Forex trading in Europe? This is what the new ESMA regulation means for you
At a glance:
-ESMA is rolling out significant changes for Forex trading in the European Union.
-What are the regulations? How will they impact trading? How can I prepare?
-This article aims to answer all these questions and more
What is it and what do we think and what is the regulation in general?
The new regulation imposes leverage limits for various assets (30: 1 is the highest level), prohibits binary options and bonuses, requires transparency and measures to protect the negative balance of brokers, etc.
More details are below.
What do we think of these significant changes?
Francesc Riverola, founder and president of FXStreet, said that if some brokers fear a drop in the profitability of European accounts, this regulation could be a step forward to make the Forex an asset class and highlights the foreign exchange sector Japanese who managed to overcome the leverage restrictions.
"The new regulations will make it possible to distinguish three types of brokers: major brands offering multi-market financial instruments, Forex brokers experts in marketing and conversion, and offshore," says Riverola.
"The rules of ESMA will help brokers focus on their audiences and traders choose the right broker for them, so far it has sometimes not been very easy to clearly distinguish between the three types."
What is ESMA?
The European Securities and Markets Authority is known for its involvement in the debt crisis, but it has a supranational role in regulating markets.
Until now, regulations varied between the different jurisdictions of the European Union (all EU countries, not just the euro area), Cyprus attracting many brokers. These guidelines also apply to the UK until it leaves the EU.
Who are the winners of these new regulations?
Prudent brokers are likely to be the winners: those who are cautious and do not sell aggressively are now protected from obscurity.
In addition, traders will benefit from greater transparency about the losses suffered by brokers' clients, which will allow them to make a better choice.
Who are the losers of these new regulations?
Brokers who have aggressively marketed with bonuses and excessive leverage will adapt or leave the scene. Merchants who like to leverage the turbo will also need to adjust or find new jurisdictions.
So let's start with the numbers.
Leverage limit
Leverage is one of the key characteristics of Forex trading as part of the cost structure. The first thing that stands out in ESMA regulations is this topic.
I trade EUR / USD and sometimes GBP / USD. Will the new rules have an impact?
Probably not. The main currency pair limit is 30: 1, which is quite broad and suitable for most traders. Japan has a 25: 1 limit and a developing market. If you trade EUR / USD, GBP / USD, USD / JPY and other major currency pairs for some time, you may not need a higher level of leverage. However, remember not to risk more than 2% of your account at a certain point.
I prefer smaller and more agile currency pairs and occasionally exchange gold and indexes. Where do I stand?
The limit for non-primary Forex pairs, gold, and the main stock index is 20: 1. Similar to major currency pairs, most traders will not need 20 times the amount they have to trade.
The limit is lower due to sharper movements of assets such as crosses, S & P, and DAX.
I trade oil, and I am an expert in stock in my home country. What should I know?
The limit for increasing leverage with volatility: oil prices move faster, and the new leverage limit is 10: 1.
For those who trade black gold and other non-gold commodities, this leverage is more of a barrier but not surprising given its volatility.
The same applies to non-primary indices: liquidity is lower in Slovenian or Malaysian exchanges than in France or Japan.
I am an expert in Apple shares and like volatility on Facebook. What are the new restrictions?
Again, everything gets tighter when volatility rises: only 5: 1. Most traders with brokers tend to prefer currencies, and high leverage ratios may not be suitable for stocks that rise and fall quickly and with a few percentage points.
I do not believe in fiat currencies and only trade cryptocurrencies. What is the leverage limit?
The highest volatility level accepts the lowest allowable leverage level. Many of those who are interested in crypto cannot really be referred to as merchants: they survive for a respectable life (or HODL): buy and never sell.
For those who trade and follow Bitcoin, Ethereum, Ripple, and others, all know that the movement may be wild.
Trader protection
Can I lose more money than I deposited?
The negative balance that should be covered by traders after the famous "SNBomb" is now banned. In January 2015, the Swiss National Bank suddenly moved the floor below EUR / CHF, and the pair collapsed.
Not only are buy positions erased, but in some cases, retailers are expected to cover deep losses and leverage. No longer. Brokers will now be asked to provide negative balance protection.
In addition, they are required to close the margin position every time the account passes 50% of the required minimum margin.
Will I know the fate of my fellow traders?
Another novelty comes from transparency. New regulations force brokers to display the percentage of clients who lose money. This is similar to the rules introduced by the CFTC in the US several years ago.
The loss rate reflects the broker's trade execution, education level and more. This joins the factors in choosing a Forex broker.
The Ban
Can I still hedge my trade with binary options?
No, because binary options are now prohibited. While some traders use this instrument to take the other side of trade and hedging, many use it for pure speculation.
Some binary options operations are run by organizations that are not too clean, and they are defined by ESMA as products that have structurally expected negative returns.
The binary options industry has decreased for some time, and the ESMA decision is the bell of their deaths.
Brokers promise bonuses. Will I get it?
If bonuses are promised under the previous regime, Forex brokers need to respect promises. However, other bonuses and incentives are now banned.
They are seen as indecent ways to seduce traders. Ads that promise big prizes will soon disappear from the European scene.
Conclusion
Although regulations can have unintended consequences and can sometimes be contradictory, the new ESMA regulations will no doubt have a significant impact on the foreign exchange industry.
Traders and brokers must all adapt, but after the initial illness, the industry has the opportunity to grow and become stronger.
So, was it helpful? Now I would prefer to hear it from you.
Also read : Why Forex brokers offer No Deposit Bonus?
