One article to understand the supervision of foreign exchange margin in various countries and regions

The foreign exchange margin industry has brought traders trading opportunities on a global scale. Brokers allow traders to easily trade various financial products such as foreign exchange, precious metals, stock indices, commodities, and stock contracts for difference in one account. As a very young and dynamic industry, foreign exchange margin trading has only developed globally for 20 years, and a number of industry-leading listed companies and fintech companies have emerged, including GAIN Capital, CMC Markets, and SAXO Bank.

With the development of the industry and the development of global financial marekt, the regulatory content and methods of foreign exchange margin trading by financial regulators in various countries are also constantly changing. Generally, based on the principle of customer fund safety and trading fairness, there has been a more and more stringent trend recently. However, contrary to the increasingly strict supervision, more and more brokers have entered this financial marekt, and the number of targets, market makers and market volume that can be traded are also increasing.

Today, let's take a look at the development and trends of foreign exchange margin trading on a global scale.

Foreign exchange margin regulation in the United States

It can be said that the current global expansion of the foreign exchange margin industry began in the United States. In 1999, under the leadership of the Clinton administration, Congress passed the Financial Services Modernization Act, and foreign exchange officially entered the retail era in the United States.foreign exchange marketThe well-known Jiasheng and FXCM were established in 1999 and 2000.

In the following years, the US foreign exchange margin market flourished and flourished. For the market, "foreign exchange trading" was still a novel concept at that time, and many American traders were willing to try to participate in the global foreign exchange market.

Regulation is also advancing with the development of the market. Let's introduce the regulatory units of the US foreign exchange and futures industries: first, the government regulator, the US Commodity Futures Commission (CFTC), approved the NFA as the "registered futures association" of the US futures industry in 1981, similar to the relationship between the domestic Securities Supervision Commission and the China Futures Industry Association.

After the 2008 subprime mortgage crisis, Wall Street and the OTC market were widely believed to be too dangerous and in urgent need of rectification and control. On June 17, 2009, the Obama administration officially announced a comprehensive financial regulatory reform plan to build a safety line in terms of Financial Institution Group supervision, financial marekt supervision, consumer rights protection, crisis management and international cooperation, hoping to restore confidence in the US financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the toughest reform bill in history, changed the U.S. financial regulatory system.

The bill stipulates that the maximum leverage for major currency trading is 1:50, and the maximum cross-trading is 1:20. The original proposal of this bill was 1:10, but it was firmly opposed by the vast majority of securities firms in the United States. Several securities firms also jointly organized questionnaires, and asked customers to write letters to the CFTC, call lawmakers, etc. In the end, under pressure, the CFTC compromised.

Even when the leverage was reduced, the accumulation of foreign exchange margin brokers over the years allowed them to achieve very rapid development. In addition to FXCM and GAIN's successive listings, there were several American Brokers on the list of the top 5000 fastest growing companies in 2010, including FXCM, GAIN, Forex Club, IBFX, GFT, and so on.

But it was also the tightening of policy that the US domestic market began to shrink. From 2009 to this year, there were only five brokers with foreign exchange margin business in the United States. This year's FXCM FXCM was fined, casting a heavier shadow on the prospects of the US foreign exchange retail market.

Because of the long-term concealment of conflicts of interest with customers, the NFA and CFTC fined FXCM $7 million in February this year, revoked the US regulatory license, and did not allow FXCM to continue to operate foreign exchange business in the United States. FXCM and GAIN subsequently signed a contract, and all FXCM US customers were sold to GAIN. Since then, the US foreign exchange margin market has entered the era of GAIN dominance.

Foreign exchange margin regulation in the UK

When it comes to the development of the UK foreign exchange margin market, it actually started with a product called spread betting. IG markets was established in 1974 with spread betting as its initial business and provided services to customers. Later, a group of familiar UK traders emerged, including CMC markets, City Index, ODL Security, and so on.

Up until now, SpreadBetting is still more dominant in the UK than foreign exchange margin trading, with similar trading and calculation methods, and spread betting does not have to pay any personal income tax.

In terms of the development of financial supervision, since 1985, the government of Margaret Thatcher established the Securities and Investment Commission, or SIB, to supervise the securities investment industry. At the same time, it introduced a policy called the liberalization of the financial services industry, abolishing various financial controls and promoting mixed operations. That is, banks can engage in securities business and can integrate with investment banks. All liberalization, this is the era of the explosion of the British financial industry.

