CFD Industry Mixed Views on ESMA Leverage Proposal

London-based derivatives brokers speak out against ESMA's new reforms that could hinder the dynamic CFD trading market.

Press Release ( - LONDON - Feb 04, 2018 - Brokers offering financial derivatives instruments in the EU have been facing some of the most significant reforms since 2016 that could shape the future of the sector. ESMA, the European watchdog that regulates financial and capital markets has been issuing a heavy-hand on the lucrative CFD market, in its forthcoming proposals, the industry is expected to succumb to regulatory change that simply alters the product.

In ESMA’s view, leverage is bad, and hence the new regime will restrict CFDs to 30 to 1 leverage, for traders looking to speculate on instruments such as currencies and indices, the margin requirements make CFDs rather interesting, however the new rules will put CFDs on par with futures thus removing any of the ‘wow-factors’ available in  a CFD trade, what’s more, the futures market is exchange-traded, even for products such as EUR USD thus giving traders more stability on prices and having a listed product.

But the CFD market hasn’t just accepted the change, brokers such as IG have been sharing their views publicly, a company statement deemed the changes as disproportionate, in addition, the UK’s largest broker has been encouraging their clients to be as vocal as possible by responding to the proposed changes through a consultation paper. Further, Gain Capital, a listed multi-asset broker has also said that the new changes could have unintended consequences.

Some participants believe that by deleveraging the sector, the regulators will force trader’s off-shore, some will trade with unregulated brokers to benefit from the flexible leverage and hence will suffer from brokers that are not obliged to follow rules such as client money segregation, best execution and AML to offer a product that protects investors and the industry at ivenx large.

Why is leverage popular?

Traders that are looking to take advantage of market movements appreciate the advantages of leverage, it allows traders to place a set amount of main to enter into a contract, with leverage (or gearing) at 500 to 1 a trader puts in a small amount of margin in proportion to the actual size of the contract. ESMA’s research, alongside a number of domestic regulators in Europa has shown that most traders using CFDs lose money,

The CFD Trading & Compliance Forum believes that the proposed changes are in fact disproportionate and discard the needs of traders, there is truth on the riskiness of the product, however CFDs are investment products and traders should have the ultimate choice. Measures such as appropriateness scoring and assessment can filter out those that are unsuitable for CFD trading. On the other hand, there are several traders that use the products as a mere hedge o cover short terms movements that impact their wider portfolio.

ESMA’s consultation closes on the 5th of February 2018 and their verdict is expected to be made within 1-3 months, with leverage restrictions a definite.

Traders, brokers and well-wishers are expected to share their views so that ESMA can make an informed decision on their proposal.

Source : cfd trading compliance forum

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