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Screenshot of a breaking news alert e-mail from Q2 2017
Exactly a month after dropping its bombshell proposal of a hard 30x cap on CFD leverage, European pan financial regulatory body ESMA has taken the next step in enacting its proposals by formally opening a ‘call for evidence’ from the public and affected parties to give formal feedback on its proposals.
The consultation period will not be very long, with all feedback due by February 5.
In its Call for Evidence, ESMA outlined more details on its proposals but did not change any of the key items, despite already having received a lot of feedback and pressure from the online trading industry to ease the hard 30x CFD leverage maximum. The main argument being made by industry participants in the EU is that the cap will just open the door for unregulated, offshore brokers offering the higher levels of leverage European traders are used to. That, of course, would have the opposite effect that the regulator is trying to achieve, that of protecting retail traders.
The leverage limits, which will vary depending on type of instrument, will be as follows:
- for CFDs in major currency pairs which have relatively low historical volatility, a limit of 30:1 is being considered;
- for CFDs in non-major currency pairs and major equity indices a limit of 20:1 is being considered;
- for CFDs in gold, a relatively stable commodity, a limit of 20:1 is being considered;
- for CFDs in commodities other than gold, and for CFDs in minor equity indices, a limit of 10:1 is being considered;
- for individual equities, which tend to be relatively volatile, and for any underlying not otherwise listed above, a limit of 5:1 is being considered.
ESMA also stated that it is currently considering how CFDs on cryptocurrencies fit within the MiFID regulatory framework as financial instruments. ESMA said that it will be considering this issue further and welcomes views on the matter. In this context ESMA is currently discussing
whether CFDs on cryptocurrencies, whose underlying assets have displayed very high price variation, should be addressed in the measures and whether a 5:1 initial leverage would provide investors with sufficient protection. Alternatively, a lower leverage limit (2:1 or 1:1) or stricter measures (such as a prohibition on the marketing, distribution or sale of CFDs in cryptocurrencies to retail clients) could be considered.
ESMA also outlined a margin close-out rule, which would provide for percentage of margin at which providers are required to close out a retail client’s open CFD. The aim is that, consistently across providers, clients are routinely protected from losing more than what they have invested. This rule would be implemented on a position-by-position basis, such that a retail client’s open CFD must be closed out on terms most favourable to the client at the point in time at which the available sum remaining in the CFD trading account of the initial margin and variation margin relating to that CFD falls below 50% of the amount of the initial margin posted.
ESMA’s other key proposals – negative balance protection on a per-account basis, a ban on ‘incentives’ such as deposit bonuses, and a full prohibition on the marketing, distribution or sale of binary options to retail clients – all remain as they were in the initial ESMA proposal from December.
ESMA’s full ‘call for evidence’ can be accessed here.