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Following the European Securities and Markets Authority (ESMA) statement on temporary product intervention measures placed on Contracts for difference trading, some brokers are welcoming the changes, stating that the work of regulators is essential to create a level playing field between CFD providers and to protect consumers from unsustainable risks.

“ESMA has put forward a raft of sensible measures and we are ready for these changes to our industry,” says Ivan Gowan, CEO of Capital .com. “CFD providers have a responsibility to help retail investors manage their appetite for risk against their ability to handle any losses and ESMA’s temporary measures provide an improved yardstick for providers to make sure that the industry get this balance right.”

ESMA and FCA collaborate on new CFD trading rules

ESMA recently published a statement detailing a range of product intervention measures to take affect across the European Union. These temporary measures will last for three months before being further reviewed. In the UK, the Financial Conduct Authority (FCA) has responded by undertaking its own consultation to explore making the ESMA measures permanent. The measures include putting a leverage limit on the opening of a CFD. This level varies according to the volatility of the underlying (from as little as 2:1 for cryptocurrencies to 30:1 for major currency pairs).

Other changes from the FCA include margin closeout rule of 50% of minimum initial required margin and negative balance protection on a per account basis. There also restrictions on advertising incentives to attract customers.

“ESMA’s negative balance protection and margin closeout rule are central to protecting retail clients from the risks of sudden gaps developing in the positions that they take and the potential for significant loses and debt, and we are very much behind these measures,” says Gowan, whose brokerage is regulated in Cyprus, although not currently in the UK.

Gowan added that the restrictions on incentives offered in advertising promotions is really good for client outcomes – “This is a financial product and people need to be clear-sighted about what CFD trading entails,” he explained. “Marketing should not make untrue statements and contain appropriate risk warnings.”

All of these measures – negative balance protection, margin closeout and marketing without bonus incentives have been implemented at Capital .com.

Tighter CFD leverage may drive investors offshore

However, according to Gowan, the leverage limits set out in the new product intervention measures are not consistent with meeting the needs of retail investors. While some leverage restriction, depending on the knowledge of the investor, is a good thing (a 400:1 leverage is very hard to justify under any circumstances), putting in place very tight leverage limits for all retail traders, regardless of their experience, is not in the consumers interest, he argues. He thinks such a situation will increase the chances that those seeking higher leverage will go offshore to access the leverage that they desire.

Gowan says that ESMA should consider the imposition of leverage restrictions in the context of the other protections in place, including CFD brokers making a responsible assessment of the level of sustainable risk that a retail investor can take (something that Capital .com already does, with differing levels of leverage offered depenfing on experience). This approach, alongside the new negative balance protection and margin closeout requirement, should be enough to adequately protect retail investors while allowing them to take advantage of what CFD trading can offer.

Adds Gowan: “In responding to the measures set out by ESMA, Capital .com views the needs of the customer as paramount, and we are fully prepared to be compliant with ESMA and the FCA’s guidelines as they become mandated.”

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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