GAIN Capital warns of ‘unintended consequences’ from ESMA’s proposed 30x CFD leverage cap

Gain Capital

New York based FX brokerage group Gain Capital Holdings Inc (NYSE:GCAP), which operates the UK-centric City Index as well as the global brands, has issued a statement in response to European regulator ESMA’s plans to limit leverage on FX and CFD trading to 30x.

Similar to the reaction of its London-based competitor IG Group Holdings plc (LON:IGG) from earlier this morning – IG called the planned move “disproportionate” – GAIN Capital is warning that the move, if implemented, is likely to unintended consequences. Specifically GAIN Capital is concerned (we believe rightly so) about the move driving European retail investors offshore to brokers that do not offer the level of investor protections present in strongly regulated markets.

GAIN did note that less than 20% of its revenues come from retail customers in the UK and the EU, so the new rules (if implemented) should not have a material adverse impact on its financials. GAIN Capital also stated – as we wrote earlier today in reaction to the steep share price drop this morning in the shares of IG as well as top-shelf brokers Plus500 Ltd (LON:PLUS) and CMC Markets Plc (LON:CMCX) – that drastic regulatory moves like this tend to benefit the larger, well-capitalized incumbents, by making it harder for smaller, aggressive (and chance-taking) competitors to compete.

Outsized leverage and deposit bonuses have been key tools of smaller brokers looking to break into the UK and EU markets. Without those tools, it will be harder to take away market share from the GAIN’s, IG’s, and Plus500’s of the world.

GAIN Capital’s full statement on the ESMA proposals reads as follows:

GAIN Capital Responds to ESMA Statement

BEDMINSTER, N.J., Dec. 18, 2017 /PRNewswire/ — GAIN Capital Holdings, Inc.(NYSE: GCAP) (“GAIN”, “The Company”) notes ESMA and FCA’s statements issued 14 December 2017 on their work in relation to the provision of contracts for differences (CFDs), including rolling spot forex, and binary options to retail clients.

GAIN remains strongly supportive of measures that enhance consumer protection in the FX/CFD market and elevate standards across the sector by, among other things, curbing aggressive marketing to inexperienced investors and mandating disclosure requirements that ensure all clients fully understand the risks of FX/CFD trading.

Over the past 12 months, GAIN has been actively engaged with both ESMA and FCA to discuss potential regulatory changes governing the industry.  GAIN has advocated for the adoption of leverage rules which strike an appropriate balance between providing additional protections to investors and other important considerations. In addition, GAIN believes that there are other effective protective measures available to ESMA and the FCA, including requiring enhanced screening of potential clients to ensure that only those persons for whom the products are appropriate are able to trade leveraged derivatives. GAIN has also strongly advocated for the adoption of more stringent corporate substance and regulatory capital requirements for obtaining a license as a CFD broker in the EU.

GAIN has also expressed concern, based in part on experience operating in other markets which went through regulatory change, that mandating excessively low leverage levels will have negative unintended consequences, including driving retail investors offshore to brokers that do not offer the level of investor protections present in strongly regulated markets.

As such, GAIN notes the availability of a consultation period in January 2018and looks forward to having the opportunity to further engage with ESMA and FCA on these matters.

GAIN operates a broadly diversified business, which includes a retail FX/CFD business spanning eight regulatory jurisdictions, a U.S.-based retail futures business and an institutional trading business, GTX.  As a result of this diversification across business lines and geographies, less than 20% of GAIN’s total revenue came from retail customers in UK and EU in the three months ending September 30, 2017, and the Company does not expect the proposed changes to regulation, even if enacted unchanged, to have a material adverse effect on its overall financial results.

GAIN believes that new regulation tends to lead to industry consolidation, which will ultimately benefit large, well-capitalized firms like GAIN Capital.

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