We had previously reported about it. The EU authority “ESMA” plans to introduce a maximum leverage of 30 in the CFD and Forex trading market, but only for private clients. For example, at first glance, it’s understandable to ban binary options when there´s no sense in a product at all, and the damage to investors is overwhelmingly clear – as is the case with binary options. But these restrictions on forex trading are something completely different!
Forex trading is the real trading of currencies. There is something real happening here. Private investors will be given the opportunity to participate in the global shark pool of institutional forex traders and major banks. Many of the private investors go under or are eaten by the sharks. But many private traders also win. But that’s not what matters most. It’s about whether Government authorities should infantilize the citizen or investor from A-Z, like an underage child who does not know what’s right or wrong.
That’s the point. With a maximum leverage of 30, forex trading is only restricted to “private customers”, not to professionals. Mature investors who know what they´re doing and are willing to take full risks are deprived of their freedom of choice! Here it would make sense to introduce more stringent risk warnings, and tough to control, if really every private customer understands what he/she is doing there. But de facto making trading uninteresting for the active trading citizen by cutting down the leverage ratios is an incapacitation! Of course that’s just my subjective opinion!
Elegant circumvention of the restrictions
The broker IG Markets writes today in response to the ESMA plans, that they have a very demanding clientele, and that so far mostly customers areprivate customers. In November IG changed its online masks so that private customers could be categorized as professional customers. Thus, they are officially no longer considered private customers, and would probably not fall under these restrictions with these maximum leverage in forex trading. You can read it well. IG hopes to increase the percentage of professional customers as much as possible! Quote:
All the measures that ESMA and the FCA are considering relate to retail clients. Whilst IG has historically categorised the vast majority of its clients as retail as a matter of course, IG’s client base is different from most in the industry due to the company’s long term focus on clients of high value and sophistication. IG launched its online process that allows clients to apply to be categorised as an elective professional in mid-November 2017. Since then, the proportion of IG’s UK and EU revenue generated by professional clients has increased from 5% to 15%, despite there being limited current advantage to them being categorised as such. IG believes that clients representing well over half its current UK and EU revenue are eligible to be categorised as professional and will elect to be treated as such if the products that they can trade and the leverage they can utilise diverges from that available to retail clients.
And what does IG Markets say about the actual main problem, namely the imminent restriction of leverage to a factor of 30? That was disproportionate, the Broker says. This would drive those clients who know what they want to do and work with high leverage into the arms of non-regulated brokers outside the EU. But otherwise, IG agrees with the ban on binary options, unified risk disclosures, etc. Quote:
IG believes that enforcing consistent close-out procedures, putting a guaranteed limit on client losses, restricting trading incentives such as bonus offers, and issuing standardised risk warnings would all improve client outcomes if implemented appropriately, and enforced effectively.
With respect to binaries, IG stopped offering its Sprint binary product to new retail clients in January 2017. Revenue from binaries traded by clients in the UK and EU has therefore reduced, and represented less than 5% of the Company’s revenue in the first half of the current financial year.
IG believes that the leverage restrictions under review are disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage. The danger of disproportionate leverage restrictions on regulated firms is the risk that they will push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes.
The broker Plus500 points in its current opinion on the fact that the Broker had never offered even binary options, and that one has always protected its customers against negative account balances. And they welcome the planned innovations of ESMA. Amazingly, Plus500 doesn´t lose a negative word about the maximum leverage of 30 in Forex trading. That´s amazing, because the high leverage brings brokers naturally larger trading volume, and also high yields. Quote Plus500:
Plus500, a leading online service provider for retail customers to trade CFDs internationally, today provides an update regarding the recent statement by ESMA, the European Securities and Markets Authority.
ESMA provided an updated statement on the preparatory work in relation to CFDs and other products offered to retail clients on Friday 15 December. It also commented that it will conclude its consultation in January 2018 with official trading restrictions to be announced then.
Plus500 welcomes this statement and the strong regulatory framework that this will bring to the industry. On the main points highlighted by this statement, Plus500 reiterates that the Company has never offered binary options and has always provided balance protection to its customers across all its product offerings in all its markets, as a core principle of its business model. The Company also has a maintenance margin level which enables its customers to have additional protection. As at January 2017, Plus500 removed its bonus schemes for the vast majority of its operations.
At this stage, Plus500 will wait for the conclusion of the consultation expected in January 2018 to understand where it will need to implement necessary adjustments to its business model.