Forex Regulations in Europe
Last Update: October 12th, 2022
The past few years have seen an evolution in methods used by unscrupulous individuals to scam people in the Forex industry.
As a result, a shift in how regulators combat such incidents has taken place resulting in several changes across Forex domains in Europe. For example, bills have already been passed to curb fraudulent business models which could most probably misappropriate investor funds.
One good example is the onset of Binary options fraud, which got remodeled in 2020 and is still disguised as a legitimate form of forex trading.
Meanwhile, besides sorting out issues to do with scamming and illegitimacy; European regulations are also focused on easing trading and managing the industry accordingly. Some new regulations to note include the following:
- Imposing a 30:1 leverage limit on major currency pairs and a 20:1 leverage limit on minor asset pairs. For a long time, the industry has been operating on a leverage limit of 200:1. Such limits intend to prevent traders from trading more than what they can afford to lose or handle at a given duration.
- Banning binary options and forex bonuses which are often fraudulent
- Increase the bar for transparency and good protection measures against negative balances.
The new leverage will help distinguish between the different types of traders. Namely, offshore brokers, big brands offering multi-market financial instruments and professional forex brokers experienced in the ins nd outs of marketing and conversion.
The foreign exchange (forex) market is a global decentralized market and doesn´t have a central trading floor. However, that doesn´t mean that it is not regulated. Although forex regulation is a touch softer and backs other financial markets regulation like banking, insurance, and equities, it is continually improving and closing any loopholes that might be left open. In most of the developed world, investing in the forex market is quite safe and regulated by local legal entities.
The forex regulation in Europe is a mixture; every country has its own local regulator, but there is also an overhead regulatory entity from the European Commission and a specific law called ‘MiFID’, which regulates most of the continent. Some countries have their own financial regulator but have adopted the EU standards, meaning they have very similar regulations. Apart from that, the EU-based investment firms can offer broker and dealer services in any EU country. If registered and licensed in one of the European countries, the broker can move and operate in another European country and is only subject to the home country’s registered legislation. We´ll explain all these in the sections below.
EU regulations set high standards for forex brokers
Markets in Financial Instruments Directive – abbreviated here to MiFID, is a law that harmonizes the regulation of the investment and financial services industry in EEA countries. Foreign exchange trading in Europe is subject to this law, and it was created in April 2004 and implemented in November 2007. The purpose of this law is to increase competition and customer protection, especially in investment services. In October 2011, the European Commission published the MiFID 2 which regulates over-the-counter trading even further, taking into account the developments and the financial crisis of 2008. Below, we have listed the key aspects of the MiFID and MiFID 2 which have been adopted by the financial regulatory bodies of all European countries and under which the trading and investment is carried out.
MiFID is the law that regulates financial markets in the EU
Passport – The European Union has established an EU passport and treaty rights; it gives companies registered in an EU country offering financial services the freedom to operate or be based in any of the other EU member countries. It also includes the other European Economic Area (EEA) countries of Iceland, Norway, Lichtenstein and Switzerland as well. Many of the companies that are registered in the wealthiest countries often have their operative offices in the less wealthy countries of the EU to save on operational costs. So, if you are trading with a broker who operates in Cyprus but is registered in the UK, you are protected and trading under UK financial laws. After all, out of 90 firms registered in London, 54 of them operate in Cyprus. The competent authorities of both the home and the host countries collaborate and exchange information so the brokers are not totally unknown by the authorities in the host countries, which makes it even safer.
Categorization – MiFID requires the companies, and in our case brokers, that they categorize their clients, separating them into two groups: retail traders and professional traders or investors. They are required to have clear procedures of categorization and evaluate the clients’ adequacy in order to offer the right kind of products for investing/trading. This is meant to prevent inexperienced traders from trading risky products, that´s why there is a section in the registration form asking what your income is and if you have trading experience when you apply for an account with a broker based in the EU.
Order handling – The firms should always query this with respect to their customers´ best interests. It is required by law that the brokerages be updated instantly with the latest information and price changes in order to handle the orders in the best way possible.
Pre-trade – All brokers that use order-matching systems in quote markets, such as spot forex, are required to make available to the public all the best bid and offer prices.
