How does foreign exchange regulation work?

| April 11, 2016 | 0 Comments

Foreign exchange or forex by definition is a system or mechanism that deals in the currency of other countries. For an economy, foreign exchange and its stability are of great importance. In this era of globalization and open economies, most of the international trade is done through different currencies, the dollar being the standard currency for most countries. Now the dilemma of the countries is that only America has the authority to print dollars. No other country is authorized to do that. Thus, in order to maintain the reserves of dollars, it has to be bought at the rate of foreign exchange in the respective country.

Foreign exchange markets, on the other hand, are markets where currencies are traded, and forex brokers are the intermediaries who act as a facilitator between the trader and the bank.

How does it work?

Foreign exchange regulation is specifically directed towards foreign exchange markets. These markets are not headed by any institution or figureheads, which is why there are so much speculation and sharp practice in the market.

The example of regulators in some countries are:

  • Cyprus: Cyprus Securities and Exchange Commission
  • Australia: Australian Securities and Investments Commission
  • Germany: Federal Financial Supervisory Authority

The regulators have laid out a set of rules of acceptable behavior and ethics that have to be practiced in the market and have to be accepted by all foreign exchange markets. Every country differs in the laws that regulate their markets, but there are some general laws that are practiced in almost every country.

The general rules are as follows.

  • The market needs to be registered and should have a license in the country where it operates. A market that is not recognized by the registrar as a financial institution is considered to be unlawful.
  • The forex brokers are obliged to enforce all laws, and they are also to cooperate in case of any audits, operations, or evaluations, even if they are recurring.
  • Forex brokers are required to stock a minimum amount of capital, which will aid in their day-to-day operations or to compensate their clients in case of any unforeseen incidents such as bank robbery.
  • Each foreign exchange market has the autonomy to run independently without any intervention from any external institution.

Not every foreign exchange system is regulated and if they are, they are done with light strings so that major cases of theft, treachery, and frauds are recorded, especially in the developing countries.The politicians in developing countries are also majorly involved when it comes to foreign exchange scams. To make more profits, they create artificial demand or artificial supply or ensure that the system is centralized and regulated by the government so that they can earn a major chunk of the profit. A fair system of regulation need to be observed by every lawful institution and strictly implemented to save economies from huge losses and frauds.

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