ESMA declares need for involved market guidelines

Regulatory system should be based on tighter guidelines, as governance is questioned within forex markets

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While forex trading has grown exponentially over the past few years, many have argued that regulatory changes have not kept pace. This has resulted in a market with thousands of individual traders buying and selling currencies, often with little education, training or experience. Unfortunately, in these types of markets, fraudsters can move in, separating the less knowledgeable traders from their money.

Among other things, MiFID allows oversight of a financial services company by the regulatory body of the country where the company is headquartered. Firms are also required to be very transparent in the brokerage services they provide to clients. Once regulated under MiFID, however, a firm can accept clients’ from other eurozone states once the firm is authorised to operate in that country.

However, even after instituting the safeguards available under MiFID, unregulated brokers were found to be operating without proper protection for clients’ assets, or disclosing the risks associated with FOREX trading. These same firms often had an extremely poor track record when dealing with customer complaints. While the European Securities and Markets Authority, or ESMA, does not specifically regulate firms, some brokerages have falsely claimed to be registered with them.

According to the Financial Services Commission, ESMA recently issued its first warning to investors regarding the risks involved in FOREX trading. These include the complexity of the trades, the capital risk, misleading adverts and the necessity of a thorough education prior to trading.

ESMA plans to go even farther than that and has proposed further regulation to protect investors. A revision to MiFID will empower regulators in each European Community as well as ESMA to protect investors by banning certain products. Because so many “retail investors” are now participating in FOREX markets, the dangers to these investors are more serious than ever before.

ESMA’s proposal at the end of 2011 was only the first step. The Authority is developing guidelines for exchange-traded funds and other commodity markets aimed specifically at the “retail” investor, as opposed to the traditional institutional investor. ETFs, are the primary focus of the regulations under development. New investor protections are being drafted that will cover a broad range of products, including ETFs, and apply similar regulations and reporting requirements to various “families” of investment vehicles, rather than separate rules for each specific type of investment.

ESMA has stated it is in favour of a “level regulatory playing field for all retail investment products in term of disclosure and selling practices.” Implementation across all European Community countries will take some time, as many have made progress on their own toward more transparency, but it is to be hoped that within a short time widespread regulations will be in place to protect investors and make these investments much more transparent.