Leverage for CFDs is expected to become much tougher in the European Union (EU). In a statement released on March 27, the European Securities and Markets Authority (ESMA) has finally made its announcement on the matter of contracts for differences (CFDs) and binary options to retail traders.
The new leverage levels will depend on the underlying financial asset but the strictest cap is expected to be applied on cryptocurrency CFDs. Other major instruments are facing significantly tougher regulations from the EU as well and could see leverage caps at 5x to 30x – unless traders declare themselves as “pro trader” (see below). Despite new regulations coming into effect only in a couple of months, feel free to contact us if you need help dealing with the situation. If You trade with XM via Elite CurrenSea you are eligible for an access to premium telegram group & award-winning trading systems (€600 free value). Furthermore, If you are interested in the ways you can increase your leverage, reach us out.
For an updated statement from XM scroll down or follow use this link.
Brokers to roll out the changes starting July 29th. Therefore, all new positions opened after July 28th will be opened with up to 1:30 leverage based on the instrument, leverage on open positions should remain unchanged.
5 New Rules by ESMA
ESMA announced its final proposal on 27th of March, 2018 and decided to opt for some drastic changes, including large reductions to the leverage levels. This decision was taken despite consultation completed earlier this year where a significant majority of the trading industry advised ESMA not to implement major changes to the leverage limits.
You will find the main implications below, including analysis of each provisions plus early comments from the PR teams of brokers.
- Leverage limits:
- 1:30 for major currency pairs;
- 1:20 for non-major currency pairs, gold and major indices;
- 1:10 for commodities other than gold and non-major equity indices;
- 1:5 for individual equities and other reference values;
- 1:2 for cryptocurrencies.
- A margin close out rule on a per account basis.
This is set to standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs.
- Negative balance protection on a per account basis.
This will provide an overall guaranteed limit on retail client losses.
- A restriction on the incentives offered to trade CFDs.
- A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
How Does it Impact Traders?
The ESMA regulator’s chair commented on the regulatory move: “The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors.”
The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors.
There’s unverified information about how traders could make sure to keep access to a leverage ratio of 1:100, but its limited and not conclusive. Nenad and Chris are currently investigating the situation to clarify when higher leverage would be allowed and applicable.
We will keep updating the information here to make sure all traders who follow Elite CurrenSea have an understanding of the situation and are prepared when the regulations come into effect later in 2018.
Of course, we also appreciate any thoughts and feedback on the situation in the comments below and via the contact form.
A Pan-EU Approach to Regulating Financial Trading in European Union
The change to regulations was long coming… Ever since the free flow of goods and services was established in the EU, numerous companies settled in areas with milder jurisdiction (Malta, Cyprus, Estonia) while benefiting from being part of the EU umbrella.
They were able to offer cross-eu/worldwide services through passporting – a method that grew old with EU “hegemons” (Germany, France, Netherlands) as years ago their respective bodies placed a tighter grip on the wild-west of trading.
The combination of the promise of high returns and easy-to-trade digital platforms has created an offer that appeals to retail investors, especially in an environment with historically low interest rates. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.
“A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue,” the head of ESMA, Steven Majoor, elaborated.
Lower Leverage and Requirement to Disclose Losing Clients
To make up for the smaller leverage, we might see a bigger effort from brokers to offer additional value in a form of better tools, market research, and commissions transparency.
Disclosing the statistics from losing clients, however, could perhaps prove to be tricky… Time will tell to which extent brokers will indeed show this info.
Savvy traders already are aware that many traders lose money at some point during their trading… Many of whom continue losing. Whether disclosing this information will make any difference remains to be seen.
Binary Options Prohibition
The announced prohibition on marketing and other aspects is needed to protect investors due to the characteristics of binary options trading.
In fact, some consider the decision somewhat late as many people behind binary have probably moved to another activities. Let’s see if the EU regulations can come in time to protect investors against ICOs and cryptocurrency related products.
How Does it Impact Brokers?
Although it’s too early to say, some of the bigger companies might be in an a bit of pickle… they are forced to choose from 2 option:
- They would either need to abide and potentially lose clients seeking bigger leverage to offshore jurisdictions OR
- Risk reputation by engaging in infrastructural and legal changes to cater to the needs of EU traders.
Part of the equation will certainly depend on the reaction of the EU consumer. Consumers might understand the necessity for change towards a bigger safety nett and smaller risks. If they do, they might decide to increase investments (trading capital) to match the margin levels circa 2017.
We’ve reached several EU regulated brokers for the early comments and will updating this article as new info arrives.
The Company acknowledges ESMA’s announcement noting it already operates in compliance with most of these regulatory changes.
Plus 500 is confident that the changes will bring positive outcome to the industry in the long run. Given the very strong start to 2018 trading, the Board believes there will be a limited impact on 2018’s expected financial performance.
The Board will assess the potential impact on future years, but believes that Plus500’s highly flexible business model and global diversification with seven licenses in different jurisdictions, five of which are outside Europe, provide confidence in the Company’s future prospects.
Plus500 is confident that it will be able to mitigate the impact of these changes since it is already attracting experienced customers that can be categorised as professionals.
Plus500’s trading platform has been developed in-house based on proprietary technology that does not rely on third party software suppliers and is supported solely by its internal technical expertise.
This structure enables it to expedite implementation of regulatory changes efficiently and react quickly to dynamic market developments, representing a significant competitive advantage. The Group also has a relatively low cost base which enables it to flex efficiently to market conditions.
Asaf Elimelech, CEO, commented:
“The new regulations are broadly as expected and can be implemented rapidly by Plus500 due to our industry leading in-house technology. We are already compliant in most of the areas targeted, will adapt our business model where changes are required and will continue to mitigate the impact due to our geographical diversification outside Europe. We believe the changes will be to the benefit of industry leaders such as Plus500 and to the detriment of the long tail of smaller and less compliant industry operators, resulting in a better outcome for CFD customers.
