On March 2018 the European Union has discussed about new ESMA regulation applying to Binary Options and Forex&CFDs broker. The new ESMA regulation should start to be affective from the beginning of summer 2018. This article will explain how the regulation will impact all traders and brokers.

esma regulation

New ESMA regulation details

In March 2018 the financial regulator of European Union called ESMA (European Securities and Markets Authority) has published a new regulation that will impact all the binary options brokers and forex&CFDs brokers within its territory.

It is unclear yet when the regulation will be officially applied, the only clear aspect is that binary options and CFDs will face important changes, affecting brokers located in the European Union and United Kingdom.

The new ESMA regulations need to be renewed every 3 months by the authority to remain in force.

The regulation for binary options it’s very clear: they will be considered illegal. This represents the end of binary options and for all those brokers offering them.

For CFDs the regulation will apply a few changes:

  • the maximum leverage for major currencies (EUR/USD, GBP/USD, USD/JPY, etc.) will be 1:30
  • the other currencies, indexes and gold will have a leverage of 1:20
  • individual equities will have a leverage of 1:5
  • cryptocurrencies won’t have a leverage greater than 1:2

Finally, all the regulated brokers will need to apply the following changes:

  • provide a negative balance protection; this means it is impossible to go under zero and lose more money than what a trader deposited
  • every type of bonus is banned
  • brokers must display a risk warning of the profitability percentage from their traders
  • brokers will be required to close a client losing position when the account equity reaches the 50% of the required minimum margin to keep it open.

What does the ESMA regulation mean for a trader?

All of these new restrictions are done with one simple goal, to protect the trader and make the online trading world as transparent as possible.

For a trader there will be some differences. Firstly the maximum leverage will be lowered, which means that in front of a lower potential profit there will be a lower risk to lose all the money in markets with high volatility.

Having a broker that closes automatically a position, which could risk more than the 50% of your the equity, is proof to show how much the authority allows a broker to co-manage the risk with clients who don’t have much experience in trading. It also allows for greater risk management between the trader and broker.

The fact that every type of bonus has been banned will also help to avoid past situations where brokers have offered high bonuses with non-transparent terms & conditions, which has been the cause of long debates and disagreements between brokers and clients.

Another main concern for ESMA regarding the bonuses was that the bonus promotions used by brokers were having a harmful psychological bearing on a user’s trading conduct. For instance traders were forgetting their account principles by taking greater risks, as the bonuses were basically encouraging traders to trade more and more.

Therefore, all bonus offers and promotions offered by brokers that are linked to trading volumes will be banned outright with the new ESMA regulations. So for brokers who heavily rely on bonus schemes to attract new traders, as well as retain existing customers, will have to think of new ways to appeal to their clientele which won’t fall foul of the new legislation.

To learn more about the best forex brokers for beginners which will apply the new ESMA regulations, please click here.