Оne of the most important factors when it comes to online Forex trading is regulation and beginner traders would probably wonder how this affects them. Interestingly, the foreign exchange market is a decentralized, over-the-counter market where trades occur directly between two parties without the supervision of an organized exchange. Since this type of trading does not fall under one single jurisdiction, many novices believe that it is not regulated at all.
This misconception is further fueled by the large number of online brokers who operate without a proper license. However, many countries do regulate Forex brokers locally through governmental and independent supervisory bodies that are responsible for setting certain standards and rules in this industry. One of these regulators is the Cyprus Securities Exchange Commission or CySEC. But rather than providing licensing services and oversight for local brokers only, its licenses give Forex brokers access to the financial markets within the entire European Union.
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Cyprus Securities Exchange Commission
The Cyprus Securities Exchange Commission, usually referred to by its abbreviation CySEC, is one of the major financial regulators in Europe. It was established in 2001 under section 5 of the Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law of 2001. It is an independent public supervisory authority that is obligated to submit an annual report of activities to the Minister of Finance. All seven members of the CySEK Board are appointed by the Council of Ministers following a proposal of the Minister of Finance.
As the main financial regulatory agency in Cyprus, CySEK supervises the investment services market, the securities market, and the collective investment and asset management sector in the Republic of Cyprus. It regulates multiple entities and markets, including the Cyprus Stock Exchange and all participants in it, investment services companies, collective investment funds, investment consultants and mutual fund management companies. Of course, the agency supervises the operation of all brokerage firms and Forex brokers in the country, too.
In 2004, when Cyprus joined the European Union and started harmonizing a large portion of its legislation with EU laws. This included financial legislation and CySEK regulations which had to be harmonized with EU rules in accordance with the Markets in Financial Instruments Directive (MiFID). Still, the country was considered a tax haven for a long time and many European brokers preferred relocating there due to the better tax conditions and the more liberal rules. After CySEC became a part of the European MiFID regulation, the financial regulatory framework in the island country changed significantly.
Much higher standards were introduced and CySEK licensees now need to comply with much stricter regulations than they had to a decade ago. Still, Cyprus is a preferred destination for many businesses and Forex brokers since they find it easier to register and obtain a license here. The taxes are also much more attractive here than almost anywhere else in Europe. Currently, brokerages based in Cyprus are allowed to provide their services across the European Union thanks to the Markets in Financial Instruments Directive (MiFID) we have already mentioned. At the same time, these firms need to comply with the rules set by CySEK rather than follow the national regulations of each and every country in the EU.
CySEK supervises the operation of the Cyprus Stock Exchange and of all other organized markets in the country. This means that it regulates all companies listed in it, brokerage firms and other intermediaries participating in the transactions carried out in the exchange. The agency also reviews applications and grant operating licenses to entities under its supervision, including Forex brokers.
It has the full authority to launch investigations against suspected offenders, enter and search premises, and suspend and revoke licenses. CySEK can impose administrative and disciplinary sanctions where malpractices have been identified. Overall, the authority is responsible for the monitoring and regulation of all market participants and investment services providers in Cyprus. Its main objective is to ensure that the securities market is fair and that investors are protected.
Guidelines CySEC Brokers Need to Comply With
All Forex brokers licensed by CySEK are required to comply with a list of rules and guidelines set up by authorities. They need to operate with transparency and in a fair manner following the regulatory framework in Cyprus and in the EU. Of course, the guidelines are constantly being updated to ensure they can adequately protect investors.
To provide Forex brokerage services, companies need to obtain a Cyprus Investment Firm license. To be approved, they need to have and maintain a minimum of €750,000 in operating capital. This is a relatively new requirement and its purpose is to ensure that brokers have enough capital to hold their clients’ positions without a risk resulting from a volatile market.
If they handle their clients’ funds, Forex brokers are required to hold an initial share capital of at least €200,000. They also need to have insurance coverage of €1 million for individual losses and €1.5 million annually for losses resulting from inactions or negligence. When brokers apply for a CySEK license, they must provide a comprehensive list of all the services and products they wish to offer. Of course, they also need to submit regular financial statements to the Commission for review, as well as annual financial reports.
Along with the many rules for fair trade and security every CySEK licensee needs to follow, there are additional guidelines that deal with investor protection. This is probably the most important aspect of Forex regulation as it directly affects clients and their funds. Traders should know that whenever they wish to complain or report a Forex broker, they need to file their complaint to the correct authority and in the proper manner.
