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New European CFD leverage restrictions – good or bad for traders?

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The European Securities and Markets Authority (ESMA), the pan-European securities regulator, has introduced its new leverage restrictions on Contracts for Difference. This is being introduced as part of a range of measures designed to lower leverage across assets classes, including equities, commodities and cryptocurrencies.

According to Ivan Gowan, CEO of Capital .com, while many CFD brokers have predicted doom and gloom following the introduction of the regulations, they will in fact create what he calls a more responsible and sustainable CFD broking industry for retail investors.

Capital .com itself implemented ESMA’s new leverage restrictions in June, and has analysed subsequent trader performance to try to understand how the leverage limits will impact traders and the wider CFD industry. It found that under the previous restrictions, traders of CFDs would typically be facing a margin call within the first two weeks. This has fallen to just under 6% using the new leverage limits. The average size of losses has also decreased by 80%.

“It is immensely encouraging to see traders losing less money due to lower leverage limits,” Gowan said. “There is a balance to be struck here, to allow traders to benefit from appropriate leverage without limiting the enjoyment and potential of CFD trading, but our analysis suggests that ESMA’s theoretically-desired levels are broadly correct in practice.”

Far from harming the CFD broking industry, as many have predicted, lower rates of leverage for new traders could ensure a more sustainable CFD market, as trading providers that encourage investors to take unsustainably high risk will struggle to operate in this enhanced regulatory environment.

Gowan thinks many CFD brokers may not survive a market that works better for the consumer, but he also thinks the “market will be fundamentally better off without them.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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