THE ESMA Regulation
The European Securities and Markets Authority (ESMA) announced new regulatory changes for CFD brokers designed to provide greater protections to retail clients. These changes will go into effect on 1 August and will have a direct effect on all retail clients trading with a broker regulated in the European Union.
The changes include the following
- Leverage limits will be imposed on all instruments, as follows:
- 30:1 for major currency pairs
- 20:1 for non-major currency pairs
- 20:1 for major indices
- 20:1 for gold
- 10:1 for commodities
- 10:1 for non-major equity indices
- 2:1 for cryptocurrencies
- A 50% margin close out rule applied on account, which means that as soon as a client’s equity reaches 50% of the used margin, all open positions will be automatically stopped out.
- A ban on applying credit bonuses on retail accounts, as well as any other monetary and/or non-monetary benefits paid to retail clients (apart from research and information tools).
- Negative Balance Protection: Your account as a whole will no longer be able to lose more than the funds on deposit.
- A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
If you would like to read the full ESMA publication on its product intervention measures then please click here
How will this affect traders?
These changes can will impact your account in the following ways:
- The margin required for most instruments will be increased for your existing and new positions. For example, if you are margin required long 1 lot (contract size 100,000) on Major FX (e.g. EURUSD at 1.1630) and the current margin required is $1,163 (100:1 leverage), as of 1 August 2018 the margin requirement would increase to $3,489 (30:1 leverage).
- Your open positions will begin to be liquidated (closed) automatically if the equity in your account drops to 50% of your initial margin requirement; and
- New orders placed may be rejected due to insufficient funds on your MT4 account.
The new changes will impact both existing open trades as well as new trades. Therefore, you may want to consider depositing additional funds into your account in order to meet the new, higher margin requirements. Alternatively, you may want to close some of your open trades in order to ensure that you have enough funds in your account to meet the new margin requirements. If funds in your trading account are not sufficient, then the system will automatically close out your positions, in accordance with the terms of the Client Agreement
Who is affected by the changes?
The new leverage limits and negative balance protection rules apply to all retail clients trading with a CFD broker regulated in the European Union.
Do I have any alternatives?The regulatory changes required by ESMA are designed to provide greater protections to retail clients by reducing the maximum risk (leverage) they can take while trading CFDs and by ensuring that all brokers guarantee that retail clients cannot lose more than they deposit in their trading accounts (negative balance protection). However, Professional Clients will not follow the proposed ESMA leverage changes. Keep your current margins by applying to change your client classification to Professional status. Note that not all clients are eligible, and the request will be subject to review.
Elect to be re-classified as a Professional Client click here
We realise that these regulatory changes leave clients with a lot of information to consider. If you have any questions regarding any of the above please do not hesitate to contact us.