ESMA 2018 – what happened?

In March 2018 the European Union introduced the new ESMA regulation. 

These rules affected many Binary Options plus Forex&CFDs brokers.

The new ESMA regulation became active in July 2018.

In this article we’ll explain how the regulation impacted all traders and brokers in the industry.

New ESMA Regulation Details

The financial regulator of the European Union is called ESMA.

ESMA (European Securities and Markets Authority), published a new list of regulations in March 2018, that was designed to make trading more secure.

However, the regulations impacted all the binary options brokers and forex&CFDs brokers within Europe. For instance, ESMA placed a complete ban on Binary Options.

From July 2018 onwards, binary options will be considered illegal in Europe

The ruling marked the end of Binary Options in Europe and prevented brokers from offering them on their platforms. 

Officially the regulations came into force in July 2018 and the new rules affected brokers located in the European Union and United Kingdom.

Legally, the new ESMA regulations must be renewed every 3 months by the authority to remain in force. So far though, there has been no lifting of the ban.

For CFDs the regulations changed a few things :

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

Finally, all regulated brokers had to apply the following changes:

• provide a negative balance protection; this means it’s impossible to go below zero and lose more money than what you originally deposited
• all types of bonuses and promotions were banned
• brokers must now display a visible risk warning of the profitability percentage. 
• brokers will have 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 were introduced to achieve one simple goal, to protect traders and make the online trading world as transparent as possible.

More financial protection is always good news for traders. However, some of the new rules definitely affected how people traded.

For instance the new leverage restrictions really affected potential profits. By reducing the maximum leverage amounts for Forex&CFDs, traders will see a lower profit potential.

However, the good thing is that there’ll be a lower risk to lose your money in markets with high volatility. The easiest way to think of the new lower leverages is that the risk vs profit ratios will be changed.

The ruling that a broker must automatically close a position, when a trader risks more than the 50% of the equity, was also good for client protection.

It shows that ESMA has tried to protect inexperienced clients from big losses. It also allows for greater risk management between the trader and broker. Brokers and traders now have to co-manage trades together.

The ruling that banned every type of bonus has also helped transparency.

In the past, some brokers offered high bonuses with non-transparent terms & conditions. This led to misunderstandings and disagreements between brokers and clients. So now it’s illegal for European brokers to offer deposit bonuses or new customer promotions.

However, international brokers who have users based in countries outside of Europe can still offer trading promotions.

Another main concern for ESMA regarding the bonuses, was that the use of bonus promotions were having a harmful psychological effect.

By promoting bonuses, traders were not trading wisely and were taking greater risks. Mainly because the bonuses were basically encouraging traders to trade more and more. 

Therefore, all promotions offered by brokers that are linked to trading volumes are completely banned due to the new ESMA regulations. If you trade regularly, you know how important it is to make trades rationally and not emotionally. This bonus ban has helped traders who struggle to do that.

The ban affected brokers who heavily relied on bonus schemes to attract new traders, and retain existing customers.

To become valid, many of these brokers have had to think of new ways to appeal to their clients which comply with the new legislation.

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