Impacts of ESMA on your FOREX, CFD, and Crypto Trading
As you may be aware, the European Securities and Markets Authority (“ESMA”) has confirmed that new measures and restrictions must be implemented for retail investors trading FX, CFDs and Spread Bets by August 1, 2018. These changes most notably impact trading leverage, margin stop out rates and negative balances. Below are the major impacts that ESMA is going to have on your trading.
With these changes going into effect though it is important to truly understand what impact they are going to have on your trading. Chances are, not much!
Leverage Limits on New Positions
From August 1st, 2018
30:1 leverage for Major Currency Pairs
20:1 leverage for Non-Major Currency Pairs, Gold and Major Indices
10:1 leverage for Commodities (Not including Gold and Non-Major Equity Indices)
5:1 leverage for Individual Equities
2:1 leverage for Crypto Currencies
Impacts - Most people do not really understand leverage. They read 500:1 and automatically think that they are trading with that much leverage. In reality that is the amount of leverage they are afforded and typically they don't actually use that much leverage. Think about it, if you have a $1,000 in your account and you place a 0.01 lot of EURUSD, you are only using 1:1 leverage. With the new rule changes on a $1,000 account you would still be able to place 0.30 lots of EURUSD. Chances are this is more size than you are currently trading at the moment on that size of account.
Margin Stop Out Rate
From August 1st, 2018, all brokers are required to have a 50% margin stop out rate. This means that if your margin drops below 50% of the amount required to maintain your current portfolio, your broker will begin to liquidate your positions.
Impacts - If you are a hope trader then maybe this is going to have an impact. What I mean by that is, hope traders hold on to trades until they are either liquidated because they don't have enough margin or the trade comes back into being profitable. If you are a hope trader then this may have some impact as your trade isn't going to be able to go against you as much if you broker had the margin stop out rate below 50%. Most brokers though have always had the stop out rate above that amount as they risk a client going debit if it is under. If you practice sound money management and risk techniques this won't impact you much.
Negative Balance Protection
From August 1st, 2018, negative balance protection will be implemented on a per account basis, providing an overall guaranteed limit of retail client losses. Should an account go into negative equity, your broker will make the necessary adjustment to the account.
Impacts - Ultra POSITIVE for you as a retail trader. What this means is that in no way can you lose more money then you put into your trading account. I.E. if you deposit $1,000 you cannot lose more than $1,000. In the past this was not the case, for a clear example Google Swiss National Bank Incident debit balance.
Professional Status
Professional clients can opt out of these new regulations.
Impacts - If you qualify as a professional trader then this may have some impacts. First, if you elect to become a professional you do not have to abide by the above rules. You are free to trade at any leverage your broker offers. But, and that is a big but, you are giving up a lot of protections. You no longer have the negative balance protection, meaning that if you go debit that broker can and most certainly is going to come after you for repayment (because they know you have money as a professional trader). Also, in the unfortunate event that the broker goes bankrupt you are going to be fighting with creditors to get your money back. This is because your funds are not segregated and do not have the same protections that retail investors are afforded, such as the FSCS in the United Kingdom that all FCA regulated brokers must participate in. In this financial scheme in the event that the broker goes bankrupt retail investors are protected up to 50,000 pounds in their trading account.
So, before you go declaring yourself as a professional trader you may want to consider whether or not it is in your best interest.
One last point of note before we wrap up is that this impacts EVERYONE who is trading with a European regulated broker. So, if your broker is regulated by the FCA, Bafin, Cysec, etc. you are going to be impacted by these new ESMA regulations. The time to act is now before the regulations go into place. Review your account, see if you are going to get impacted, and if so start looking for brokers that don't fall under these regulations.