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Screenshot of a breaking news alert e-mail from Q2 2017
Shares of the leading FCA regulated UK online brokers traded down sharply on Monday morning, following proposals made late Friday by pan-European financial regulator ESMA to enact fairly severe restrictions on leveraged FX and CFD trading.
While ESMA made a number of proposals which it will put to public consultation in January – a Binary Options ban, required negative balance protection, and a ban on incentive bonus payments to retail traders – it is ESMA’s restrictions on leverage which are sending investors in these shares to the exits this morning.
ESMA’s proposal is to impose a hard 30x leverage cap on all Forex and CFD trading in Europe. And, for more volatile instruments (which it didn’t as yet define), maximum leverage of as low as 5x.
Our estimation is that average trading and position leverage at most of these regulated online brokers is somewhere in the 60-80x range. Meaning, that if imposed the 30x leverage cap might cut trading volumes by as much as 50% at some brokers, all other things being equal.
On fairly heavy trading volume, shares of the leading CFD brokers in the UK have traded down sharply Monday morning. As of 10:50am GMT:
- UK CFD industry leader IG Group Holdings plc (LON:IGG) shares are down 11%,
- #2 market share holder Plus500 Ltd (LON:PLUS) shares are off 13%, after trading off by as much as 18% earlier,
- CMC Markets Plc (LON:CMCX) down 10%.
There are a few things to note in all this. First, ESMA doesn’t really have the ability to enforce its proposals on individual country regulators. But, the proposals are likely to be adopted in an environment where country regulators are looking to increasingly harmonize their rules.
Also, the FCA is in process of “exiting” ESMA alongside the UK’s Brexit from Europe, and might not go as far as ESMA is suggesting for the rest of Europe. So far, the FCA stated that it “supports ESMA in its consideration of potential EU-wide product intervention”. And, that “any permanent FCA policy measures would take in to account any prospective ESMA measures.”
Today’s market action is somewhat reminiscent of what happened almost exactly one year ago, on December 6, 2016, when the FCA surprised the market with its own call for a hard 50x leverage cap on CFD trading. On that day surprised shareholders in IG, Plus500 and CMC sent shares in those companies tumbling by between 25-33%. While Plus500 has more than fully recovered from that dip, after posting record results during most of 2017, both IG and CMC shares remain below where they were in late 2016 prior to the FCA announcement. The FCA, of course, has since put its own initiative on hold as it waited for ESMA to come out with its proposals.