FX is the most liquid market in the world with over 5 trillion USD in daily turnover, and 1.6 trillion USD in OTC spot transactions executed each day on average. Volatility makes it an attractive investment vehicle for many traders around the world, institutional and retail. Retail FX has been around for longer than 2 decades now, but we have yet to see the industry reach a mature state.
Two decades might be just an infancy stage for an asset class, one would say, and would be right. Regulatory frameworks in many countries are not greatly fine-tuned to deal with FX or are not encompassing FX at all. A lot of ambiguity about regulation or lack of thereof, explosive growth of the industry and high risk of the leverage investment created many abusive behaviors from all sides: traders, brokers and counterparties.
Regulators around the world are stepping in to clean up retail FX and establish sensible guidance and rules of engagement. Many of them are getting right to the point of addressing the over-leveraging. Most of the Tier 1 regulators globally have taken steps to reduce leverage over years. Some examples are: Japan FSA reduced leverage to 25:1 for retail clients in 2011, Korean regulator FSS dropped it to 10:1 in 2011 and Turkey's CMB introduced 10:1 just recently in 2017, on the extreme side of things.
While some may think that certain rules are going overboard, my opinion is that industry needs it and it's long overdue. I commend regulators like CySec, ASIC and the UK’s FCA on introducing better protection for investors and for enhancing oversight over brokers’ activities. These regulators do not leap before they look and while changes in leverage are contemplated, it is seriously considered and not implemented overnight.
Given the decisive steps that some regulators around the world have taken to protect the investors, brokers may soon find themselves in a situation where they need to figure out how to adhere to lower leverage requirements quickly. Many will find that running solely B book model of business (where all the risk is internalized) might not be efficient anymore and they may need to introduce STP (straight through processing) into the mix. Beware, however, that in many cases selecting the right counterparty might be a very challenging task on its own.
As regulatory landscape becomes more rigorous, brokerages will need to deal with reputable counterparties (in many cases, counterparties need to be approved by the country’s FX governing authority), and those that have a long standing history of success and can scale up will thrive. Advanced Markets is a true, STP Prime of Prime and the gold standard when considering a reliable and transparent institutional broker with impeccable reputation. We understand the importance of delivering long-term value to all stakeholders and the goals of Advanced Markets are fully aligned with those of our valued client base.