In March 2018 the European Union discussed the new ESMA regulation. These rules will affect Binary Options and Forex&CFDs brokers.
The new ESMA regulation should start be active from the start of summer 2018.
In this article we’ll explain how the regulation will impact all traders and brokers and how you can prepare for it.
New ESMA Regulation Details
The financial regulator of European Union called ESMA (European Securities and Markets Authority), has published a new regulation in March 2018.
It’s a regulation that will impact all the binary options brokers and forex&CFDs brokers within Europe.
It is unclear yet when the regulation will officially happen, all we know is that Binary Options and CFDs will face important changes. This will affect 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.
The regulation for Binary Options is very clear: they will be considered illegal.
So this is the end of Binary Options in Europe. It also means that brokers won’t be able to offer them on their platforms.
For CFDs the regulation will change a few things :
- 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 set leverage of 1:5
- cryptocurrencies can’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’s impossible to go below zero and lose more money than what you deposited
- all types of bonuses and promotions are banned
- brokers must display a risk warning of the profitability percentage. It must be visible for 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.
More financial protection is always good news for traders. However, some of the new rules will definitely affect how you trade.
For instance the new leverage restrictions will affect potential profits. By reducing the maximum leverage amounts for Forex&CFDs, there’ll be lower profit potential.
However, the good thing is that there will be a lower risk to lose your money in markets with high volatility. The easiest way to think of the new lower leverage is that the risk vs profit ratios will be changed.
The new ruling that a broker must automatically close a position, when a trader risks more than the 50% of the equity, is also good to see.
It shows how ESMA has tried to protect clients that don’t have much experience in trading from big losses. It also allows for greater risk management between the trader and broker. Brokers and traders will now be able to co-manage trades together.
The ruling that every type of bonus has been banned will also help transparency.
In the past, some brokers have offered high bonuses with non-transparent terms & conditions. This has led to misunderstandings 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 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 bonus offers and promotions offered by brokers that are linked to trading volumes will be banned outright with the new ESMA regulations. If you trade regularly, you know how important it is to make trades rationally and not emotionally. This new bonus ban will help traders who struggle to do that.
So the ban will affect brokers who heavily rely on bonus schemes to attract new traders, as well as retain existing customers.
To move forward they’ll have to think of new ways to appeal to their clients 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.