the freedom for traders. The maximum leverage of 1:50 may make sense from a trader’s perspective on lowering risk, but rules such as FIFO and no hedging will severely diminish the ability of a trader to pace themselves to the market. For instance, the FIFO rule stipulates that a trader should close his positions in the same order that they were opened. Therefore, a trader cannot manage his trades by holding on to long-term positions while taking short-term profits on scalps. The no hedging rule also requires traders to avoid buying and selling on the same currency pair, which essentially prevents the trader from hedging his risks during volatile market conditions.
Apart from the rigorous CFTC guidelines, the NFA also prevents US citizens from opening an account at international Forex brokers. Essentially, the NFA and the CFTC acts as a watchdog over investors by severely limiting their freedom to trade the markets through their strategies. Of course, it is easy to understand the commitment of the US regulatory agencies to protect their investors, but imposing trading restrictions is a severe drawback of trading with US Forex brokers. Several established traders in the retail trading industry avoid US Forex brokers due to the limiting trading conditions.
Why Did High-Profile US Forex Brokers Pull Out From The US?
Most mainstream and established Forex brokers no longer provide their services to US traders and have completely pulled out of the US retail trading market over the past few years. One of the primary reasons for this massive pullout is the insane amount of regulation that Forex brokers are expected to follow, which does not make sense from a business point of view. Lower leverage and enforced trading conditions negatively affected the profitability of brokers, which in turn prevents brokers from offering competitive products without making a loss.
It is also illegal for brokers to operate in the US without obtaining a valid NFA license and being registered as a member of the CFTC. The regulatory procedure for US FX brokers is extremely complicated and time-consuming, which prevent brokers from setting up a brokerage in the US altogether. Even if brokers decide to set up camp in the country, the strict capital requirements, and other regulatory guidelines usually deter companies from enjoying consistent profits, unless they can garner a sizeable customer base.
Other countries such as the UK, Australia, and other parts of Europe, Asia, and Africa provide better conditions for setting up a brokerage without involving too much cost. The UK only stipulates an operating capital to the tune of £750,000, while some regulatory agencies do not require a working capital. The easier regulations and better trading conditions, along with tax benefits, allow companies to cater to a global retail trading market, rather than concentrating their efforts on entertaining traders from the US.
Give Us A Few Pointers For Choosing The Best USA Forex Brokers
Most US based Forex brokers do not indulge in scam practices and are relatively safer than most of the brokers in the market. However, one needs to be careful about brokers that misrepresent the facts about their US regulation, as some brokers wrongly claim to be regulated by the NFA and the CFTC. Both the NFA as well as the CFTC provides an updated list of its member firms, which should make the job easy for traders to perform adequate research about a broker before investing.
Never trust a broker for its word, as you have the option of ascertaining the authenticity of a broker by searching the NFA register using a unique broker ID. Every regulated US broker will have a representative identification number, which can be used for correspondence with the NFA or in court for arbitration. Any broker that is unwilling to share its registration number is most probably a scam broker since the NFA mandates all brokers to display their NFA membership details on their website and produce it to their clients upon request.
Investors can also keep track of NFA’s newsletters and periodic updates, which provide information on financial irregularities in the market. The NFA also publicly advertises its actions against brokers that have deviated from the US regulatory guidelines. The NFA provides vital information on the penalties accrued by brokers and how it affects their clients, which helps traders to safeguard their investments by taking precautionary measures. Ultimately, a trader should always perform extensive research through multiple sources before depositing their money with a US Forex broker.
Is It Possible To Trade With Overseas FX Brokers From The US?
It is illegal for US citizens to trade with overseas brokers; however, US citizens residing outside the US may open an account with an international broker. Of course, US residents and foreign nationals may be able to open and operate global Forex trading accounts while residing in the US, but they do not get any protection from the regulatory authorities in case they run into trouble.
The US regulatory authorities also stipulate several anti-money laundering laws. Therefore, US citizens might face a few issues while maintaining foreign FX brokerage accounts. It is always a good idea to follow the existing rules to stay away from trouble, especially because the NFA and CFTC are quick to initiate legal proceedings against all individuals as well as firms that are found to be in violations of the general code of conduct.
US traders might find it hard to fathom the overall restrictions on trading imposed by the CFTC, but that is the price to pay for improved security against broker scams and other issues that may lead to financial abuse. Eventually, a trader from the US should be able to create a consistently profitable trading strategy that conforms to all of the CFTC guidelines, which will not only enable them to enjoy more profits but can also guarantee the safety of their trading capital against all types of broker irregularities.
