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Capital Requirements for Forex Brokers
Forex trading has become more mainstream in the last few years, with continued account growth from retail traders since 2000. Forex trading was not subject to very stringent regulations in the early years, and recent years have seen much stronger regulatory requirements implemented, to protect individuals from large losses due to retail trading. When consumers choose a forex broker to trade with, it is important to check the capital reserves held by the broker, before depositing any funds and trading with them.
Meaning of Forex
Forex is an abbreviated word used in the place of foreign exchange, referring to currency trading through a broker. Forex traders purchase one currency, and at the same time sell another. These buy-sell transactions take place in an over-the-counter forex market, functioning similar to the stock market. The forex market stays open continuously, 24 hours each day, from Sunday evening to Friday afternoon. No central market exists for forex; trading happens through a global network of computers.
Institutional traders and businesses account for about 5 percent of transactions in forex, with the other 95 percent being initiated by speculators and other individuals through retail forex trading accounts. Years ago, forex did not have the technology available to individuals to allow trading; however, as market information became more readily available to individual investors in recent years, many have become attracted to forex trading.
Capital Requirements for Forex Firms
The National Futures Association (NFA) serves to regulate the capital required to be held by forex firms that are headquartered in the U.S., working along with the CFTC, or Commodity Futures Trading Commission. Specific requirements are enforced by the NFA regarding capital reserves. It is important for each forex broker to keep enough capital in reserve to protect against bankruptcy and the loss of traders' deposits and trading capital. Forex traders usually deposit capital when they open an account, and it ranges from $500 to $20,000 or more. In addition, traders may keep earned profits in their trading accounts as well.
Starting in 2008, the NFA started to require all forex dealers to raise their capital reserve funds, in stages, to reach a $20 million amount per forex firm by 2009. Few forex firms in the U.S. could meet this requirement, and many brokers were forced to shut down or relocate to another country.
Check a Broker's Capital Resources
For any individual wanting to verify the financial strength and safety of a forex firm he is trading with, the current balance of capital accounts can be found by broker, on the CFTC website (cftc.gov). The higher a forex firm's capital balance is over the $20 million minimum requirement, the more protection it provides its customers. For people using trading firms headquartered outside the U.S., Babypips.com has published an article listing regulatory bodies. On their website, search for "6 Most Important Things to Consider When Choosing a Broker." Europe, Australia, Hong Kong and Canada have strongly regulated forex markets with stringent capital requirements; however, brokers in other countries, especially third world, may not have the same high level of regulatory oversight.