ESMA's New Regulations
In June, the European Securities and Markets Authority (ESMA) announced its decision to implement a range of measures intended to harmonise EU-wide regulation.
These changes will come in effect from 1st August 2018 and aim to provide better protection to retail clients trading leveraged products, like CFDs.
We are strong advocates of responsible trading and support the initiatives set forth by ESMA. We recommend you read the full ESMA statement here.
Overview of the measures
For retail clients, the changes are described below. There are three main changes that will affect the way your account is maintained: margin requirements, margin close out and negative balance protection.
- Leverage limits on new positions.
- 50% margin close-out rule on an account-level basis.
- Negative balance protection limiting client losses.
- Prohibition on benefits used to incentivise trading.
- Standardised warning statement of the risks involved across promotional material.
In addition to these changes you will continue to benefit from:
- your funds kept in a segregated bank account;
- access to the Financial Ombudsman Service,
- eligibility to claim under the Financial Services Compensation Scheme (FSCS).
The main changes and how they affect you
New minimum margin rates
ESMA's new rules will be applied from 30th July, 2018 with the following leverage restrictions for retail clients:
- 30:1 leverage on major currency pairs = 3.33% margin;
- 20:1 leverage on major indices and gold = 5% margin,
- 10:1 leverage on commodities (excluding gold) = 10% margin;
- 5:1 leverage on equities and bonds = 20% margin.
For example, if a retail client placed a EUR/USD trade at 100:1 leverage before 30th July, 2018 with a notional value of $10,000 the minimum margin requirement would be $100. After this date, the minimum margin required will be $333.
Any trades already open before the introduction of the new rules will remain on their existing margin rates.
Margin Close Out
If the total margin in an account falls more than 50% of the amount of the initial margin required in respect of the open CFD position, we must close one or more of the CFD positions – however the rule does not prescribe which positions must be closed out or in what order.
Negative Balance Protection
Negative balance protection means that a retail client can never lose more than the total sum invested for trading CFDs. There can be no residual loss or obligation to provide additional funds beyond those in the retail client’s trading account.
Does this affect everybody?
No, these changes will only affect retail clients, professional clients are exempt to these intervention measures.
Professional clients, or those who successfully apply to re-categorise as such, will benefit from the following:
No limitation on leverage
Security of a Swiss group
Segregation of funds
Fast track onboarding
As a Professional Client, you may lose some regulatory protections offered to Retail Clients those are described below.
- Disclosures: you may not be given any of the additional disclosures required to be provided to Retail Clients (for example on costs and charges or risk warnings).
- Appropriateness: we can assume that you have the necessary level of experience and knowledge when assessing whether a product or service is appropriate for you.
- Order execution: we are required to obtain the best possible result when executing orders for our Clients. For Retail Clients this is based on total costs whereas we can prioritise other factors when dealing for Professional Clients.
When the ESMA measures are adopted, as a Professional you would not benefit from any negative balance protections offered to Retail Clients, however we will still treat your money as Client Money and if you are a consumer you will still have access to the Financial Ombudsman Service (FOS) and the UK Financial Services Compensation Scheme (FSCS) in the unlikely event of our default.
What do I do next?
To qualify as a Professional Client you will need to follow the following three simple steps: