Regulations can affect the forex markets as businesses that are impacted might need to change their procedures and practices. miFID, EMIR, the Tobin Tax and Dodd-Frank FX are all rules that need to be followed in the forex trading world. These rules continue to alter the way market participants trade and the way firms handle forex traders. There are several steps that a forex broker or dealer would need to undertake to make sure they followed forex regulations.
Monitoring Position Size
Under the MiFID program, government authorities that regulate the forex markets can terminate unusually large trades. Most of these new rules will impact those who are regulated by the European Securities and Market Authority. The reason behind this regulation is to help authorities monitor positions that could generate unwanted volatility in the forex markets that could potentially threaten the entire securities market. The rule has had an impact on the market as forex trading firms have become their-own watchdogs, keeping a close eye on traders who are taking large positions especially ones that could threaten the ability for the market to function properly. Another situation that could arise is that forex firms that are regulated by ESMA might consider restricting the number of transactions a trader takes withing one day to avoid the interference from authorities.
Managing Third-Party Relationships
Regulations now strictly forbid accepting gifts or payments from third parties. Before these regulations from MiFID, an investment advisor or trader was able to accept payments from third parties as part of their normal business practice. These payments or gifts would incent an investment advisor to use a third party, even if the business was unwanted or needed. The regulations have put Forex forms on notice that the relationships that they have with third parties needed to be at arms-length. The goal of this regulation is to make sure that forex firms that are transacting with third parties do not have a conflict of interest when conducting online trading.
Assessing derivatives and putting forth an estimate of market structure is forbidden under the Dodd-Frank legislation. Unfortunately, complex structures that use forex markets are important to traders that depend on estimates to conduct transactions. Trade entities now need to be careful in their estimated assessment especially if they are going to be published in any form of written product or given to a media outlet. The reporting requires under the Dodd-Frank regulations in forex swap dealers (mainly banks and investment banks) need to be registered. Their forex records need to be maintained by the company and each transaction needs to have a clear value along with pricing.
The Tobin Tax and the EMIR
This regulation requires that a forex firm taxes every transaction that is entered by a forex trading firm. This has helped to limit the number of transactions and in cases has caused traders to seek other firms in countries that are not regulated by the Tobin Tax. The EMIR regulations require that OTC derivate contracts that must be traded on an electron platform.
The Bottom Line
The upshot is that its important to understand new regulations that will impact your costs, as they might spillover from your forex broker to you. Your broker could be required to participate in many of the new forex regulations to maintain its status under its regulator. Forex regulations that become too large are subject to regulatory scrutiny and could unset the apple-cart.