Which Regulations Govern the Operations of Prop Firms? - Prop Firm Hero (2024)

In the world of finance, proprietary trading firms, commonly known as prop firms, play a unique role. These entities trade their own capital, distinct from client-based brokerages, exposing them to a different set of regulatory frameworks that govern their operations.

The financial regulatory landscape is categorized by a series of stringent rules and standards designed to uphold the integrity of the markets and protect the interests of all market participants.

As a proprietary trader or someone interested in the operations of prop firms, it’s essential to understand the complex milieu of compliance obligations.

Registration with financial authorities, capital adequacy requirements, adherence to risk management protocols, and implementation of anti-money laundering (AML) and know-your-customer (KYC) policies are just a few components of the regulatory fabric.

Furthermore, given the global nature of trading, prop firms must consider international regulations that could influence their activities, no matter where they are based.

Key Takeaways

  • Prop firms engage in trading with their own capital and face a specific set of regulations.
  • Legal compliance includes registration, capital requirements, risk management, and AML/KYC policies.
  • International regulatory environments impact prop firms’ operations worldwide.

Regulatory Framework

Your proprietary trading firm is subject to a stringent set of regulations to promote transparency, fairness, and stability in financial markets. Below, you will find key regulators and their specific rules that you need to follow for compliant operations.

Securities and Exchange Commission (SEC) Regulations

The SEC oversees all aspects of the securities industry and requires your firm to register with them if you trade securities. You must adhere to the SEC’s rigorous reporting standards, which include the disclosure of financial information and trading activities to avoid fraudulent practices. Compliance with the SEC’s rules helps protect investors and maintain orderly market functioning.

Financial Industry Regulatory Authority (FINRA) Rules

As a member of the FINRA, you are obligated to follow its rules and guidelines. This involves undergoing regular audits and adhering to its best practices to prevent market manipulation and conflicts of interest. FINRA focuses on maintaining the integrity of the market, and as a prop firm, your trading activities will be continually monitored for compliance.

Commodity Futures Trading Commission (CFTC) Regulations

Under the CFTC, your firm must comply with regulations if you trade in futures or options markets. The CFTC ensures the protection of market participants from fraud, manipulation, and abusive practices related to derivatives and other financial products regulated by the Commodities Exchange Act. Your firm’s adherence to these regulations is critical to your ongoing operations and reputation.

Operational Compliance

As you navigate the complexities of proprietary trading firm operations, understanding the nuances of regulatory compliance is crucial. These regulations aim to ensure the integrity of financial markets and protect clients’ interests.

Capital Requirements

Your firm must meet specific capital requirements set by regulatory bodies to manage risks effectively. These standards are structured to maintain your firm’s solvency and depend on your trading activities’ nature and scale.

For instance:

  • Minimum Capital Thresholds: You must maintain a baseline amount of capital.
  • Risk Management: Capital levels should align with the risk profile of your trading strategies.

Client Fund Protection

To safeguard your clients’ funds, you’re mandated to adhere to segregation and protection rules, such as:

  • Segregation of Funds: Your clients’ funds must be kept separate from your firm’s assets to prevent misuse.
  • Protection Schemes: Enrollment in compensation schemes is vital to cover clients in the event of your firm’s failure.

Audit and Reporting Obligations

Regular audits and precise reporting are non-negotiable to comply with regulatory standards:

  • Audit Requirements: You’re required to undergo periodic audits by independent and certified auditors to verify financial compliance.
  • Reporting Standards: You must provide timely, accurate reports on trades, financial status, and compliance with market rules to regulatory authorities.

International Considerations

When you operate a proprietary trading firm, understanding and complying with international regulations is crucial. Your firm’s global activities must align with the relevant regulations to ensure legal and ethical trading practices.

MiFID II in the European Union

MiFID II, or Markets in Financial Instruments Directive, is a legislative framework instituted to increase transparency and regulate financial markets in the European Union.

As a prop firm operating within the EU, you must meet MiFID II’s requirements for:

  • Reporting transactions to national regulators for monitoring.
  • Ensuring markets operate smoothly and protected from excessive risks.
  • Adhering to specific investor protection rules.

Financial Conduct Authority (FCA) in the UK

In the UK, the FCA serves as the autonomous regulatory body for financial firms.

If your firm is UK-based or deals with UK markets, compliance with FCA guidelines ensures you maintain:

  • Integrity in financial markets by detecting and preventing abusive trading practices.
  • Consumer protection through fair and transparent business conduct.
  • Adequate capital reserves and risk management strategies.

