By Admiral Markets
The European regulator ESMA (the European Securities and Markets Authority) has introduced a series of temporary restrictions on a few investment products, including CFDs and binary options, that will be implemented in a short time. Since June 1, the final agreements have been reached and the regulator announced temporary measures on July 2 for binary options, and from August 1 for CFDs, says Dmitry Kuravkin, Member of the Management Board of Admiral Markets AS.
The right to intervene in the product
Various developments that led the world into the financial crisis served as the reasons for the fact that the G20 countries, step by step, began to tighten the requirements for financial market participants, giving regulators more and more rights, and adding new rules to increase market transparency and protect the interests of retail investors. One such rule is, for example, the obligation to have an LEI code for all persons making transactions in the financial markets.
With the entry of the pan-European regulations MIFID2 and MIFIR in force, regulators received the rights to intervene in the product. For the first time, the regulator has the right to influence the conditions of a particular instrument (e.g. shares, bonds, funds or derivative financial instruments) and complete it much faster than before. This right was given to ESMA, EBA, as well as, to each individual supervisory authority of each member state of the European Union. Restrictions can be provided by the ESMA, EBA or local regulators to apply to financial service providers registered in Europe, and also to the activities of service companies in the countries of the European Union. The maximum time limit for a possible restriction is 3 months, but it can be extended if necessary.
The essence of the restrictions
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The sale and advertising of binary options to customers are prohibited entirely. CFDs will be primarily limited in the amount of leverage that can be achieved today at 1:500, but will be limited from August 1 for retail investors to 1:30 or 1:20 for currency pairs, and 1:2 for CFDs on cryptocurrencies (the size of the leverage was chosen by the regulator depending on the volatility of the underlying instrument). More details about all the changes in leverage can be found on the ESMA website.
“An example for a trader: reducing the leverage from 1:100 to 1:20 with a security deposit of 24 euros will be necessary for the same position to have a deposit of 120 Euros. Prior to the implementation of the measures, ESMA conducted a survey among investors receiving more than 20,000 reviews, which shows that radical changes may affect a larger group of retail investors who, due to lower leverage, will need to use more collateral, including previously opened positions. Many of the reviews were related to the possibility of obtaining the same conditions from brokers outside the EU. Despite the fact that CFDs are tools that you can access not only from regulated brokers, Admiral Markets does not recommend doing this. In such cases, one always needs to be prepared for the fact that in this case, the loss of funds is very high and there will be no one to apply to for protection, because the regulator is either absent, or because it is difficult to get contact with them).” says Dmitry Kuravkin, Member of the Management Board of Admiral Markets AS.
Dmitry Kuravkin, Member of the Management Board of Admiral Markets AS
Admiral Markets conducted research on how customers are reacting to the restrictions of the new regulation. In our most visited regular webinar in Germany, we made a quick poll of traders. Of the 293 participants in the event, 43% took part in the survey and gave the following answers to the question “How will ESMA change things for you, as a trader?
· 24% will trade as Professionals
· 45% will just trade with a leverage of 20 or 30
· 17% will deposit more money
· 38% will trade smaller volumes
· 10% others
“Most of our clients encountered a problem with the issue of the ESMA regulation, but there is still a great demand for higher-quality information on this topic,” explains Jens Chrzanowski, Member of the Management Board of Admiral Markets Group AS. “It was important for us to get an idea of how the CFD traders plan to deal with the new regulation.”
Jens Chrzanowski, Member of the Management Board of Admiral Markets Group AS
Temporary restrictions also apply to advertisements – the regulator limits the various bonus programs often used by brokers and introduces a standardized risk notification that each broker must post on the site and on all of its promotional materials.
All temporary measures introduced by the regulator apply only to retail investors, as a less protected group and do not concern professional investors.
“Admiral Markets was preparing for these changes long before the announcement of the final measures. As we said before, we welcome any measures aimed at protecting retail investors (professional investors do not have temporary restrictions) and believe that this set of clear rules will improve the market by ensuring that access to high-risk instruments will be more conscious,” explained Dmitry Kuravkin, Member of the Management Board of Admiral Markets AS.
About Admiral Markets
Admiral Markets is a leading online Forex and CFD trading provider. In addition to a wide range of financial instruments, Admiral Markets offers free educational materials, including analytics, webinars and seminars.
Risk Disclosure: Trading in financial markets on margin carries a high level of risk and losses may exceed your initial deposit. Admiral Markets UK Ltd. recommends you seek advice from an independent financial advisor to ensure that you understand the risks involved with Forex, CFDs and margin trading (https://admiralmarkets.com/