What is foreign exchange (forex) investment, or forex trading?
The forex market, also known as FX market is a decentralised international network with no settled or physical location that trades in all the world's currencies. It is an over-the counter (OCT) market where intermediaries make their negotiations directly with each other. The participants of the forex market buy sell and/or trade in currencies.
The trade in currencies can be made easily by the retail investor through the use of the internet by entering the market using electronic online trading platforms which are available by forex brokers.
Because of the complexity of the trading products and the considerably high risk involved in the particular market, investing in the forex market is targeted for risk aware investors with sufficient knowledge of the market procedures. Potential investors should seek independent advice from an independent financial adviser as well as a lawyer before entering into a contract with a broker.
The main risks associated with forex trading
Forex transactions are not straight-forward. Thus, it is advised for an investor to exercise care, set out his investment objectives and take into consideration his risk strategy and his experience before entering into such transactions.
The investor must always take into account the fact that exchange rates are influenced by several, not exhaustive factors which are differentiated by political and economic situations. The changes of exchange rates will affect the investor's contract and consequently his gains and/or losses.
Despite the fact that leverage can increase the returns of your investment, it can also work in the opposite way and produce magnified losses. Thus, investors are strongly advised not to invest money which they cannot afford to lose.
Marketing and advertising techniques
It is often observed that advertisements and promotions offered can be misleading and may encourage the investor to become part on an investment scheme without exercising the necessary care in order to make clear the risks and fees associated. It is important for the investor to carefully read and comprehend the marketing material and the subsequent contract and legal documents.
Unauthorised and unregulated firms
Some firms are not regulated and are not authorised to provide legitimate forex services and products. Some of those firms do not specify whether they are regulated and under which regulatory authority or falsely indicate to be regulated by the European Securities and Markets Authority (ESMA), which however does not authorize or regulate any type of investment firm. The authorization and regulation of investment firms in the EU is made by the regulatory authorities of the EU Member States. An unauthorized firm does not have to comply with investor protection rules such as safeguarding of client assets, clear information, disclosure of risks, suitability and complaint handling.
In Cyprus the relevant authority is the Cyprus Securities and Exchange Commission (CySec) which keeps an updated list of the Investment Firms regulated under its authority and is published in their website.
Protection of Investors
Safeguarding of client assets
The safeguarding of clients assets is an important objective and the investment firms in order to ensure the reasonable safety of clients assets maintain internal control programs which detect and prevent 1) fraud, 2) violation of regulatory rules and regulations and 3) risks due to errors in day-to –day business processes. One way of securing those assets is by ensuring that client funds which belong to them are deposited in an account or accounts that is/are separate accounts from those used to hold funds which belong to the Investment Firm. Essentially, an Investment Firm ought to keep such records and accounts in order to enable at any time to distinguish assets held by each client and by their own assets.
The investor must receive clear information related to his transactions, commission fees and charges. An investor must also receive clear information in respect of the risks involved and the price quotes intended to be used in his transactions. Usually, in respect of price quotes, the firm will provide an online tool which could be used upon request. On the other side, the investor must provide his real and correct personal, conduct and credit/debit card information.
Disclosure of risks
Usually the risks involved are disclosed in the Terms and Conditions of the Client Agreement.
The Investment Firms usually state that they offer online trading facilities only to individuals with sufficient knowledge and experience in the field and in financial matters, who are able to acknowledge and evaluate the risks and merits which are engaged with the potential transactions involved thus limiting their liability. Some firms in order to ensure the knowledge of their clients ask them to pass a 'client suitability test'.
The client should have in mind that the forex broker should have an internal complaint procedure which he is advised to follow in the case where an error or failure is detected. In accordance with the complaint management procedures of CySec, the applicable Laws, Rules and Regulations the Investment Firms must keep a record of complaints and measures taken in respect of complaint resolution.
Complaints handled by CySec and Legal Measures
A client of a CIF has the right to make a complaint in the Department of Market Surveillance and Investigations of CySec. An online form can be filled in with the details of the complaint, the investor and the CIF. It has to be noted that the client in order to be able to submit such form he must first address to the internal complaint controls of the CIF.
The contract formed between the Client/Investor and the Forex Broker/CIF is a binding contract under private law. Thus, a violation of the agreed binding Terms and Conditions, a bias behavior or an inability to provide the agreed services may raise the possibility or the necessity of taking legal measures. In such situation of injustice and after making the relevant complaints the investor is advised to seek legal advice.
To sum up the Investor has to be careful in his forex investment and all his decisions have to be subject to his knowledge and the risk he is willing to take. Before entering into a contract with a forex broker he must fully comprehend the binding Terms and Conditions and the consequent rights and obligations of each party.