An update on the FCA/ESMA regulations for Retail Customers.
The European Securities and Markets Authority (ESMA) has made an announcement (link is external) today on its work in relation to the provision of contracts for differences (CFDs), including rolling spot forex, and binary options to retail clients.
ESMA is considering the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (MiFIR) to address risks to investor protection. In particular, ESMA is considering measures to:
Prohibit the marketing, distribution or sale of binary options to retail clients.
Restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.
The restrictions on CFDs currently under review are:
leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset
a margin close-out rule
negative balance protection to provide a guaranteed limit on client losses
a restriction on benefits incentivising trading, and
a standardised risk warning
ESMA will conduct a public consultation in January 2018 on this matter.
I agree with all of the new regulations, but as you said, leverage being cut to less than 1:30 would be an issue.
To put 1:30 into prospective lets run an example of the typical day trader?
You have a $1,000 account, denominated in USD with a maximum allowable leverage of 1:30. You decide to risk 3% on a single trade in GBP/USD using a 25pip Stop Loss with a target 2 pip Spread. The current FX rate for GBP/USD in this example is 1.5000
Your margin in this case would be $555.56, or 55.56% of your account balance. Thatâs one trade which youâve risked 3% of your account balance on, and yet over 50% of your account is tied up in margin (providing the initial margin remains the same rate as maintenance margin - according to the ESMA report initial margin and maintenance margin will be one of the same with no difference. Not good news).
Hopefully they will get enough of a push back from clients and brokers alike that they settle at 1:50, as mentioned by the initial FCA proposal.
In all honesty though, 1:30 would not hinder any of the trading that Iâm currently doing as I rarely have more than 3% on the table at any one time. Historically the maximum leverage I have employed on a single trade came in at just over 1:11.
Oh well - regulation to protect us or regulation to control usâŚ
I certainly donât appreciate ESMA trying to protect me by taking away an affordable means of access to the markets like Iâm some toddler playing with matches.
Thanks for that RoF - a couple of those measures like negative balance protection, may be helpful - no doubt the âbrokersâ will put in âbalancingâ measures to limit their own maximum payouts.
A lot of âBorderline brokersâ will not be affected that much as they will just drop the âFCA approvalâ and offer higher leverage in any case imo.
[Edit - but NOW they will have a plausible excuse ! ]
Does that mean spreadbetting is under the control of FCA ? - I was under the impression that being classifed as âGamblingâ that would be likely to be exempt ?
As far as I understood, and I may be wrong, it makes no difference if you are FCA regulated or regulated by any other form of European organisation. If youâre based in Europe as a broker of any type offering CFDâs or derivative products then you must by law follow the ESMA regulations. Also, as I gather, the FCA were waiting on ESMA. So essentially, ESMA trumps FCA in this case.
I think Spread Betting is out of scope - as you mentioned itâs regulated by the gambling authority, not the FCA. But as ever, lets see how it all works out.
Edit: It appears I was wrong, Spread Betting is in fact a CFD.
Date: 10 Jan 2018
The Financial Conduct Authority (FCA) said it âuncovered areas of serious concernâ in the contracts for difference market, which is a type of betting on financial products banned in the US, but legal in the UK with a severe health warning. CFDs are a type of high-risk, complex derivative that allow investors to gamble on the price of an asset without owning it.
Shares in London-listed Plus500 fell by almost 5%, CMC Markets was down by nearly 4% in early trading and IG Group lost almost 5%. The intervention follows repeated warnings from European regulators about the risks posed by CFDs and a crackdown on the market.
In a letter to the industry after a year-long review, the City watchdog said it foundâŚ
##⌠76% of consumers had lost money on CFDs between July 2015 and June 2016
I wouldnât place too much reliance on âThe Guardianâ RoF
I can see âSpread-bettingâ in the question, but not in the reply and certainly as far as HMRC are concerned, there is a world of difference - unless their rules have changed.
Iâm just sticking my finger in the air with regards to how spread betting is classified - never using it myself. But, iâd be surprised to see no material changes taking place in that area also. Iâd be keen to follow this and see what the outcome is.
Times must have changed since I looked into it 7 years ago with IG Index - although there were suggestions at the time that regulation was changing to the FSA, now FCA from the Gambling Authority.
FCA regulate a spread bet because they define same as a CFD.
FCA voiced concerns back in early 2017 on the high number of losers, they decided to put a hold on any action in June to await the EU action.
The FCA thinking is broadly similar to the EU approach, membership of EU is irrelevant, the FCA can act on their own if the so choose, they indicated back in June that should there be delays to Esmaâs action, the FCA will reconsider making final rules in the first half of 2018.
First report of the âFCA Crackdownâ was in Dec 2016 - headline on Dec6 2016: FTSE 100 rises but spread betting firms plunge 40pc after City watchdog clamps down on CFD trading
