I briefly alluded to the fact that there is little to no regulation of the Forex market. The market is run on an international scale, and since there is no international government, it is virtually impossible to monitor the legal goings-ons of the market. This does not mean that the market is anarchic, though. What little oversight that goes on is conducted on a nation by nation scale. Certain conventions are followed for the most part with a handful of independent regulatory institutions handling the more complex transactions, mainly the futures market, within their respective countries. Spot trading, to this day, remains free of regulation. This hands-off market is known as the over-the-counter (OTC) market.
A year after the advent of the modern foreign exchange market in 1971, the International Monetary Market (IMM) emerged. Connected to the Chicago Mercantile Exchange, the IMM’s purpose is to oversee the futures market. This includes currency futures contract and options on futures. Their main activities are ensuring that contracts between parties are facilitated and followed through.
The Commodity Futures Trading Commission, which was authorized by the United States government in 1974, is an independent agency with the ability to fine, suspend, and sanction companies and individuals in violation of their futures contracts. Although independent, they are overseen by the US Congress. In theory, this organization monitors all currency futures accounts dealing with the US Dollar. The CFTC also publishes data weekly on earned interest in market segments with 20 or more participants.
Of course, because the OTC market is so unregulated, scams and fraud are much more likely. The CFTC lists several items to beware of in order to avoid Forex scam:
- Stay Away From Opportunities That Sound Too Good to Be True
- Avoid Any Company that Predicts or Guarantees Large Profits
- Stay Away From Companies That Promise Little or No Financial Risk
- Don't Trade on Margin Unless You Understand What It Means
- Question Firms That Claim To Trade in the "Interbank Market"
- Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
- Currency Scams Often Target Members of Ethnic Minorities
- Be Sure You Get the Company's Performance Track Record
- Don't Deal With Anyone Who Won't Give You Their Background
(List taken from http://www.cftc.gov/opa/enf98/opaforexa15.htm)