Forex trading is an activity full of risks. Once you dive into the world of forex, you are participating in a very liquid and dynamic market. To make a profit, you also need to use real money and understand that there is the potential for loss.

Choosing a regulated broker can help reduce risks related to trading security. A regulated broker means that the broker's operations are directly supervised by a regulatory body. Some of the world's largest regulators even implement strict rules so that there is almost no room for forex brokers to cheat. The risk of money being taken away by the broker is increasingly minimal.

Apart from that, there are several more reasons why you should trade at forex broker which has regulations, namely as follows:

1. Trading capital is protected
2. High transparency
3. Avoid the risk of scams
4. Help solve problems

For further details, see the explanation below.

1. Trading Capital Protection

One of the main advantages of trading with a regulated broker is the strict rules that require them to keep client funds separate from the company's operational funds. This means that your funds as a trader will be kept in a special account (segregated account) which is separate from the broker's own assets and funds.

By keeping client funds separate, regulated brokers ensure that trader funds will not be used for the broker's internal operational or investment purposes. This is an important step to protect traders' funds in any situation, including if the broker experiences financial problems, for example, in the event of bankruptcy.

Segregated accounts themselves are regulated by forex supervisors in many jurisdictions. The FCA in the UK sets out rules regarding segregated accounts under Client Assets Sourcebook (CASS) 5.5 which also covers organizational requirements, segregation methodology, records and reconciliation, and recognition of trust.

CySEC in Cyprus also regulates companies in its jurisdiction to implement segregated accounts. CySEC Law Section 18 (2)(j) explains that a CIF (Cyprus Investment Firm) must make adequate arrangements to protect client rights and funds to prevent the use of client funds for the company's own interests.

See also:

How Much Money Required for Forex Trading?

2. High Transparency

Transparency is an important principle in the context of forex trading. Regulated brokers always offer high levels of transparency in their business operations. This is related to the broker's compliance with strict transparency standards set by regulatory bodies.

One of the main aspects of transparency is providing clients with clear and detailed information about costs, risks and trading conditions.

Cost transparency can include clarity of spreads, commissions, swaps and other trading costs. With this clear information, traders can make better decisions about trading strategies while avoiding hidden costs that can affect profit accumulation.

In addition, regulated brokers must also provide clear information about the risks associated with forex trading itself, including market volatility, potential losses, and other risk factors that traders need to consider.

Bonafide regulated brokers also often provide free educational services to facilitate novice traders. This educational service can be in the form of webinars, e-books, live trading, and so on.

Then, broker transparency regarding trading conditions is matters relating to trading rules, contract size and margin requirements. This helps traders to clearly understand how trading is done with the broker.

See also:

How To Choose A Good Forex Broker?

3. Avoid the Risk of Scam

Regulated brokers are required to comply with all rules and regulations set by regulatory bodies. This includes regular reporting of operational activities, compliance with anti-money laundering (AML) principles, and ensuring client data is protected.

By maintaining compliance with the law, brokers can ensure that their operations are within the bounds of industry standards and do not violate applicable laws. You can't find this in unregulated brokers.

Brokers who are not registered with one particular regulatory body clearly have more freedom in running their business. There are no rules that need to be obeyed and no legal umbrella that binds him. Their chances of scamming traders are greater.

One example of a real case of broker scam without regulation is the case of brokers MFX (Masterforex) in 2015 and 2016. Initially, IFSC Belize as the forex regulator stated that MFX Broker no longer had a license and warned all traders to be careful.

However, MFX claims this is only temporary and they will still be regulated in Belize under a different name, namely Master Services. However, Master Services apparently is not registered as a licensed broker under IFSC.

In June-July 2016, traders began experiencing withdrawal difficulties at MFX Broker. Some traders can still withdraw their money, but it takes a very long time.

MFX was then accused of being a scam broker. Instead of explaining what actually happened, MFX Broker blamed the IBs, payment service providers and exchangers.

The MFX case is also a valuable lesson that broker regulation is indeed important. Traders must also confirm the broker's regulations and not just believe the broker's claims.

4. Helping Traders Solve Problems

Regulated brokers usually have good and responsive customer service. The function of customer service is to receive complaints, questions, or help handle any trader problems. Generally, customer service is available 24/5 from Monday-Friday. Traders can contact CS agents via live chat on the broker's website, email, or via social media such as WhatsApp, Telegram, and Line if available.

While the availability of CS is not directly regulated by regulatory bodies, regulated brokers tend to have higher standards for providing good customer service as part of their commitment to comply with regulatory requirements and maintain trader trust.

See also:

Why You Should Choose Top-Level Regulated Forex Brokers?

Hierarchy of Regulatory Bodies and Their Regulatory Stringency

The landscape of forex brokers regulation encompasses various regulatory bodies, each with its own set of policies and standards. It's important to understand that not all regulators operate with the same level of stringency; some impose stringent regulations, while others adopt a more relaxed approach.

When categorized, regulatory bodies can be grouped into three tiers or levels, characterized as follows:

• Tier 1: Top-Tier Regulators
  Regulators in this category enforce highly stringent regulations, leading to a lengthy licensing process for brokers. These top-tier regulatory bodies are known for their robust oversight and regular monitoring activities. Brokers regulated by these authorities are subject to strict compliance requirements, minimizing the likelihood of fraudulent activities. Moreover, in the event of broker insolvency, top-tier regulators often provide mechanisms to reimburse some or all of the traders' funds.
• Tier 2: Mid-Tier Regulators
  Regulatory requirements and monitoring procedures under mid-tier regulators are relatively less rigorous compared to top-tier counterparts. While these regulators oversee broker operations and work to prevent scams, the security guarantees may be less comprehensive. In cases of broker insolvency, traders may not receive guaranteed refunds from mid-tier regulatory bodies.
• Tier 3: Offshore Regulators
  Considered the least stringent among the three tiers, offshore regulators may lack robust oversight mechanisms. If a broker claims offshore regulation, it may imply less regulatory scrutiny and oversight. Offshore regulators typically focus on the existence of brokerage entities rather than closely supervising their activities. Consequently, in scenarios of broker insolvency or misappropriation of client funds, offshore regulators may not provide assurances for fund recovery.

In summary, understanding the hierarchy of regulatory bodies and their varying levels of stringency is crucial for traders seeking a secure and reliable trading environment. Opting for brokers regulated by top-tier authorities offers enhanced protection and peace of mind, while offshore-regulated entities may entail higher risks due to limited regulatory oversight.

Based on this classification, below is a table of several world forex regulators and their tier levels.

See also:

What is Regulation? And Why Should There Be Regulations?

Conclusion

At this point it can be concluded that the regulation of forex brokers is very important. Just like when you buy a new cellphone, you would prefer if the cellphone had a guarantee. When you buy a new cellphone with a warranty, you have the protection and guarantee that the cellphone has passed certain quality and safety standards.

Similarly, when you choose a regulated forex broker, you get similar protection and security for your funds and transactions. As mentioned earlier, forex broker regulation ensures that the broker complies with the standards set by the body financial supervisor.

This includes fair broker practices, transparency, safe fund management, and handling trader complaints. By choosing a regulated forex broker, you have confidence that the broker has passed a strict supervision process and meets the requirements set to safeguard your interests as a trader.