The ESMA's 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 went into effect on the 1st of August 2018 and have a direct impact on all retail clients trading with brokers regulated in the European Union.
The changes include the following
1. 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
2. A 50% margin close-out rule is applied on all accounts. This means that as soon as the client’s equity reaches 50% of the margin used to maintain open positions, they will be automatically stopped out and closed.
3. A ban on applying credit to retail client accounts in the form of bonuses, as well as any other monetary and/or non-monetary benefits paid to retail customers (excludes research and information tools).
4. Negative Balance Protection: Your account can't get into negative equity regardless of market conditions.
5. 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 publication by the ESMA on its product intervention measures then please click here
How will this affect traders?
These changes will impact your account in the following ways:
1. The margin required for most instruments will be increased for your existing and new positions. For example, if you are required to maintain a long position of 1 lot (contract size 100,000) on a Major FX pair (e.g. EURUSD at 1.1630) and the current margin required is $1,163 (100:1 leverage), as of the 1st August 2018 the margin requirement would increase to $3,489 (30:1 leverage).
2. Your open positions will begin to get liquidated (closed) automatically if the equity in your account drops to 50% of your initial margin requirement; and
3. New orders placed may be rejected due to insufficient funds on your MT4 account.
The new changes will impact both existing open positions 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 insufficient, 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 CFDs brokers regulated in the European Union.
Do I have any alternatives?
The regulatory changes required by the ESMA are designed to provide greater protections to retail clients by reducing their risk exposure (via leverage). The new caps that traders are mandated to use while trading CFDs and the negative balance protection guarantees ensure that retail clients cannot lose more than they deposit toin their trading accounts. Professional Clients will not be subjected to the proposed ESMA leverage changes. Clients can trade with higher leverage by applying to change their client classification from retail to Professional status. Note that not all clients are eligible for re-classification and the approval will be subject to the client attaining the required opt-up criteria.
We realize that these regulatory changes could 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.