Post-trade – It is mandatory for the brokers/firms to make available to the public all the trades, their prices and times of execution.
Execution – The brokers must take all the measures in order to offer the best order execution to their clients. This means that the trade is executed at the best price available, the fastest possible execution speed and the highest likelihood of the trade being executed.
Systematic Internaliser – These are the brokers that set the trades of their clients against other clients or against their own book. These are better known as ‘market makers’ in forex. The market makers are considered as mini-exchanges and are subject to all of the above aspects.
Apart from the above clauses, EU legislation sets other enforcements on the brokers operating in Europe. There is no cold calling allowed, which means that the sales and marketing departments cannot call people out of the blue and persuade them to open an account and start trading with them. So if a broker you never had relations with contacts you, be sure that they are not licensed in the EU. The MiFID also sets a tough standard regarding the brokers’ own funds, which totals 730,000 Euros.
Funds segregation – Under the EU financial rules the brokers must segregate their clients’ funds from the company´s funds and place them in separate accounts. This way the clients’ funds are protected and the company cannot use these funds when it is in financial difficulty, even if it suffers from a short-term liquidity dry-up. Some countries of the EU, like Cyprus, are less strict when implementing this rule while others like the UK are stricter towards enforcing this rule. This is particularly important nowadays, given the increased volatility and unexpected events that have a huge impact on the financial markets.
Investor compensation – Under the MiFID terms, the investors are covered up to 20,000 Euros in case the broker bankrupt. If you have a 30,000 EUR account with a licensed broker, you´ll get 20,000 Euros back if the broker goes out of business, while if you have 15,000 Euros you´ll be refunded in full. That´s the minimum requirement by MiFID, but national regulators may have higher requirements. For instance, the FSA in the UK offers up to 50,000 pounds in compensation if the firm is registered in the UK under an FCA license. This MiFID compensation scheme applies only to EEA citizens; for the clients residing outside the EEA, the compensation is only 1,160 Euros.
Financial Regulators in European Countries
The list of the national financial regulators for the separate EU countries:
Great Britain – Financial Services Authority (FSA), Financial Conduct Authority (FCA)
Switzerland – Swiss Financial Market Supervisory Authority (FINMA)
The New York Times – Federal Financial Supervisory Authority (BAFIN)
Spain – National Securities Market Commission
Cyprus – Cyprus Securities and Exchange Commission (CYSEC)
Denmark – Danish FSA
Sweden – Swedish Financial Supervisory Authority (Finansinspektionen)
France – Autorite des Marches Financiers (AMF)
Italy – Commissione Nazionale per le Società e la Borsa (CONSOB)
Latvia – Financial and Capital Market Commission
Lithuania – Securities Commission of the Republic of Lithuania.
Luxembourg – Commission de Surveillance du Secteur Financier (CSSF)
Malta – Malta Financial Services Authority (MFSA)
Netherlands – Authority for the Financial Markets (AFM)
Poland – Polish Financial Supervision Authority (KNF)
Portugal – Portuguese Securities Market Commission (CMVM)
Romania – Romanian National Securities Commission
Slovenia – Securities Market Agency (ATVP)
Greece – Capital Market Commission
Hungary – Hungarian Financial Supervisory Authority
Ireland – Central Bank of Ireland (CBI)
Austria – Financial Market Authority (FMA)
Belgium – Banking Finance and Insurance Commission (CBFA)
Bulgaria – Financial Supervision Commission of Bulgaria (FSC)
Croatia – Financial Services Supervisory Agency
Czech Republic – Czech National Bank
Denmark – Danish Financial Supervisory Authority (Danish FSA)
Estonia – Finantsinspektsioon
The firms are operating in the financial markets, therefore, the forex market in the European Economic Area (EEA) is under unified regulation rules. MiFID is the EU law that regulates trading and investing in the EEA. Although, there are differences between countries as MiFID sets the basic requirements. Some countries like Bulgaria, Cyprus, and Malta only meet the basic requirements while other countries like the UK and Switzerland go way above the basic requirements. Nonetheless, the EU financial regulation makes it quite safe for a trader to trade with an EU-based broker. Transparency, execution, segregation of funds and investor compensation rules are all part of the EU legislation, which makes the EU-licensed broker more reliable.
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