Tightened rules could lead to smaller forex players joining forces, as well as promoting greater transparency across the industry
The rapidly increasing popularity of online forex markets has come at a time when much of the financial services industry has come under pressure to adhere to tighter regulations. While other markets have signed up to a series of new rules designed to improve transparency and trust with investors, the world of online forex brokers has proven somewhat harder to police.
In light of the Libor scandal that saw banks manipulating interest rates, some expect currency rates to begin being overseen by global regulators. One group, the Madrid-based International Organisation of Securities Commissions (IOSCO), has said that it might propose new guidelines that would improve transparency in the coming months. The IOSCO earlier in the year had suggested that it wanted to see rates used in currency markets subjected to more regular audits, increased regulatory oversight and a clearly defined code of conduct.
Elsewhere, the UK’s FCA is investigating the potential manipulation of the forex markets – worth a reported $4.7trn a day – having been contacted by a whistleblower earlier in the year.
According to Chantal Hughes, a spokeswoman for the EU’s Financial Services Commissioner Michel Barnier, a standardised framework for currency benchmarks is necessary to ensure confidence is restored to financial markets: “All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence. We will also be making a proposal this summer on the framework for benchmarks.”
In Europe, the new Markets in Financial Instruments Directive (MIFID II) is causing consternation among currency managers and their willingness to participate in retail forex markets. In particular, some are concerned about the incoming rules regarding client protection requirements, which states that firms offering investment services to retail clients must make sure that the client fully understands the product they’re trading.
Another potential consequence of increased scrutiny from regulators is consolidation within the industry. While there are many independent brokerage firms, especially in Europe, there are few big hitters in the industry. According to one industry expert, as firms conform to tighter regulations, smaller players won’t be able to spread themselves so thinly across the continent.