The CEO of Saxo Capital Markets, Andrew Edwards recently made the following observations about the rules and limits on the marketing and sale of contracts for differences (CFDs) introduced by the European Securities and Markets Authority (ESMA) on 30th July 2018.
CFDs are instruments used by traders to speculate on whether an asset with rise or fall without owning the asset. The new rules initially installed caps on leverage and the losses a retail client could incur on CFD trades given that most retail traders may not understand the high risks associated with such products. The regulations were extended for three months in February 2019.
Edwards reiterated Saxo Capital Market’s support for the ESMA rules and proposals as he believes they are good both for retail clients and brokers in general. The new rules came at the right time given the high leverage levels being offered in the market by brokers registered in countries with less stringent rules. Such companies were offering high leverage levels to inexperienced clients as their key marketing strategy, which exposed inexperienced retail traders to massive potential losses.
The ESMA ruling triggered a significant drop in the profits of most retail CFD providers, which Edwards believes is good for the industry as the lower profits will be a barrier to new entrants and the existing firms will have to consolidate and focus on competing based on quality services and products, instead of focusing on high leverage.
He insisted that CFDs are products that democratized access to leverage and hedging in the financial markets, which was previously reserved for HNWI and institutional clients. CFDs allow retail traders to hedge many of their open market positions without using options due to the stringent account requirements and large sums needed to trade options. High leverage levels limit the effectiveness of CFD products due to the high potential losses.
He stated that CFD clients could benefit from multi-asset offerings instead of high-leverage and that the rules create opportunities for stable firms to acquire struggling companies, or their CFD client books as the industry undergoes a major consolidation. He insisted that CFDs are a good product and that the problem to be addressed by regulators is the high-leverage, which has so far been accomplished. His view was that by participating responsibly in the financial markets firm can be profitable without offering highly leveraged products to inexperienced clients.