After the Blair government came to power in 1997, it completely restructured the system and established a large new financial regulatory agency - the British Financial Services Authority (FSA). At the same time, the functions of supervising the banking industry originally belonging to the Bank of England were transferred to the FSA. The positioning of the FSA is equivalent to the combination of the three committees in our country (Securities Supervision Commission, Insurance Regulatory Commission, Banking Regulatory Commission), which is responsible for supervising banking, insurance and investment enterprises, including securities and futures.

In 2008, the global financial crisis hit the UK hard. The UK conducted a review and believed that the three-party supervision system of the Bank of England, the Financial Services Authority FSA and the Treasury was an important reason for the setback of British finance. The result of the review was the introduction of the Financial Services Act 2012 in the UK, which abolished the Financial Services Authority FSA established in the Blair era in 2013 and split the FSA into two agencies: the FCA and the PRA; the full name of the FCA is the Conduct Financial Supervisory Authority, and the full name of the PRA is the Prudential Regulation Authority, which is mainly responsible for the supervision of the banking industry.

The UK's financial regulatory system has established a special prestige and status in the foreign exchange industry. FCA is a leading broker in the UKaccount openingThe global customers have provided financial insurance FSCS, when the dealer bankruptcy will be able to get up to 50,000 pounds of government guarantee compensation, this insurance in the Swiss franc black swan time caused by the collapse of Alpari Alvory event has been practiced, Alvory bankruptcy after the British designated KPMG KPMG as the bankruptcy liquidator, after several years of bankruptcy liquidation process, although most of the investment in the 50,000 pounds below the most customers have been paid, but the process is cumbersome, not imagined easy.

At the end of last year, the FCA released new draft regulatory policies for public comment. The new policies include restrictions on the bonus policies offered by retail foreign exchange brokers to clients. Yesterday, the FCA officially announced that the policies involved in the consultation will not be adjusted for a short time, because the European Economic Area Securities Regulator ESMA will review the financial leverage rules for all European brokers.

ESMA announced earlier yesterday that it will reformulate its retail foreign exchange margin trading and CFD trading policies for European brokers under its supervision, including trading leverage restrictions, account wear protection policies, liquidation ratio policies, and advertising content restrictions across Europe.

In this case, the UK foreign exchange industry has to consider whether the potential leverage restriction policies of ESMA and FCA will have an impact on the market? How to balance and meet the customer's requirements for capital safety, high leverage and flexibility, and how to deal with and fight for ESMA; and European customers have more time to think about whether the trading environment provided by brokers can meet their needs, and whether the regulatory environments in other parts of the world are more suitable for their own transactions.

The decisions of the FCA and ESMA will affect the future of the UK foreign exchange margin market.

Foreign exchange margin regulation in Europe

Let's talk about the European Union again. The development of the foreign exchange retail industry in European countries has prospered with the development of the British and American markets, but because of the special political system of the European Union, the European foreign exchange margin industry is under the coordinated supervision of one institution and a legal framework. Under the legal framework, national regulators manage their own markets according to their own conditions.

The poster of the European Securities Market Authority ESMA

The European Securities Market Authority (ESMA) is responsible for the formulation and revision of European OTC product-related rules. The supervision of foreign exchange and CFD products is within its scope of functions. Its mission is to establish a unified set of European Union capital markets supervision rules, provide protection for European Union investors through effective supervision and supervision, and provide a level playing field for Financial Institution Groups.

Recently, ESMA announced that it will reformulate its retail foreign exchange margin trading and CFD trading policies for European brokerages under its supervision, including trading leverage restrictions, account wear protection policies, liquidation ratio policies, and advertising content restrictions across Europe.

The regulatory framework for the European market is called the "European Markets in Financial Instruments Directive" - MiFID, and the countries of the European EEA Economic Area establish their own regulatory details within the general framework of MiFID.

National regulators manage according to their own circumstances. Let's take CFD products as an example. As a member of the European Economic Area, the British regulatory agency FCA does not have many restrictions on CFD products, but at the same time, the Netherlands, a member of the European Economic Area, completely prohibits CFD transactions. Belgium prohibits over-the-counter CFD transactions.

In 2018, a new framework, MiFID II, will come into force, which sets out a number of information disclosure requirements between dealers and agents, which may have a significant impact on the existing business system. These include:

IB's ability to continue to receive volume-based commission payments from dealers within the European Union will be limited;

IB must continue to provide value-added services to its customers.

IBs must disclose specific commissions to their clients.

It can be anticipated that when MiFID II is implemented, the existing system of cooperation between dealers and agents will be broken; at the same time, ESMA may continue to tighten the leverage and other services that European foreign exchange brokers can provide to customers, and the European Union foreign exchange brokers will be getting worse and worse.

