Eternity Law International News Forex Brokers Activities Regulation in USA

Forex Brokers Activities Regulation in USA

May 23, 2022

As known, Forex brokers activities regulation in USA are classified as one of the most stringent, but at the same time the most reliable in the world. Its mechanism is built on the principle of maximum protection of customers from fraudulent activities, although some features of the regulation are still a topic for active discussion. Below we consider the functioning of forex companies in States.

Regulations and Appropriate Laws of forex companies

US residents and citizens are required to use operators licensed by Commodity Futures Trading Commission and NFA for forex broker activities. Transparency is a key factor for forex in US. It means forex operators must give access to a wide range of data, including the number of genuine accounts, profitability of firm’s traders, etc. On the one hand, the US has formed well-regulated system, but, on the other hand, it has caused some forex operators to leave market.

Forex normative basis is of great importance for both security and mutual trust between traders and operators. Companies that operate in jurisdictions that don’t have regulatory oversight may conduct illegal operations without severe consequences. Thus, taking advantage of the current situation, some providers ignore even the basic principles of protecting people’s actives. Regulation of forex operators requires client funds be kept separate from broker’s own capital, thus preventing him/her from using client actives for his/her own selfish purposes. Therefore, in order to avoid unpleasant repercussions, a trader is advised to take choice of operator seriously.

In 2000 and 2008, a number of laws were adopted that designated the types of companies in forex field:

  • companies acting as the second party to transaction (dealer);
  • managing funds;
  • trading advisors;
  • introducing brokers.

Forex Brokers Activities Regulation in USA: Main Demands for FX Structures

To obtain forex license in USA, you must complete the following:

  • register a firm;
  • prepare corporate documents;
  • drafting a business plan, AML/KYC policy, etc.;
  • fill and submit an application to the appropriate authority;
  • open local bank account;
  • open a merchant account.

Obtaining a US brokerage license often means registering with the NFA as an RFED or FCM. Obtaining an RFED license in the US allows an entity to act as a counterparty for a person who is not an eligible party when transaction is either:

  • a futures contract, an option on a futures contract or an option contract (other than options traded on a stock exchange);
  • is negotiated on margin basis, financed by counterparty, or a person acting in concert with an counterparty on a similar basis.

Buying Forex license in the US allows you to request or accept orders to buy/sell contracts, retail OTC foreign exchange agreements or swaps, and accept money or other assets from clients to support such orders. Company registration in America is required in following cases:

  • firm carries out transactions only for the firm itself, affiliates of the firm, senior management of the firm or its directors.
  • organization has a non-U.S. resident or a firm with clients in other states and clears all trades registered with the CFTC.

Persons wishing to get a forex license in USA should familiarize themselves with special rules. They are designed by the CFTC to minimize risks for traders. Normative rules are as follows:

  1. It’s based on margin trading concept. Thus, maximum leverage is 1:50.
  2. Forex trading involves buying currency pairs. Regulators have banned hedging of the same currency pair.
  3. Traders are be able to hold one of currency pairs.
  4. Services to American citizens can only be provided by brokers registered in the United States.

The regulator has the right to apply sanctions and penalties of varying stringency to violators, depending on the amount of real damage from the activities of financial institutions. NFA has developed such a strict mechanism for detecting and combating fraud among brokers, both at the stage of issuing a license and at the stage of controlling their activities; thus, today the association is rightfully classified respectful and reliable global regulator. In fact, it is a guarantee of the broker’s clearance.

Forex Broker Protection in the USA

For investor’s protection, the Corporation for the Protection of Investors was formed by a special act of Congress. SIPC is required to submit an annual report to the SEC, the latter, in turn, has the right to audit its activities and make adjustments to the normative ground of its functionality. Most registered brokers and dealers are SIPC members. In this case, a court-appointed trustee or SIPC may arrange for the client’s funds to be transferred to another SIPC member firm. If this impossible, SIPC protects the user in the following way:

  • the client receives securities owned by the company being liquidated in his/her name and not subject to negotiation. Remaining securities are distributed among clients on a pro rata basis;
  • if the liquidated firm lacks the resources to satisfy all of the client’s claims, SIPC satisfies the remaining claims in the amount of $500,000, of which no more than $100,000 can be in cash;
  • if the client remains dissatisfied even in this case, then he/she receives in proportion to other creditors a share from the sale of the remaining assets of the bankrupt.

Time for SIPC to resolve customer claims depends on the size of the liquidated company and the circumstances of the liquidation. Thus, SIPC protects the investor from the financial failure of the brokerage firm.

Do you intend to run your business? If you appreciate time and money, take your look to licenses for sale and ready-made companies. Eternity Law team supports and advices you based on your commercial needs.

We believe that we replied for all your questions, however, if some exist, we remain at your disposal. Please, contact our specialists for detailed information.

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