CySEC says that it does not have restitution powers, which means that it cannot investigate individual complaints. Still, traders can submit their complaints to the agency if they wish to. What they have to do is first, to contact the CySEK-regulated broker, who is required to respond within 5 days and even if the issue is not resolved, traders will at least receive a unique reference number for their complaint.
If they are not satisfied with the response they get from the firm, they can submit their complaint with the Financial Ombudsman. This is an independent institution that deals in protecting customers’ and investors’ rights, mediating in disputes between financial services firms and their clients, etc. Another option, which is much more complex, money and time-consuming, is to start a civil action in the District Court.
Still, CySEK has a couple of important requirements regarding licensees and they are designed to protect clients from different malpractices and compensate them for financial losses of a certain nature. First of all, Forex brokers are required to keep their clients’ capital in tier-1 European banks and in segregated accounts. The main purpose of this rule is to make sure that investors’ funds are protected and cannot be used by the broker for unauthorized activities. This way, transparency is guaranteed.
Additionally, CySEK requires licensees to protect their clients in case of a broker’s insolvency. The firms need to make sure investors’ money is secure under the Investor Compensation Fund. The maximum amount of compensation paid to traders eligible for compensation is €20,000. The coverage, however, applies to the total amount of claims by an applicant against CySEK licensee and ICF member. This includes all client accounts the individual may have with a broker.
CySEC Regulated Forex Brokers
There are hundreds of online Forex brokers that hold operating licenses from CySEK. While some firms are local and cater to the needs of traders within Cyprus, most of the licensees are international companies with a local office in Nicosia or Limassol. Some of the largest and most reputable online brokers regulated by CySEK are XM.com, Markets.com, eToro, and easyMarkets.
XM.com is a popular Forex broker that is available around the world and offers its clients low-cost trading, fast execution and access to over 1,000 markets through MetaTrader 4 and MetaTrader 5. Established in 2009, XM.com has quickly grown to a global Forex and CFD broker with 2.5 million clients in 196 countries. Its website is available in more than 20 different languages, while the minimum deposit of only $5 should suit all types of traders.
The broker is recommended for those who are interested in Forex and CFD trading. It offers trading on over 55 currency pairs, cryptocurrencies, as well as contracts for difference (CFDs) on indices, company stocks, commodities, metals, and energy products. Account opening is free and user-friendly and traders can open demo or live accounts in their national currencies (11 account base currencies are available). In addition, deposits are free and instant via a credit card or an e-wallet.
The Israeli fintech startup is available to traders from all over the world as it is licensed and fully regulated by several authorities, including CySEK in Cyprus, UK’s Financial Conduct Authority, and the Australian Securities and Investment Commission. Founded in 2007, this online broker is currently the largest and most preferred platform for social trading. Just a few years after its inception, eToro became the first Forex broker to offer its clients the opportunity to connect with each other and copy other successful traders using the innovative CopyTrader feature.
But apart from being a leader in social trading, it is also a wonderful option for every novice who is interested in Forex trading. Its product portfolio includes foreign currency pairs, ETFs, stocks, indices, commodities, crypto trading, and CFDs. The minimum deposit is $200 and traders can easily open a demo account before they opt for a live, real-money trading account on its proprietary platform.
Established in 2010, Markets.com is a safe and reputable online Forex broker that focuses on CFD trading. It can be accessed from nearly every corner of the world and it is licensed by several different regulators. It gives access to a wide range of markets and instruments, including CFDs on currencies, metal, indices, commodities, energies, bonds, shares, ETFs, IPOs, and CFD blends.
Markets.com offers its clients high levels of security, investor protection, and convenience, being available in 8 languages and offering even more base currencies to register your account in. The minimum deposit here is $250 and traders can sign up within seconds with their Google account. Of course, further verification is required for those who wish to trade with real money. Demo accounts are readily available and easy to use, though.
This is one of the first brokers that offered online Forex trading to a wide range of retail clients. Founded in 2001 as easy-forex, it was rebranded to easyMarkets in 2016, increasing significantly the number of its clients around the world. The broker holds licenses from CySEK and ASIC in Australia, so it can be accessed by everyone in Europe or the Asian Pacific Region.
Providing a wide range of Forex pairs, CFDs, vanilla options, shares, and indices, easyMarkets is a truly multi-asset platform for online trading. Traders can choose from several different software systems and client accounts and take advantage of the many unique features offered by the broker. Overall, this is among the safest and most user-friendly options for beginner traders.