Following the recent implementation of contracts for difference (CFD) trading rules by the European Securities and Markets Authority (ESMA), the regulatory body has announced that it will not renew the restrictions on selling CFDs to retail clients in Europe. Since August 2018, the regulatory body has been cracking down on brokers offering highly leveraged products to retail investors.
Between August, when the restrictions were first applied, and now, ESMA has put in place four extensions to the limitations on CFD trading. The latest of these extensions was applicable until July 2019 when the restrictions and the extensions are due to expire.
ESMA’s announcement that they will not be renewing the restrictions comes as no surprise due to the fact that the restrictions and regulations have been permanently adopted by many national regulators in Europe. The decision was also expected since ESMA did not renew its temporary ban on binary options.
The regulator’s decision to not renew the restrictions should not be misconstrued as the relaxing of regulations surrounding CFD trading. ESMA stated that they would continue to monitor the developments and activity around speculative products in a bid to determine whether or not other measures are needed in the European Union
The Impact Of ESMA’s rules
The regulations which ESMA put in place have had a strong impact on brokerages in Europe. Although these rules and regulations are optional for European countries to adopt and each country can tailor its own to suit their markets, many regulators took ESMA’s regulations and implemented them in their territories.
The revenues and profits generated by a large number of brokers in Europe have gone down significantly. One example is that of Polish FX and CFD broker, XTB, which suffered a 95% decline in revenue when H1-2019 results and those from H1-2018 are compared. Plus500 and IG Group are other brokers that have also suffered revenue losses after the implementation of the rules.
Brokers have mainly been affected by ESMA’s decision to limit the amount of leverage a broker can offer a client to juice up bets. For regulated firms, the maximum amount of leverage they can offer has been limited to 30:1 and for cryptocurrencies, the limits are even as low as 2:1. These limits have changed how brokers do their business and profits and revenue across the market have significantly gone down.
ESMA’s rules were also designed to protect negative accounts. The rules ensure that trading clients can not lose more than their trading stake which was previously a challenge for customers. One notable example is the 2015 collapse of the Swiss Franc. The rules have also done away with bonuses and incentives which previously encouraged overtrading.
Smaller brokers in the European Union may entirely disappear from the scene as they struggle to cope with pressure from the regulators and competition from bigger brokerages. The trading playing field will also become better in terms of it becoming a more level playing field.