The regulatory framework in the United States for traders and Forex brokers – News Chant USA
There are banks and brokers that can engage in financial frauds, scams, hidden fees, exorbitant costs, or high-risk exposure through high-leverage levels, or other poor practices. Although the internet and mobile-based trading are convenient, they can also introduce the risk that unrecognized websites may close unexpectedly or take investors’ money. These practices can be avoided by regulations. These regulations are intended to protect individual investors and ensure fair operations that protect clients’ interests.
When choosing a forex broker, the most important criteria are its regulatory approval status and its governing authority.
The United States is the world’s largest economy, both in terms of GDP/wealth, and has the largest stock exchanges: NASDAQ and the NYSE. Forex traders based in the United States will likely have difficulty finding a suitable broker as not all brokerages are open to American traders. The U.S. Forex trading regulations are some of the strictest in the world.
Regulations for Forex trading in the U.S.
Many traders are mistakenly assuming that Forex trading is not allowed in the United States. However, this information is bogus. As long as the traders pay the appropriate taxes, they can participate in this market legally. The U.S. regulatory agencies closely monitor brokerage operations.
A license must be obtained in order to offer services to traders who are based in the U.S. This is not surprising as many EU Forex brokers also apply for licenses with foreign licensing agencies. The capital holding requirements in the United States are so high that only a few people can legally operate there. These requirements were first introduced in 2012 by the Dodd-Frank legislation. It covers virtually all financial services sectors.
The Wall St. Reform and Protections Act, which Obama suggested in 2010, was officially adopted by Congress the year after. This law aims to reform financial regulation in the wake of the 2008 financial scandal. This law is believed to be the largest overhaul of the American financial system.
The Dodd-Frank law outlines the main rules that govern currency trading. Leverage caps are a set limit that applies to currency trading activities. It is 50:1 for main currency pairs and 20:1 for exotic. Hedging is a trading technique that allows you to open multiple transactions on the same currency pair simultaneously in order to reduce losses.
Residents must also submit annual mandatory tax returns. 60% of profits are capital gains and are subject to a 15% tax. Depending on the income bracket of the trader, 40% could be subject to tax.
Many companies have been scared off by the capital requirements of Forex brokers since the Dodd-Frank law was enacted. Brokers must have an operating license and a $20 million security fund. Brokers in Europe, however, only need to show that they have cash reserves of between $100,000 and $500,000 as opposed to the US. This is a significant deterrent and most brokers have decided to leave the U.S. because of it.
U.S. financial regulators
The Dod-Frank Act created several new regulatory bodies that each have jurisdiction over a particular sector of the trading market. The CFTC (Commodity Future Trading Commission), and the NFA (National Future Association) are currently responsible for monitoring the foreign currency market.
You will frequently meet unregulated Forex brokers that trade with US clients. For instance, if you were to check OspreyFX Forex broker reviews you would notice that the broker holds no license whatsoever neither from US regulators nor from any other official authorities in the rest of the world. However, according to the broker’s statement, it has dozens of traders from the US, which is not surprising due to the strict regulatory framework in the region urging US traders to enjoy the benefits of an unregulated trading scene despite the risks.
Brokers who want to service U.S.-based traders must be registered with the former as well as a member. The CFTC regulates derivatives markets including options, futures, and swaps. However, the NFA is a self-regulated agency that oversees all forex trading activities. The SEC (Security Exchange Commission) has no authority in currency trading as currency pairs don’t constitute securities. FINRA (Finance Industry Regulatory Authority) regulates a few U.S. brokers. This agency is a private agency.
However, most sites are hosted and managed from outside the United States. This may mean that they cannot be approved by the relevant authority in the host nation. Regulations that are applicable to U.S. residents may not apply to even those who have been authorized locally. Each country will have its own regulations regarding required deposits, offered leverage, reporting requirements, and investor protections.
Funding and depositing in the US
American traders greatly benefit from the fact they can fund their trading accounts with their national currency, the dollar, without having to pay additional foreign exchange fees. Many brokers will accept credit cards. However, most online payments are done with standard credit cards. This is followed by e-wallets (19%) and prepaid (3%) as well as smartphone payment apps (2%) or wire transfers (4%).
Credit cards allow you to make instant deposits into trading accounts. They are highly secure and very easy to use. There are rarely any fees. Withdrawing profits from a credit card may result in a percentage (up to 4%) of the amount sent. These transactions may take up to two business days.
Alternative payment methods like digital wallets such as PayPal are preferred by many traders. You can use it for both deposits and withdrawals. Skrill is another popular UK cash transfer method. Wire transfers are also quite common and bank checks still are used, although by an older population.
U.S. traders prefer web trading platforms over mobile apps
It is crucial to choose a trading platform that handles currency transactions. Forex is a global market. Trading doesn’t happen through one exchange. It happens via a worldwide network. Some brokers offer their own trading platforms. Some brokers offer additional features that professional traders will appreciate. Sometimes, they will provide in-house analyses on where currency pairs might go in the medium and short-term.
All brokerages offer these platforms free of charge, and none would consider charging a fee to use them. MT4 (and MT5) are the most popular platforms and the easiest to use. The first platform was launched in 2006. The second is more recent and can accommodate trading of futures, shares, and CFD securities.
MT4 and MT5 might appear identical to the naked eye, but their features differ quite a bit. MT5 executes trades faster than MT4 and can also accommodate forex transactions only. Traders can also use MT5 to trade on centralized national markets such as the NASDAQ. cTrader, TradingView, and TradingView are two other options.
Forex trading in the U.S. is a complicated business. One must remember that the country is vast and has a large population. It also produces advanced biotechnologies and space exploration equipment, etc. Retail, automotive building, energy production, and transport are the major industries contributing the most to the nation’s GDP. In addition, the USD is the currency that is the most traded of all and the most used reserve currency.
Many Forex brokers have been scared off by strict financial regulations. Only a handful of brokers are now able to take American traders. The US currency market remains attractive to traders, with over $6 trillion being traded daily.
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