Foreign exchange margin regulation in Asia Pacific and Oceania

Retail foreign exchange margin trading in Japan began in 1998. After several years of economic recession and the impact of the financial crisis in South East Asia, Japan's financial system nearly collapsed. Then the Financial Regeneration Act was passed, which opened the market and cleared the bankruptcy and liquidation of financial enterprises. With this, foreign exchange margin opened the door to retail investors.

The Watanabe wives' trading ability cannot be underestimated, and because of their flexible and leveraged characteristics, they have become very popular trading markets. Leverage has also become a hurdle in financial supervision. In 2010, the Japanese Financial Services Agency FSA limited foreign exchange leverage to 50:1; by 2011, the leverage ratio was increased to 25:1.

The two countries in Oceania, Australia and New Zealand, are both legal to conduct business, and the regulation is getting stricter day by day. On March 27, 2017, the Australian Parliament passed a reform decision on the retail over-the-counter (OTC) derivatives industry related to customer funds. The rule that allows Australian financial services licensees to use retail OTC derivatives customer trust account funds was lifted, and the licensees under the supervision of ASIC were ordered to keep customer funds segregated in trust accounts. However, there is a one-year grace period until March 2018, and investors should be aware that their funds are still at risk of being misappropriated. Because foreign exchange dealers can use customer funds for company payment operations without authorization, investors' funds are not guaranteed. This also explains why in the black swan event, some investors cannot get a penny back. In addition, the Australian regulator ASIC has banned the application for a new ASIC license, and there have been news that ASIC is considering reducing leverage and restricting CFD products; the New Zealand financial regulator FMA is increasingly scrutinizing the qualifications of companies that already have licenses. A few days ago, the FMA also made a risk statement for companies that only hold FSPR financial registration. It should be noted here that there are brokers on the market who say they are regulated by the FSPR, but the FSPR is not actually a regulator but only a financial company registration authority. It is worth noting that it does not have any regulatory functions, so if a broker only claims to have an FSPR license, it may be misleading investors. In addition, like the Cyprus CYSEC, the FMA does not require foreign exchange dealers to segregate client funds, so investors face the risk of misappropriation of funds. "

Foreign exchange margin regulation in offshore archipelago areas

CIMA in the Cayman Islands: The Cayman Islands is a British Overseas Territory, and the Cayman Islands Monetary Authority (CIMA) is the main financial services regulator in the Cayman Islands. In terms of compliance, the Cayman Islands ranks fifth in the FAFT, (the international body that sets anti-money laundering standards). CIMA works with monetary authorities around the world to ensure compliance with international anti-money laundering regulations. CIMA regulates more than 300 banks, more than 800 insurance companies and more than 10,000 mutual funds.

The most commendable point of Cayman CIMA regulation is to prohibit foreign exchange brokers from misappropriating client funds in any form and in any proportion, requiring regulated foreign exchange brokers to achieve strict separation of equity funds and client funds.

The British Virgin Islands' FSC: The British Virgin Islands' government has designated the financial regulator as the British Virgin Islands Financial Commission (BVIFSC), which is responsible for regulating "offshore companies" registered in the British Virgin Islands. The Securities and Investment Business Act 2010 is the new regulatory regime currently governing investment business activities in the British Virgin Islands.

Development and Outlook

As far as the current market situation is concerned, there are three main ways for foreign exchange brokers to deal with global compliance reviews:

The first type of dealer uses regulatory licenses (e.g. IG, CMC) according to different markets and regions. This type of broker has multiple financial licenses around the world, which can be customized to local conditions and provide corresponding regulatory systems for customers in different regions.

The second type of broker only chooses to use a highly regulated entity to provide foreign exchange brokerage services to global clients, represented by Think Markets, which has both FCA regulation and ASIC Australia regulation, and chooses to use ASIC Australia as the regulatory unit for clients.

The third type of dealers also have different licenses around the world, flexible to provide customers with different choices, GAIN customers can now choose CIMA regulation and FCA regulation of two different account entities, in the balance of compliance rigor and customer experience, but also as far as possible to protect the choice of customers.

Global regulation is becoming stricter and stricter. How can traders maintain a balance between providing customers with a smooth and convenient trading and account opening experience and increasingly strict supervision? Many UK-based brokers regulated by the FCA have expressed that they are seeking supervision other than the FCA. This phenomenon shows that foreign exchange margin traders are not limited to single regulators and are flexible to respond to different compliance needs in different places. It will be more common.