UK’s Financial Conduct Authority (FCA) confirmed its decision to permanently restrict the sale of CFDs and CFD-like products on a national level earlier this week. While most of these restrictive rules mirror ESMA’s product intervention measures, there are some slight alterations, such as the higher leverage allowed for the sale of government bonds. FCA’s rules are aimed at guaranteeing consumer protection and will come into effect from the 1st of August for CFDs and on the 1st of September for CFD-like options. More specifically, these measures include a requirement for all brokerages to provide negative balance protection to all account holders, to close out a customer’s position when their funds fall to 50% of the margin needed, to place a standardized risk warning on their websites, to stop offering monetary and non-monetary inducements to encourage trading (such as bonuses), as well as to offer leverage of 1:2 to 1:30, depending on the asset class.
Thanks for the research. The ESMA measures are simply making a permanent requirement out of what was industry best practice. Of course, tougher regulation also raises barriers to entry by small, cost-cutting and nimble competitors and I have to think that ESMA's main concern is the stable maintenance of the industry and their main constituents are the stable large industry players - which excludes me and the likes of me. Nevertheless, these regulations are welcome.
the 50% percent closeout rule meams balances are always positive so the large industry players won't have to take counterparty risk. the 50 pct levels with the margin requirements require extreme moves to get to the close out level. Large industry players won't have to offer this care to their customers often and in most cases probably never. Clearly the esma is looking after the big players whilst helping thier most vulnerable customes who dont have better rules like never close available. Players make on bid offer, nothing to do with margin so wont affect pnl. its win win. I agree if the esma were unanable to look after the stable large players it would be concerning.
Nice, 5x for bonds was a bit restrictive for certain strategies. Overall ESMA is great anyway. I would imagine most retailers that used 100x used it for gambling.
I also find that any regulation which protects traders and investors should be welcomed. However, I am just imposing a question, what has happened with free market? Are these financial products indeed so tragically risky that they must be completely banned from market?
They aren't completely banned from the market, assuming you're talking about CFDs. It's not so much the inherent risk such as that 90%+ of people using very high leverage have no idea what they're doing. Any backtested strategy will quickly collapse under significant leverage unless it's very very good (e.g. high Sharpe and other metrics), consequently anyone who bothered to backtest will not use that much leverage. Negative balance protection should have been standard in the business from the start and it's great that ESMA enforces it. Combined with very high leverages, opaque backend (e.g. someone selling you CFDs might not even place corresponding trades if they think you will lose) means there has been a perverse incentive to offer clients the means to blow themselves up quickly.
The European Securities Markets Authority (ESMA) reacted negatively to the proposal of the Polish regulator to allow leverage as high as 1:100 for some qualified retail traders. The pan – European regulator also will not give green light to the CySEC proposal to allow different tire leverage for retail traders depending on their income. Back in May the Cyprus Securities and Exchange Commission proposed to allow wealthier traders to use leverage of up to 1:50, while for not so affluent retail investors the leverage rules to get tougher.
The Malta Financial Services Authority (MFSA) also adopted permanent rules restricting the marketing, distribution or sale of CFDs to retail clients.