The benefits of unregulated FX derivatives trading venues come at the expense of reduced customer protections resulting from a lack of comprehensive regulatory oversight, according to a white paper published by The Foreign Exchange Professionals Association (FXPA).
Going by the name of “Regulated FX Derivatives Trading Venues: Promoting Fair and Orderly Markets“, the paper concludes several months of work by FXPA’s Trading Platforms Working Group.
Focused on the varying structures of trading venues, the potential impacts on market integrity, and the benefits of regulatory oversight for these venues, the report explores the potential risks posed by the current, uneven playing field that exists between regulated and unregulated trading venues operating in over-the-counter FX derivatives markets.
Regulatory status affects market surveillance, trading practices, and affiliated market makers
Trading venues are crucial to global currency markets. As regulations evolve, these venues must also adapt, the FXPA says. The current foreign exchange (FX) derivatives market includes both regulated venues, which operate under global regulatory bodies, and unregulated venues, which may engage in activities requiring oversight but lack formal regulation.
“While unregulated venues might offer benefits such as higher leverage, lower deposit requirements, and fewer fees, these advantages often come at the cost of reduced customer protections due to the absence of comprehensive regulation. This creates the risk of regulatory arbitrage in FX markets and raises concerns about market fairness and integrity,” said the report. “Traders must understand the regulatory status of the platforms they use, as this affects key issues like market surveillance, trading practices, and the role of affiliated market makers.”
The white paper from the FXPA examines the structure of over-the-counter (OTC) FX derivatives trading venues, focusing on their impact on market integrity and the advantages of regulatory oversight.
Regulatory arbitrage is an issue
The FXPA warns that unregulated FX platforms also introduce the potential for regulatory arbitrage, where participants exploit differences in regulation to avoid compliance, further compromising market fairness. This lack of oversight affects important market factors such as permitted trading practices, market surveillance, and the presence of affiliated market makers.
Another key concern raised is the competitive imbalance between regulated and unregulated venues. Regulated platforms face significant operational costs due to compliance with transparency, surveillance, and customer protection regulations. In contrast, unregulated venues avoid these expenses, allowing them to operate at a lower cost and potentially offer more attractive terms to customers. This imbalance can drain liquidity from regulated markets, further weakening their effectiveness and reducing price discovery.
The white paper emphasizes that while unregulated venues may seem advantageous in the short term, they pose serious risks to both individual participants and overall market integrity. The FXPA calls for greater regulatory oversight to ensure a level playing field and protect the interests of market participants.
