Press Release

What Are The New ESMA Rules And How It Will Impact Your Trading or Investment?

This March, the European Securities and Markets Authority (ESMA) announced its intentions of imposing new rules regarding the trading industry. The new rules are to come into effect from 1st of August 2018.

 

What are the restrictions?

ESMA Will Impose Five Key Measures:

• An imposition of leverage limits – max 1:30
• A Margin Close Out (MCO) rule of 50% on a per account basis
• A negative balance protection on a per account basis – broker still has to pay the liquidity provider though, but you won’t have to pay the broker
• A restriction on incentivisation of trading
• A standardised risk warning
• Prohibits the marketing, distribution and sale of binary options

It’s not the end of trading industry, but rather the beginning…

Regulation is something that can either hurt an industry or help it. In most cases, it hurts it. In this case it’s being used well, as all new rules actually favor the trader. The amount of people who go into forex trading not knowing anything about the skill or industry is tremendous. These regulations will, at least, offset their losses somewhat and offer additional stability to the trading account of the retail client. The amount of noise created behind the regulations will also cause traders to seek out more valid information, and thus be more aware of what they are getting into. The new rules are a good step forward to reducing the bad rep this industry has.

 

Here’s An Example Of The Margin Requirements With 1:100 (A) And 1:30 (B) Leverage:

A. Trading 3 lots of EUR/USD using 1:100 leverage with an account denominated in USD:

Trade size: 300,000

Account currency exchange rate: 1.200

Required Margin: 300,000 / 100 * 1.200 = $3,600

 

B. Trading 3 lots of EUR/USD using 1:30 leverage with an account denominated in USD:

Trade size: 300,000

Account currency exchange rate: 1.200

Required Margin: 300,000 / 30 * 1.200 = $12,000

 

With a $10,000 account you won’t be able to place a 3 lot trade with the new rules on leverage.  Your highest trade size would be 2.5 lots in this example.

Nevertheless, if you want to take higher risk you still have more than enough opportunity to do so. Placing a 2.5 lot trade with a $10,000 balance would still be deemed quite risky in the eyes of VESBOLT.

How to keep your leverage at 1:100?

If you still can’t get around having to deal with the new rules on CFD’s, there is still an option for you. If you have enough experience in the trading industry, you may opt to sidestep the new regulations by becoming an ‘’elective professional’’. This will allow you to receive the old leverage amounts. To do this, you would need to pass a qualitative test as well as a quantitative test. Check with your broker for extra information.