Difference between Canadian and US Forex markets

Forex trading in Canada has made significant leaps over the years. This can partly be due to the Canadian Dollar being classified as a major currency in the world; a decision which led to an increasing in Canadian Forex traders. The United States, on the other hand, has been a frontier in the  Forex market due to the strong regulations imposed by the National Futures Association unlike Canada which has relatively weak regulations. You can simply head over to Topbrokers.com portal to find a comparison between the US and Canadian Forex brokers. What distinguishes Forex brokers and the overall market from these countries?

  • Regulations
  • Investor protection
  • Freedom of choice
  • Features
  • Regulatory Authority

The regulation authority in a country plays a crucial role in enhancing or discouraging Forex trading. Countries such as the US impose heavy regulations on Forex brokers as a way of ensuring that Forex traders can safely invest their funds. Pursuant to the Dodd-Frank rules, the CFTC requires companies acting as Forex brokers to always maintain $20 million as the minimum capital. They are also expected to maintain 5% of any liabilities to Forex traders in a brokerage firm that surpass $10 million.

Forex traders in Canada, on the other hand, are allowed to trade currencies using any overseas platform which need not have a regulatory license from the country. This not only increases the options for Canadian traders but also enhances competition in the retail currency trading industry. However, it also exposes Canadian traders to scam brokers from other jurisdictions who might take advantage of these rules to defraud other individuals.

  • Investor protection

Canada investors are generally more protected than traders from other countries. The country has the Canadian Investor Protection Fund which offers Forex traders up to $1 million as guarantee in the event that a brokerage firm is liquidated or goes bankrupt. Investor protection is relatively higher in Canada as compared to other countries such as the UK where the FCA can only compensate £50,000 when a Forex broker is liquidated.

Investor protection in the US is largely guaranteed by the large amount of minimum capital that Forex brokers are expected to hold. Furthermore, a leveraging limit of 50:1 on major currencies and 20:1 of minor currencies has also been imposed to ensure inexperienced traders do not take too much risk while trying to make a profit.

  • Freedom of choice

A significant difference between US and Canadian brokers is the level of freedom that each trader enjoys. As stated above, Canadian investors are free to select their preferred Forex broker who should not necessarily have a regulatory license from Canada. This means that Forex traders from Canada are free to sign up to any Forex broker around the world. While this is a great privilege to the investors, it also come with certain perils such as the risk of losing money to unregulated Forex brokers.

  • Features

Each broker will often have their features including policy on swaps or rollovers on leverage which inform how the broker executes the trades. Most brokerage firms, whether in the US or in Canada, have almost similar features relating which include the types of platform, leverage and minimum deposits. These features will largely depend on the services being offered by an individual broker.

  • Advantages and Disadvantages of Canadian Forex Market

One of the primary advantages of investing in Canada is the high level of safety that is accorded to currency traders in the country. Safety of capital invested has been one of the main concerns of Forex traders around the world. In Canada, the CIPF guarantees a compensation of up to $1 million in the event that a Forex broker goes bankrupt due to a volatile market. While most regulators consider the impact of market volatility when making policies, it is worth remembering that no brokerage firm can be fully guaranteed against liquidity.

Since traders can choose an appropriate Forex broker from the high number of brokers in the market, the minimum deposit is $1, which is offered by some brokers. Furthermore, there is no maximum limit imposed which means that brokers can offer more leverage. Novice traders in Canada are, however, advised to use a lower leverage as it may also magnify their losses.

Although the CIPF offers a higher guarantee to traders, a persisting challenge with Canadian traders is that they are susceptible to fraud. The country has a number of regulatory bodies but they cannot regulate overseas brokerage companies. Furthermore, lack of strict regulations enhances competition in the country which may hurt the local Forex brokers.

  • Advantages and disadvantages of US Forex market

The US has reliable regulatory agencies and framework which guarantee safety of funds for their investors. The National Futures Association is an independent and powerful agency that enforces the highly regulated framework in the US. This, in turn, builds investor confidence and trust in the US Forex market as the NFA always acts in the interests of the currency trader as opposed to the Forex broker.

Another benefit of investing with Forex brokers in the US is that they are required to hold high amounts of operating capital, which means that they will not have any challenges in processing deposit and withdrawal transactions. It is for this reason that US brokerage firms are well-known for  their timely payments.

A regulated market also makes it a safe one. One common problem with Forex trading is the belief that you can easily trade a couple of bucks and make millions in profit. As a result, a significant number of individuals will speculate on the movement of the FX markets but they end up making losses. In the US, the CFTC has placed rules with regards to using high leverage, hedging and other high-risk strategies that traders use recklessly.

Lack of freedom is, however, a major disadvantage for US traders. Although the FX regulating agencies in the country may have sufficient reason to institute such restrictive rules and practices, it also reduces the ability of a trader to play the market. The rule against hedging, for example, prevents traders from buying and selling a similar currency pair which is common among trader when the market conditions are volatile.


Posted in: Personal Finance

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