Since the majority of the brokers are the principal or the counterparty of the forex contracts traded in the retail forex market, understanding the regulation that applies between you and your broker is probably the most important factor when considering to open an account with one broker or another.
In the following table we summarized for you the principal characteristics that define the most popular regulations when it comes to forex trading.
|Offices in country||required||required||required||at least one responsible manager is located in Australia||institution is managed in Switzerland||office in Cyprus
nominated employees should reside
|nominated employees should reside||will need to establish a Hong Kong subsidiary|
|Capital requirements trading as a principal||$ 20million||$20 million||$1 million||10% of revenue (minimum of $A1 million; 50% in cash or cash equivalent)||100 million CHF
10% total risk exposure
0.02% of the amount by which the value of the portfolios under management exceed EUR 250,000,000
|Capital req. Intermediary||$10million||exceed 120% of the total risk equivalents||$100,000||Tailored to needs
$100,000 or more
|1.5 million CHF||€125,000||125,000||HK$5,000,000|
|Institutional Effectiveness||4th||Not considered||6th||Not considered||1st||Not considered||Not considered||2nd||5th|
|Regulatory Enforcment||6th||Not considered||3rd||Not considered||8th||Not considered||Not considered||1st||4th|
|Reducing Financial Crime||7.06||Not considered||7.54||Not considered||7.36||Not considered||Not considered||7.55||6.90|
|Protection client investment||SIPC-500.000$||¥10 million
Deposit Insurance Corporation of Japan (DICJ)
|Fscs 50k pounds||Financial Claims Scheme
|100,000 CHF||ICF (Investor Compensation Fund)
|90% max 20.000eur||$150,000
Investor Compensation Company Limited
|Min. Margin||2%||4%||0.25%||0.20%||No limit|
As we can see in the table, in some countries to be a market maker doesn't require a large amount of own funds, however in other regulations does. The fact of being able to create a market without having a large sum of free funds increases the risk of bankruptcy when taking the counterparty risk of your trades. Moreover, the regulator might not effectively control whether the execution policy of the broker is being applied correctly; or whether the client funds are being systematically segregated from the broker's money. In the table you can also check what is he maximum allowed leverage per regulation, and the investment protection amount that the regulator offers if any.