Who Regulates the Financial Markets?
In the United States, financial markets receive general regulatory oversight from two government agencies: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). They both have similar goals: to ensure that investors and traders have enough information to make decisions and prevent fraud and abuse.
However, neither body has complete power over the markets. Much of the responsibility for proper behavior lies with the self-regulatory organizations that the brokerage firms join, and the exchanges themselves. This is not straightforward, but the overlap between these organizations appears to ensure that problems are identified early and the interests of companies, brokers and investment managers are fairly represented.
Apart from the organizations listed here, the exchanges have their own regulatory groups that ensure that traders comply with the exchange rules and regulations of other institutions. Exchanges also monitor trading in order to look for patterns that may indicate market manipulation or insider trading.
Regulating the stock market and corporate bonds
Stock and corporate bond markets are the most prominent. Regulators are active and visible because these markets have a relatively large number of relatively small issuers. There is not a single government issuance currency – there is a whole group of companies that issue shares of stock.
>>> US Securities and Exchange Commission (SEC): The US Securities and Exchange Commission is a government agency that ensures markets work efficiently.
>>> Financial Industry Regulatory Authority (FINRA): FINRA represents and regulates all stock and bond brokerages and their employees. More than 4,750 member companies, with 634,000 employees registered to sell stock. It also runs background checks and licensing exams, regulates stock trading and monitors how companies comply, and provides information to investors.
Regulating the treasury bond market
Treasury bonds are slightly different from corporate bonds. They are issued by the US government, so regulations are handled by the Treasury’s Office of Public Debt, with additional oversight from the Securities and Exchange Commission.
Derivatives market regulation
Derivatives markets have their own regulatory bodies, but they correspond to the form and sequence of regulation of the stock and bond markets. Organizations may not be household names, but their functions will sound familiar.
>>> CFTC: The CFTC is a government agency that oversees market activities in agricultural and financial commodities. It ensures that the markets are liquid and that both parties to the options or futures deal are able to meet their contractual obligations. It also provides oversight of the markets by ensuring that stock exchanges and self-regulatory organizations have adequate regulations in place, and that those regulations are enforced.
>>> National Futures Association (NFA): The NFA regulates 4,200 companies and has 55,000 employees working on various futures exchanges. It administers background checks and licensing exams, regulates futures trading and monitors how companies comply, and provides information to investors.
Trading in options on stocks is regulated by the US Securities and Exchange Commission (SEC) and FINRA, but trading in options on futures is regulated by the CFTC and NFA. Since the lines between derivative products are blurred, you may find a lot of overlap, and many in the industry expect the CFTC to merge at some point.
Foreign Exchange Regulation (Forex)
Since it is the largest and most liquid market in the world, many day traders trade in foreign exchange or forex. But here’s the problem: these markets are not well regulated. There is nothing to prevent anyone from exchanging US dollars for Canadian dollars; Tourists do this every day, often in a hotel office or retail store. No paperwork, no hassles – no censorship.
Supervision is not necessary for someone in a convenience store to buy a tube of Smarties for US dollars and get Canadian recruits in return. Unfortunately, this allowed some companies to misrepresent forex trading for day traders, causing day traders to suffer severe burns.
1. Options and futures on currencies: most currencies are traded instantly; Traders exchange one currency for another at the current exchange rate. The spot market is unregulated. But a lot of currency trading uses options and futures. Options and futures contracts on currencies are regulated as derivatives by the CFTC, NFA, and related futures exchanges.
2. Banking and Supervision: Banks are responsible for most of the forex trading, and banks are highly regulated. This means that the Federal Reserve and the US Treasury are looking after the forex markets, looking for evidence of manipulation and money laundering.