What is ESMA and How Has ESMA Impacted Forex & CFD Trading?

In 2018, a landmark decision known as ESMA significantly changed forex & CFD regulation in Europe.

In 2018, rules governing forex & CFD trading across Europe were significantly changed as a result of what is commonly referred to as ESMA.

We’ll cover the entire process from start to finish in order to provide an overview that both experienced traders and new investors can easily comprehend. To get started, we’ll first provide a basic overview of ESMA.

What is ESMA?

The European Securities and Markets Authority (ESMA) is a European oversight committee focusing on financial services and investor protection for the European Union. The measures proposed by ESMA, which we’ll shortly elaborate upon, were adopted unanimously by all EU member states.

It’s worth noting that each EU member state has its own financial regulatory body, allowing for autonomy in financial regulation. This means that an EU member state can set its own rules as it relates to the regulation of forex & CFD trading. In the case of ESMA, however, all EU member states agreed to the changes that we’ll now explore further.

Why Did ESMA have Such an Impact on Forex Trading Regulation? – Changes in Leverage Restrictions

Changes to leverage for FX & CFDs were by far the biggest result of the 2018 ESMA decision and what most people are referring to when they mention the term ESMA in conversations or on social media posts.

Per the official decision, changes to leverage were as follows: 

· 30:1 for major currency pairs;

·     20:1 for non-major currency pairs, gold and major indices;

·     10:1 for commodities other than gold and non-major equity indices;

·     5:1 for individual equities and other reference values;

·     2:1 for cryptocurrencies;

Additional Changes Brought About By ESMA – The Elimination of Binary Options Trading in Europe

Updates to leverage weren’t the only significant changes announced by ESMA. Another major change to the FX trading industry was the elimination of binary options as an investment product in Europe. The official ruling, which was put into action on August 1, 2018 calls for “a prohibition on the marketing, distribution or sale of binary options to retail investors.” 

How Else Has ESMA Impacted Forex & CFD Trading?

ESMA introduced the concept of negative balance protection to EU investors. The idea here is that forex & CFD traders would no longer be financially liable if their account balance reached a negative level due to a stop out. Under the new ESMA guidelines, this means that if a forex trader incurs a negative balance as a result of a stop out, the broker is responsible for bringing the balance back to a positive level, or 0.

In addition to calls for negative balance protection, ESMA also eliminated the more gimmicky aspects of the FX market in Europe. Prior to the adoption of ESMA policies, many forex brokers would offer trading contests, deposit bonuses and other incentives to attract clients. This practice was eliminated by ESMA.

Finally, all licensed brokers in the EU must furnish a risk warning to clients which not only informs them of the risks involved in CFD trading but also the percentage of clients which lose from an investment in CFDs.

From reductions in leverage to negative balance protection, ESMA brought about many changes to forex trading in Europe.

Our Thoughts on the Changes Brought by ESMA

We have mixed feelings about what we’ll refer to as the ESMA decision. On the one hand, we agree with the elimination of binary options in Europe. In our opinion, binary options are not a viable trading product. From what we’ve seen, almost all binary options brokers that were once very prevalent throughout Europe added no value to investors. Unlike gambling products, which as the name implies, involves gambling, binary options were falsely promoted as a form of investment when it was anything but that. Binary options traders were falsely led to believe they were investing when the entire product was titled in the favor of the broker, making the decision by ESMA to eliminate binary options an update in law that we approve of.

The reduction of maximum leverage on forex & CFDs, however, was undertaken in a rather extreme fashion. Our own firm’s growth in offshore licensing is testament to the fact that there is still investor appetite for higher leverage. Consider a region such as Labuan, Malaysia where leverage is capped at 100:1. There are now 60 brokers licensed there and the number is growing. It’s no surprise that interest in a region like Labuan, Malaysia was a direct result of the ESMA decision.

While our firm still receives inquiries from clients looking for EU licenses, the post-ESMA theme that we’ve seen has been for larger brokers to diversify their regulation to several jurisdictions, a service we specialize in.

While the ESMA decision was no doubt a boon for consulting firms such as ours, we beleive the leverage changes especially were too swift and pushed many investors to the offshore, a place where regulators ostensibly wish to protect clients from.

Atomiq Consulting – Consultation & Expertise in Forex Broker Licensing

If your FX broker is looking to obtain regulation either in Europe or offshore, our team of experts are here to help. We have a long and positive track record of successful license approvals across the globe, both offshore and continental.

To learn more about our forex broker licensing services, don’t hesitate to contact us today!

Have a look at some of the additional services our clients have found to be helpful in the growth of their business.

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