Retail Off-Exchange Foreign Currency Market

What Investors Need To Know

Companies and individuals may speculate in foreign currency exchange rates (commonly referred to as “forex”), and a number of firms are presently offering off-exchange foreign currency futures and options contracts to the public. If you are a retail investor considering participating in this market, you need to fully understand the market and some of its unique features.  NFA has prepared this booklet to educate you about off-exchange foreign currency trading.

Like many other investments, off-exchange foreign currency trading carries a high level of risk and may not be suitable for
all investors. In fact, you could lose all of your initial investment and may be liable for additional losses. Therefore, you need to understand the risks associated with this product so you may make an informed investment decision.  You should also understand the language of the forex markets before trading in those markets. The glossary in the back of this booklet defines some of the most commonly used terms.

Additional Risks Of Trading In The Forex Market

You are relying on the dealer’s creditworthiness and reputation Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer goes bankrupt.

There Is No Central Marketplace

Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.  The trading system could break down If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.

You Could Be A Victim Of Fraud

As with any investment, you should protect yourself from fraud.  Beware of investment schemes that promise significant returns with little risk. You should take a close and cautious look at the investment offer itself and continue to monitor any investment you do make.

source: NFA National Futures Association
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