Special Risks of Off-Exchange Forex Trading
Forex trading in general presents significant risks to individual investors that require careful consideration. Off-exchange forex trading poses additional risks, including:
- There Is No Central Marketplace. Unlike the regulated futures and options exchanges, there is no central marketplace in the retail off-exchange forex market. Instead, individual investors commonly access the forex market through individual financial institutions – or dealers – known as “market makers.” Market makers take the opposite side of any transaction; for example, they may be buying and selling the same foreign currency at the same time. In these cases, market makers are acting as principals for their own account and, as a result, may not provide the best price available in the market. Because individual investors often do not have access to pricing information, it can be difficult for them to determine whether an offered price is fair.
- There Is No Central Clearing. When trading futures and options on regulated exchanges, a clearing organization can act as a central counterparty to all transactions in a way that may afford you some protection in the event of a default by your counterparty. This protection is not available in the off-exchange forex market, where there is no central clearing.
Regulation of Off-Exchange Forex Trading
The Commodity Exchange Act permits persons regulated by a federal regulatory agency to engage in off-exchange forex transactions with individual investors only pursuant to rules of that federal regulatory agency. Keep in mind that there may be different requirements or treatment for forex transactions depending on which rules and regulations might apply in different circumstances (for example, with respect to bankruptcy protection or leverage limitations).
You should also be aware that, for brokers and dealers, many of the rules and regulations that apply to securities transactions may not apply to forex transactions. The SEC is actively interested in business practices in this area and is currently studying whether additional rules and regulations would be appropriate.
CFTC/NASAA Investor Alert on Foreign Exchange Currency Fraud
Press Release: SEC Charges Forex Ponzi Operator Who Fled After Scheme Unraveled