If you are not yet aware of the changes that are coming in the forex market, you should pay attention to this article. The new measures decided by the European Securities and Markets Authority (ESMA) will be implemented on August 1st. Here we explain what these regulations consist of. We also discuss how these should impact the forex market.
| Contents |
|---|
| What is ESMA? |
| New ESMA regulations |
| Some explanations and assessments about these measures |
| How do these regulations affect my trading? |
| Some issues to be clarified |
Table of contents
What is ESMA?
ESMA stands for European Securities and Markets Authority. It is one of the European entities that are in charge of supervising the European financial system. Their functions are similar to those of other entities of its kind in other regions, such as the National Futures Association (NFA) in the United States, or the Financial Services Agency (FSA) in Japan. You can find more detailed information about this entity here. You can also check their official website here.
New ESMA regulations
These are the measures that will take effect from August 1, 2018.
- Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold and major indices;
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and other reference values;
- 2:1 for cryptocurrencies;
- A margin close out rule on a per account basis. This will 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; and
- A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
Check here the official publication.
Some explanations and assessments about these measures
The new regulations seem to want to eradicate years of speculative practices inherent to the forex market. Moreover, it seems to be clear that the ESMA aims to reduce and control the level of risk in the sector.
The 1st regulation imposes a drastic drop in the leverage limit, well below what until now was accepted as ordinary risk levels. Currently, some brokers offer leverage above 800:1, and it is not uncommon to find a leverage of 500:1. With leverages so low, the size of the operations will correspond more to the real deposit of the account, and not to the money lent by the broker to increase the benefits —and of course, the risks—. For a more detailed explanation about the leverage, you can consult this page.
In addition, from now on brokers will be forced to expose a reality that we all already knew but were reluctant to admit: only a small fraction of those who trade, consistently generate profits.
How do these regulations affect my trading?
The main affected by these measures will be, of course, those traders with accounts in brokers registered in the European Union (EU). It is recommended that, in these cases, they ask for explanations from their brokers about the implications that the new ESMA regulations will have on their accounts and their trading operations. Although the measures are clearly described, it is important to check how each of the brokers will implement them.
Those with accounts in brokers operating outside the EU should not be affected in the short term by these measures. However, after the emergence of such regulations in such an important region as the Eurozone, it should be observed very closely as the rest of the regulatory entities will react in their respective control areas.
Some issues to be clarified
For now, we will have to wait to see how the brokers will implement the measures. But some doubts arise about what their immediate implications will be.
With such low leverages, the retail forex will no longer be attractive for individuals and small investors? Will we go back to the times when the forex trading was almost exclusive for institutions and large investors?
Will the brokers really expose the percentage of clients with losses or will they seek some legal trick to camouflage the information? If brokers are forced to publish the percentage of clients with losses, will they also be obliged to provide their clients with tools that help them obtain benefits? We must bear in mind that, with these data exposed, customers probably will not have any other criteria in mind. Everyone will want to open accounts in those brokers with the highest percentages of successful clients. There will not be much more to analyze.
Can you think of other questions that can be derived from the measures described above? Do not hesitate to tell us. It is clear that any change creates some uncertainty, but we believe that, in the end, these regulations will be positive for the currency market. What do you think?
Conway
I wish they would apply these rules here in Australia. Retail traders here will now be exclusive targets for what is left of the retail FX industry.
The positive for this may be that market moves may not be ‘noisy’, hence maybe potentially more profitable??
Barmenteros FX Staff
Interesting view, Conway. Probably the noise in the market would decrease if these measures were applied globally. But first of all, we will have to see if the brokers accept and implement these regulations, or if they evade them with some legal trick. Best regards
Paul O'Neill
Totally disagree. ESMA restrictions have made it impossible for anyone with a small account size to start trading.