ESMA’s warning against unregulated Forex firms – why now?


The EU’s new financial markets regulator, ESMA (the European Securities and Markets Authority), issued a somewhat strange and “plain-vanilla” sounding warning against dealing with unregulated Forex brokers. ESMA’s stated reasoning for issuing its warning was that it had “noticed an increase, in some EU countries, in unauthorised firms….” (Frankly, similar advice to what we give in our list of Approved Forex Firms).

Industry insiders in Europe, however, inform us that this is likely ESMA’s opening volley in what may become an effort by ESMA to tighten Forex regulation across the continent, similar to moves recently made by regulators in the US and Japan – limiting allowed leverage levels, increasing minimum capital requirements for Forex brokers, restricting certain instruments from trading, etc.

It must be remembered that ESMA, like its predecessor CESR (the Committee of European Securities Regulators), is not a regulator itself – each EU / EEA country has its own national securities regulator, such as the FSA in the UK and CySEC in Cyprus. However ESMA, which came into being at the beginning of 2011, was meant to have more powers that its somewhat toothless predecessor CESR, which was basically only able to consult to national regulators. ESMA has powers which include drafting technical standards that are legally binding in EU member states. Essentially, ESMA cannot force national regulators to adopt certain regulations, but it can make formal suggestions which – if not adopted – can put a national regulator in an uncomfortable position.

ESMA’s initial priorities seem to have been with the (mainly U.S.-based) credit rating agencies, which Europeans seem to still blame (in part) for the 2008 financial crisis (i.e. things which should not have been rated “AAA” were, and were relied upon by many European investors), as well as the current Euro crisis and market volatility. New legislation in Europe requires credit rating agencies to disclose how they determine risk, and forces changes in their own internal corporate structure and reporting lines, to address conflicts of interest.

Now that certain issues with the credit rating agencies seem to be resolved, ESMA may be looking at the Forex world to make its next mark, as it continues to establish itself and its relative power within the somewhat complicated EU regulatory system.

A good overview of ESMA and its powers can be found here.

For more on Forex regulation in Europe, the U.S., China and elsewhere see the LeapRate-Dow Jones Forex Industry Report for 2011.

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ESMA's warning against unregulated Forex firms – why now?

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