The regulatory landscape around Europe’s retail online traders shifted significantly last year, ostensibly for the better. So what’s changed and how does it benefit you as a trader?
In 2018 ESMA, the European Securities Markets Authority, Europe’s supranational financial services regulator, introduced a raft of new measures designed to better protect retail traders. They centre around preventing traders from being able to take poor financial decisions and overly exposing themselves. A minority of brokers were considered guilty of encouraging financially imprudent trader behaviour through aggressive marketing and sales techniques. New rules should help protect retail traders from themselves and the minority of brokers who may not always have put the interests of their clients first.
So what are the most significant of these new rules?
Limits to Leverage
Retail traders can now be offered a maximum leverage of 30:1 on positions. Instruments with a history of lower volatility, such as major forex pairs can be offered at up to 30:1 while exotic pairs, individual stocks and particularly cryptocurrencies now have even lower leverage thresholds imposed.
Margin Close Out
As well as initial margins having been raised to reduce available leverage, maintenance margins have also been increased. Retail accounts are no longer allowed to breach a margin utilisation of 100%. Doing so will lead to automatic margin close-out of positions.
Negative Balances Banned
Brokers are no longer permitted to allow retail accounts to move into negative balance. At the point all collateral including cash deposits is exposed to losing positions the broker must close them off. Any negative balance incurred before that point must be refunded to the trader’s account, taking their balance back to zero.
Promotions and Bonuses
Tight restrictions have been placed on the kind of bonuses and other promotional offers used by brokers in marketing. Any bonuses that are offered are not allowed to involve lock-in small print that obliges traders to reach a particular turnover of the bonus before account withdrawals are permitted.
Brokers are also now obliged to publish data on the percentage of leveraged trades made by their account holders that close in positive territory. The idea behind this is to allow traders to positively discriminate in favour of brokers whose traders have a stronger comparative record on the assumption this is a direct result of favourable trading conditions and resources having been provided by the broker. On the flip side, traders will be able to see if a broker’s traders have a poorer than average record and draw their own conclusions around whether or not that broker is doing everything they can to support the success of their clients.
Binary Options Banned
Finally, the new ESMA rules effectively outlaw the offering of binary options as a retail-facing trading instrument. Dubious sales and marketing of binary options, which are similar in structure to sports betting, representing them as an investment rather than speculation has seen them banned entirely by the regulator.
While some retail traders might consider the new rules overly restrictive and an example of ‘nanny-ing’ by the regulator, the wider industry response is that they will help clean up the industry. Brokers that anyway had positive client-centric practises and marketing will see little disruption to their business model and the new regulations should favour best practise.