Unless you’ve been hiding under a rock for the last few months, you’ll have heard about ESMA (the European Securities and Markets Authority) making changes to the way Spread Betting / CFDs work throughout Europe, with restrictions to leveraged accounts, reducing the risk for traders new and experienced across the Continent.
Essentially, as of August 1 2018, leverage on CFDs and major FX pairs will be traded with 30:1. Indices, the minor currency pairs and gold will be traded at 20:1, and other commodities and minor indices will be provided with a 10:1.
This is is somewhat different picture than the 200:1, 300:1 or 400:1 leverage we have seen recently from UK and European brokers and it changes the landscape somewhat for traders.
If you’re heavily experienced, you can self-certify as a professional trader and bypass ESMA’s draconian changes, but your broker is going to want some proof of your experience that they can verify before you get that.
Anyway, it’s not all bad. The leverage restrictions in place are there to save newbie traders from losing a ton of money whilst learning to trade. And let’s face it, about 90% of new traders do blow their accounts in no time at all, not helped by the huge leverage that you have been able to historically get (and may get again). Who knows – ESMA are due to review their leverage restrictions in a few months’ time.
There are several changes, depending on what you’re trading. Using IG.com as an example, given that they’re the biggest retail Spreadbetting broker in the UK, here’s what’s changing with ESMA leverage restrictions:
FX Majors – Current Margin Requirements: Rising from 0.5% to 3.3%
Stock Indices – Current Margin Requirements: Rising from 0.5% to 5% (a ten-fold increase)
Gold/Commodities – Current Margin Requirements: Rising from 0.5% to 5%
How do the new ESMA leverage restrictions affect you as a trader?
Let’s imagine you’re a new trader and you’ve put £500 into your trading account which is much too little anyway, but it’s not unheard of so let’s go with that.
Under the old ESMA rules, £500 would have enabled you to trade at £1 a point and use only around £60 of your margin (deposit) amount, meaning you can trade at perhaps £5/point if you so choose, or trade multiple instruments at £1/point.
Under the new ESMA rules, given the same £500 deposit/margin, you’ll use around £400 of that trading at £1/point, meaning that £1/point is all you can trade at, and you can only trade one instrument at any one time.
The main reason behind this is to prevent over-leveraging of accounts, prevent people blowing their accounts in no time at all – given that a major FX pair could easily move 100 points against you during news time and wipe out 1/5th of your margin/deposit if you had a £500 account at £1/point.
Are the August 2018 ESMA changes for the better?
On the face of it, as someone who has been in this space for quite a while, I’d have to say yes the latest raft of ESMA changes do represent a positive step for the consumer. They put sensible leverage limitations in place for the new trader, helping them to manage their risk more effectively and reduce their exposure when, quite often, people won’t understand how highly leveraged it actually is.