ESMA and Changes in CFD and Binary Options for European Clients

new ESMA regulations trading

What is the ESMA (European Securities and Markets Authority)? 

If you do not know what the ESMA is and you are a CFD trader from Europe, in the next weeks and months, it will sound a lot. Todaw we will explain what is the ESMA and how it will influence European Trading in negative ways.

ESMA is the abbreviation in English of European Securities and Markets Authority.

It is a body of the European Union, whose mission is to protect investors and ensure the integrity, stability and proper functioning of financial markets. It would become like the regulator of regulators.
When there are decisions on financial regulation and investor protection, which go beyond the national scope of each of the financial authorities, it is the ESMA that develops proposals and standards, which are binding for all members of the union.

New rules of the ESMA on Binary Options and CFD 

I do not know if you’ve noticed, but Binary Options Brokers are no longer advertised in Europe. Some have even closed, as is the case of Anyoption, one of the oldest, others have been converted into CFD Brokers, like the case of 24Option.

The reason is very simple, the ESMA will use a mechanism called product intervention, which will affect the Binary Options Brokers and the CFD Brokers, and logically traders who invest in these products.

These new guidelines, which will begin to be applied as of August 1, 2018, are:

  • Complete prohibition of Binary Options, considering that they are too complex, and that they have not been shown to offer benefits to investors.
  • The leverage of the CFD will also be affected, and will be as follows: 1:30 for the main currency pairs, 1:20 for other currency pairs (I imagine the more volatile and exotic), as well as for gold and the most important stock indexes, 1:10 for other indices and commodities, 1: 5 for unspecified instruments and 1: 2 for cryptocurrencies, such as Bitcoin Ethereum, etc.These changes mean that most small investors, who trade with accounts between €1,000 and €10,000, will see how they have to raise their deposit levels, to support the margins and obtain the same results they obtained before, with a higher level of leverage.
  • Another important change, and I think very damaging for small investors, is the inclusion of a stop-out rule, which will force the Broker to close a position, if the client’s deposit level falls below 50%. Although it may be a good idea, I think it is also limiting the use that the client can make of their funds.
  • It obliges to include protection against the negative balance, so that a client can not lose more than what is deposited. This was already being applied by many Brokers and it seems to me one of the few good decisions.
  • There will also be limits to the incentives Brokers can offer their clients. This goes directly against the Bonuses and similar promotions.
  • The standard has standardized the discharges of responsibility of the Brokers, so that they are identical throughout the European Union.

Will retail traders change their European brokers due to ESMA regulations?

You can not imagine the amount of people trapped and cheated by brokers in tax havens. Regulation in these places is practically non-existent. It is practically impossible to claim any kind of money. In these places they use all the bad practices that the European Union has been limiting in recent years.

They make more or less fraudulent fundraising, use different tactics to convince their clients, telling them, for example, what they have to buy and sell, and when the account stays at zero, they simply wash their hands.

I am against all these practices, but I think the European Union is wrong and can create a cure worse than the disease. They wield leverage as a problem, when in fact the problem is not leverage, the problem is the lack of transparency.

Most of the CFD Brokers are Market Maker, so their orders do not reach the market. Nor do I say that all Market Maker Brokers are bad, simply that if there was a regulated market for CFD, this problem would be reduced a lot.

I believe that these restrictive regulations can encourage many investors to fall from the pan to the fire, letting themselves be led by better conditions of Brokers installed outside the European Union, and not having any scruples.

That’s what really scares me about so much regulation.

There are literally dozens of brokers in tax havens that offer better trading conditions and that will benefit from the ESMA regulations. And we are talking about companies that are not very recommendable.

However, other countries that have much more regulated and serious financial markets such as Australia will also benefit directly. In this country there are very good Forex and CFD brokers that are regulated (by ASIC, an important financial services regulation body) and that offer excellent trading conditions, including high leverage and accounts with ECN/STP trade executions. Surely many retail traders will move from Europe to Australia.

There are CFD Brokers that are already adapting to the new restrictions, creating new alternatives to their clients, such as eToro, which now offer cash shares. In such a way that instead of operating in the stock markets through CFD, their clients can buy and invest in shares directly, just as if they were operating directly in these markets.

This is an interesting service and an interesting way to evade without breaking the ESMA regulations.


Leave a Comment