Foreign exchange transaction risk manual

Foreign exchange transactions

The National Futures Association of the United States is a self regulatory organization of the futures industry authorized by the United States Congress. Its purpose is to provide innovative regulatory programs and services to protect the integrity of investors and the market. This manual is prepared by the American futures association to educate potential investors by providing information. The manual gives an overview of personal OTC foreign exchange market, and also includes other information that investors need to know.


Just like other investments, OTC Foreign Exchange trading is risky and not suitable for everyone. In fact, you may lose all or even more of your initial investment. Therefore, you need to understand the risks involved, have sufficient information and make wise investment decisions.

This manual does not provide investment advice. You should consult your financial advisor. This handbook may help you to have a better understanding of this market, so that you can make a decision whether you want to participate in this market or not.

Foreign exchange can be conducted in one of the following three places

One of the trading venues is an exchange regulated by the U.S. Futures Trading Commission, such as the Chicago Board of trade. The second is an exchange regulated by the stock exchange, such as the Philadelphia Stock Exchange. The third is OTC market. Individual customers directly trade with a home-to-home company. There is no exchange or unified clearing organization to support this kind of transaction. OTC foreign exchange market is subject to limited supervision.

This manual only discusses OTC foreign exchange market

OTC foreign exchange market is a huge financial market with continuous development and strong liquidity. It works 24 hours a day. This market is different from the traditional market because it does not have a central trading place. Most of the transactions are over the phone or over the Internet. The main market for foreign exchange is the "inter-bank market", in which banks, insurance companies, large companies and other major financial institutions manage the risks caused by the fluctuation of foreign exchange rate. The real "interbank market" is only open to institutions with large trading volume and high net worth.

In recent years, another OTC market has emerged, which allows individual investors to participate in foreign exchange trading. Although the prices offered in this market are different from those in the "inter-bank market", they share many of the same characteristics.
How is foreign exchange priced? Edit this paragraph back to the table of contents and use 3 letter codes for each currency. The standard codes for the most commonly used currencies are:
EUR – Euro
USD - US dollar
GBP - pounds
JPY yen
Aud - Australian dollar
CHF Swiss Franc

Foreign exchange transactions are quoted in the form of currency pairs. When you buy a currency, you sell it. The first currency in each pair is the base currency and the second currency is the currency of the quote. The exchange rate shown represents the second currency amount needed to buy a unit of base currency. For example, the ask price of EUR / USD is 1.2178, which means that the customer needs $1.2178 to buy a unit of euro.

How much money do I need for foreign exchange transactions? Foreign exchange brokers can set a minimum account opening amount. Individual traders must ask the broker for details.

Most brokers also require individual investors to make enough margin for each transaction, which is called "margin". Margin is usually a percentage of the amount of a contract and may vary in different currencies. Margin is not a prepayment or partial payment of the contract, but a kind of mortgage.

Some brokers guarantee that the loss of investors will not exceed the investment. This part includes the first account opening fund and the subsequent income. Some brokers may require investors to pay more than the investment. Investors need to read the contracts signed to see if brokers limit the scope of losses.

The risk of foreign exchange market transactions although every kind of investment contains risks, the risk of OTC foreign exchange market is likely to be great. If you are considering investing in this market, you should understand the risks involved and make wise investment decisions. The foreign exchange transactions in OTC market contain high risks and are not suitable for everyone. The funds used for such speculative foreign exchange transactions or other highly speculative transactions must be venture capital, that is to say, even if such funds are lost, they will not have any impact on your financial situation. Here are the reasons why this kind of foreign exchange trading is suitable or not suitable for you: the market trend may be contrary to your judgment. No one can accurately judge the trend of the exchange rate. The foreign exchange market is very turbulent. The exchange rate fluctuation that may occur during the period of your position opening and closing will affect your foreign exchange contract price and the corresponding profit and loss.

You may lose all your investment

Foreign exchange brokers will require you to deposit a certain amount of margin for OTC foreign exchange contracts. As discussed above, you can create a position that is much larger than the guaranteed amount with a small margin. The larger the difference between margin and contract value, the higher the financing ratio. If the exchange rate goes against you, a high proportion of financing will bring a big loss to your deposit. In fact, even if there is a small change against your position, it will bring you a big loss, including all your deposit. According to your agreement with the dealer, you may lose more than your investment.

You rely on the credibility and reputation of the broker

OTC foreign exchange transactions are not guaranteed by settlement institutions. Your income used for trading foreign exchange contracts is not protected by any regulatory authority and is not a priority for bankruptcy protection. Even if the client's funds are deposited in a bank account with FDIC insurance, the client's funds will not be protected if the broker goes bankrupt.

There is no central market

Unlike other regulated futures exchanges, the OTC market has no central market and many buyers and sellers. The foreign exchange broker decides to execute the price, so you need to rely on the integrity of the broker to provide a fair price.

The connection to the trading system may be broken

If you use the online trading system for trading, there may be some system interruption. In this case, you may not be able to place an order or modify or cancel the existing position at a certain stage. System interruption may also lead to loss of orders.

You can be a victim of fraud

Like any other investment, you have to protect yourself from fraud. We need to be alert to those who blindly promise high returns and avoid disclosure risks. You need to investigate investment opportunities carefully and carefully, and always pay attention to your investment.

Other matters needing attention

Before deciding whether to participate in the OTC market and which broker to choose, you need to understand not only how the OTC market operates, the hidden risks, but also some other characteristics of the OTC market.

Who does not have the right to supervise the CFTC.

The futures trading law allows regulated counterparties to sell foreign exchange futures and options contracts to individual clients through OTC foreign exchange markets.

Was this article helpful?

1 out of 1 found this helpful