1 Check the registration.
All brokers that offer retail spot forex trading must be registered with the Commodity Futures Trading Commission (CFTC) and the NFA. “If they are dealing with U.S. customers, they have to be registered. If they’re dealing entirely with foreign customers, they may not need to be registered,” Wuertz says. “If they’re not registered, that’s a huge red flag.”
The regulators make it very easy to see if a firm is registered by visiting the NFA’s Background Affiliation Status Information Center (BASIC) database online at www.nfa.futures.org/basicnet.
If you are a non-U.S. customer looking to trade with a foreign firm, you may have a little more work to do. Nonetheless, Dean Popplewell, senior currency analyst for Oanda Corp., says traders still should look to see that the firm is registered with a regulatory authority. “The forex market is becoming better regulated, and like anything, regulation is continuously changing,” he says. “What we’re finding is regulation is moving toward global [unification]. Anybody who is responsible should encourage regulation.”
2 Look under the hood.
Now that you know the broker is registered with a regulatory authority, it’s time to dig deeper into its background to get to know the broker better. Again, the NFA’s BASIC system makes a lot of this information very easy to access.
Wuertz lists some of the details the BASIC system makes available. “You can dig down into some details like how long they have been registered, and you can look at their regulatory history. There’s a whole due diligence that a customer needs to do by looking through the BASIC registry,” she says. “How long has the firm been around? Understand their disciplinary history, know who the principal of the firm is and also do background checks on the firm. It’s entirely possible that the firm is brand new, but the principal has a long list of regulatory issues.”
Barbara Rockefeller, president of Rockefeller Treasury Services and author of “The Foreign Exchange Matrix,” agrees that checking the BASIC system is an essential step, but warns that it has its own limits. “[Checking the BASIC system] may not help you because [Peregrine Financial Group] (PFG) was fine until it wasn’t,” she says. “I’m not sure that the CFTC, NFA or anybody can protect you completely from fraud or collapse. However, you do want to make sure that your broker doesn’t have a lot of grievances against it.”
Spot forex customers from MF Global, which declared bankruptcy in 2011, and PFG, which went under in 2012 after fraud was revealed, continue to face an uphill battle in recovering the funds they had on deposit at the two brokers. When Refco declared bankruptcy in 2005, its spot forex customers did not receive any of the funds they had on deposit.
In addition to checking the firm’s regulatory and disciplinary background, Popplewell says that now also is a good time to check the firm’s books and capitalization. “You’re concerned about capitalization because that will have a direct impact on their ability to remain solvent and is a good indication of the size of a particular company, and its ability to remain in business,” he says. “You go to the CFTC [or NFA] to look at a dealer’s capitalization levels. All this is transparent information that is publicly recorded on the CFTC website if they are regulated in the United States.”