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Lessons learned from broker bankruptcies around the world

Recently we have seen a huge wave of bankruptcy sweep through the financial markets. It is no more secret that a lot of financial institutions out there were overly exposed to the global financial meltdown and subsequently further exposed their clients to extreme risk. The market comprises of big players and small players alike, but it is interesting to note that as small market players get bigger in the business, they tend to move closer to the major players in the market – big investments banks, hedge funds, mutual funds. Basically, the big players constitute around 75% of the currency market capitalization.

In light of this, we find banks who function as brokers as well. It is unsurprising that just around 25% of market participants are private clients/traders like you and me, and this number also represents a few small trading firms.

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Looking at the structure of the market you’ll discover how tilted it is towards the direction of big players, and this is more of the reason why when things go wrong with the major players (large financial corporations), the market catches cold.

In line with this, the market has seen well established financial giants like the Lehman Brothers in the United States, Northern Rock in the United Kingdom, three banks from Iceland (Glitnir, Kaupthing and Landsbanki), and host of other smaller financial bodies across the globe. It was borne of of this that we had changes in broker regulations by the National Futures Association (NFA) in the U.S. The NFA imposed new leverage rates of 50:1 for major currency pairs and 20:1 for the crosses, away from the standard 100:1. Although, brokers that are outside the United States are excluded from this changes, this cannot be seen as a positive or negative news in anyway, but it does depend on how it is being looked at.

We know that for the winning few, such announcements mean little to them as they are always looking for better ways of staying profitable in the market. However, the losing multitude would continue to whine about such changes. Just like we find among other businesses, brokerage can go bankrupt as well. We have seen a couple such as: Refco that is based in the United States went down in October 2005; Crown Forex SA based in Switzerland went under in May 2009; PFG(a US based forex brokerage) went under in 2012; MFGlobal, a commodities, derivatives and forex brokerage. Just to name a few. Many more forex brokerages have gone bankrupt in the last few years, most were small enough that they don’t catch the attention of the general public, however traders have lost millions of dollars this way.

Lessons to Learn from All of These

We can make some positives from all the mess. To be able to look into the future with optimism, going forward one has to get a broker that places client’s funds in a segregated account away from the firm’s own capital. In the verge of collapse, there’s a good possibility that your funds can be given back to you.

It is wise to go for forex brokers that are properly registered with a regulatory body such as the FSA (Financial Services Association) in the U.K., or the Australian Securities and Investments Commission in Australia. CySEC the financial regulator in Cyprus, a popular financial hub forex brokers. The Swiss Federal Banking Commission regulates brokers in Switzerland. US based traders can go with CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association) regulated brokers.

In doing so, you’ll discover that forex brokers try to comply with the regulations by putting forward their regulatory standing on a regular basis, making it possible to track them.

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