We recently announced record results for 2017 and a very strong start to 2018, and are confident that we can become the market leading CFD provider based on new market opportunities and our excellent current performance.”
Plus500 LTD Stock Performance
Asaf Elimelech has something to be confident from. The company showed a very strong yearly growth, and judging by the stock price – should not find the regulation damaging its shareholders value proposition. In case like this, Market confidence could be a strong indicator in the time of changes.
CMC Markets Plc (“CMC”) notes the announcement by the European Securities and Markets Authority (ESMA) issued today. CMC will use its technology meet all the requirements. CMC will amends its standard risk disclosure and is proud to never withholding the information from its stakeholders.
Binary business accounted for £2.1m revenue, mostly from UK and EU, and the reduction should be subtle in the context of the Holding Group.
Margin changes are likely to have an impact on how clients trade, although at this stage it is not possible to quantify the impact. However, CMC remains confident that its strategy of targeting high value, experienced clients that could be categorised as ‘elective professionals’, puts it in a strong position to manage regulatory change.
CMCX Stock Performance
Overall CMC had a good 2017 as well, although investor’s confidence is still recovering from the drop in the end of 2016. CMC Markets services and positive community feedback makes this company a one to watch.
IG Group Holdings plc (LON:IGG) has stated that it is pleased with the efforts of the regulators to bolster client outcomes but voiced its disappointment with the regulators’ decision to proceed with what the broker called “disproportionate leverage restrictions”.
In a filing with the London Stock Exchange, IG warned that the leverage restrictions “will unduly restrict consumer choice, and risk pushing retail clients to providers based outside of the EU or to use other products which allow the leverage clients seek. This may result in poor client outcomes”.
IG does not believe there will be any financial impact from the implementation of the measures in the current financial year, FY18.
The company, however, expects that its revenue in FY19 will be lower than that expected in FY18, primarily reflecting the impact of the regulatory changes in the UK and EU. Also, IG’s revenue in FY18 year to date has benefitted from the volume of client trading in cryptocurrencies which is unlikely to be as strong in the next financial year. IG expects to return to growth after FY19.
IG GROUP HOLDINGS Stock Performance
XM reply indicates the full compliacne with the ESMA regulatory decision. See the full reply below:
The following measures will be applied to all XMCY and XMUK retail clients. Leverage limits on the CFDs by a retail client from 1:30 to 1:2 which vary according to the volatility of the underlying:
- 1:30 for major currency pairs
- 1:20 for non-major currency pairs, gold, and major indices
- 1:10 for commodities other than gold and non-major equity indices
- 1:5 for individual equities and other reference values
- 1:2 for cryptocurrencies
Please note that this will be FIXED margin in our case. Retail clients will no longer be able to select their margin and in jManager you will see leverage 1:30 for all retail clients. This will affect existing and new positions.
If You trade with XM via Elite CurrenSea you are eligible for an access to premium telegram group & award-winning trading systems (€600 free value). Furthermore, If you are interested in the ways you can increase your leverage, reach us out.
We’ve reached out to FXDD to see what the broker with minor EU presence is doing regarding the new rules. We are expecting to hear from FXDD shortly.
Victor Gherbovert, Jens Chrzanowski and Mindaugas Deksnys voiced that Admiral Markets is well-prepared for the new generations, saying:
Admiral Markets always saw the balance between risks and opportunities and welcomes the negative balance protection for retail clients, which is quite near to the protection policy that we’ve offered under AM UK Ltd. for a long time already.
However, the board also argued:
“We are disappointed that ESMA’s decision to restrict leverage is so harsh – we still believe that a variable leverage, which Admiral Markets has offered for a long while, could be more appropriate – “let the client choose and decide”, even today our clients could choose only a leverage of 10 for Forex trading, for example.”
Admiral Markets has also suggested that there could be potential changes the way brokers charge clients:
We will review if we, or maybe the whole industry, need to change conditions: higher spreads or a (flat) order fee could also be an answer for the industry to continue to gain revenue. But it’s clear, the whole industry will be affected.
Overall, the Admiral Markets Board seemed confident in whatever decision the industry will come up with as a repsonce to stickter rules.
The Cypress-based broker wasn’t available for comments to our questions. We will keep updating you on the communication, as new information arrives.
The company seemed to welcome the changes as the new regulations are designed to protect retail clients, arguing:
That is in line with Land-FX’s core values. Our UK entity may have some work to do in response to the new EU regulations. However, other entities will be intact from the ESMA rulings.
The company also commented on whether they believed that similar regulations will follow in other jurisdictions?
We are a global company with licenses in multiple jurisdictions and that puts us in a unique position where we need to monitor and prepare for any regulatory issues within the industry. It is hard to tell whether others will follow suit but we feel that it will depend on the outcome of the first phase of the ESMA implementation.
Land-FX also weighed in on the likelihood of EU clients moving off-shore:
There can be some EU clients moving to companies offshore if they are unhappy with the lower leverage proposed by the new regulations. However, we do not think there will a large exodus as the retail clients generally prefer local brokers. The industry will have to rethink how to attract retail customers in light of tighter regulations regardless of where they operate. Ultimately, is up to the discretion of EU regulators and will depend on how the new ruling pans out for the time being.
We will be showing the combined statistics required by the new regulations on our website in the form of best execution disclosure. No terms and conditions will change in relation to the disclosure. We have gathered the data to be ready for a release and have plans to publish it on the website when the implementation takes place for all.
Awaiting comments as well. Most likely will use other jurisdictions to attract clients, if they express the desire to trade under different regulatory supervision.
More commentary and analysis will be added as we move to the more concrete stages.