ASIC in Australia

The Australian Securities and Investments Commission (ASIC) oversees financial services and markets in Australia. ASIC mandates compliance with:

  • Licensing requirements for financial services firms.
  • Market integrity rules to promote fairness and transparency.
  • Responsibilities towards the prevention of fraud and improper financial dealings.
Which Regulations Govern the Operations of Prop Firms? - Prop Firm Hero (2024)


Which prop firms are regulated in US? ›

OANDA, Axi, and Hantec Markets are three regulated forex and contracts for differences brokers that launched prop trading services.

Is MetaQuotes banning prop firms? ›

MetaQuotes, the developer of popular trading platforms MetaTrader 4 and MetaTrader 5, is cracking down on several prop trading firms such as Ftmo, the5ers, etc., and forcing many brokers to terminate their services (if these firms do not comply). This decision has had a negative impact on most prop traders in the US.

Is FTMO a prop firm? ›

FTMO is one of the most reliable firms in modern prop trading industry.

What are the problems with prop firms? ›

Limited Control Over Capital and Payouts:

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

Who regulates prop firms? ›

To be able to do that, you'll need to adhere to the US prop trading regulations and get licenses from the SEC and FINRA.

Who regulates prop trading firms? ›

The Securities and Exchange Commission (SEC) rule change requiring FINRA membership for virtually all proprietary firm broker-dealers. The SEC's proposed rules requiring broker-dealer registration for many currently unregistered traders.

Why is FTMO banned in USA? ›

FTMO have now restricted access to all new US-based traders as of January 2024. This appears to be related to regulatory issues and may have something to do with the recent My Forex Funds case.

Why is MT4 banned in America? ›

The two MetaTrader apps were banned on Apple's App Store in 2022 for their alleged use by fraudsters targeting the US citizens and residents.

Will prop firms be banned? ›

The speculation now is that the governing bodies and regulators will put a ban on the whole prop firm industry – which is not going to happen. The prop firm industry has been alive, well and regulated for decades. It's only the online prop firm space that is yet to see regulation.

Is FTMO regulated and legit? ›

FTMO is generally considered a legitimate prop firm, but it's essential to do your own research based on the trading strategies you would like to use. However, I recommend considering True Forex Funds as a reliable alternative for trading.

Are prop firms legal? ›

The legality of Prop firms has been a topic of debate. Regulations like the Volcker Rule and the Dodd-Frank Wall Street Reform and Consumer Protection Act have made it more difficult for banks to engage in proprietary trading.

What is the cheapest prop firm? ›

Best cheap forex prop firms
  • FTMO: evaluations starting at $399.
  • TopStepTrader: Challenges starting at $375.
  • T4tCapital: Flexible evaluation options starting at $299.
  • Funded Trading Plus: Starting at $25.
  • Earn2Trade: $99 Mini challenge.
  • True Trading Group: $49 evaluation with a $25,000 virtual account.
Feb 27, 2024

Which is the most trusted prop firm? ›

Best Prop Trading Firms 2024 - Reviewed by Experts
  • FTMO.
  • E8.
  • City Traders Imperium.
  • Fidelcrest.
  • LuxTradingFirm.
  • FundedNext.
  • The Funded Trader.
  • Audacity Capital.
Feb 2, 2024

How is prop firm income taxed? ›

You cannot classify as capital gains on trading at a prop firm as you are independent contractor and thus it is self employed income, meaning there is sales tax to be paid when you make declaration of your yearly tax income.

Is FTMO allowed in the US? ›

Unfortunately, at present, we are not able to do that in the United States due to specific conditions in the market segment there. Therefore, we have decided to suspend the purchase of the FTMO Challenge for our new and existing US clients (nationals), just as we put a hold on onboarding new US clients.

What is the best prop firm for Americans? ›

Best US Prop Firms
  • SurgeTrader – Best For Managing Big Capital Without Scaling.
  • My Funded FX – Best for Diverse Traders.
  • TradeDay – TradeDay is Best For Learning from Experts.
  • TopStep – Best For Trading Futures.
  • Earn2Trade – Best for Guided Futures Learning Paths.

What is the most trusted prop firm in the world? ›

Overview: Apex Trader Funding is the best futures prop trading firm on this list for a variety of reasons, but most notably because it boasts the highest pass rate for its evaluation program out of all the futures prop firms on this list. It is also by far the most friendly option for beginner futures traders.


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