The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
What is Cryptocurrency (and How Does It Work?) | Trading Forex
What is Cryptocurrency?
“Cryptocurrency” is digital currency which uses cryptography to create new units of the currency and to secure and manage all transactions. Cryptocurrency is created and managed by computer software, and has no physical existence at all. Another way to think of it is as currency used within, and created, by computer software, as opposed to having a distinct physical form. As opposed to cryptocurrency, the U.S. dollar is created by the U.S. government and used within the United States as the official means of exchange. Its creation and maintenance is regulated under license from the U.S. government in accordance with the laws of the country. The U.S. dollar is a “fiat currency”, like almost all national currencies, backed by the country’s government and national bank. In contrast, Bitcoin, currently the largest and most important cryptocurrency, is created by and used within the Bitcoin blockchain software, and is entirely regulated and managed using Bitcoin blockchain technology. There is one distinct similarity between fiat currencies and cryptocurrencies: Just as fiat currencies can be used as a currency in many cases outside their country of origin, so too, Bitcoin can be exchanged in transactions completely unrelated to use of the Bitcoin blockchain technology.There are many other cryptocurrencies besides Bitcoin. They are all created by and used within other computer software platforms that utilize similar blockchain technology. The most notable examples are, based on the market capitalization of 1st September 2017: Ethereum, Bitcoin Cash, Ripple, and Litecoin. We will look at how cryptocurrencies are created, stored and managed in detail later, but you probably have more important questions in mind that need to be answered first.
Are cryptocurrencies “real money”?
Believe it or not, the answer to this question can be both “yes” and “no”. Money, or “currency”, to use the correct term, is defined as an accepted “means of exchange”. The national currency of the country where you live is legal tender by law – providers of goods and services, with a few exceptions, must accept payment in that currency. If you have a job, you would expect to be paid by your employer in that currency. If you have a debt, or are issued with a bill, you can always pay it off with your national currency. It is truly a “means of exchange”. With cryptocurrencies, the situation is very different as most goods and services cannot be purchased with cryptocurrency. This might change in the future, but it is the case now.In other words, if you own a cryptocurrency such as Bitcoin, you can exchange it for a fiat currency any time there is an open and accessible market but you cannot go out and spend it in most stores at your local mall or market (although there are a few stores and online retailers that DO accept the larger cryptocurrencies, such as Bitcoin, as payment). In this sense, owning a cryptocurrency is the same as owning shares or a commodity such as gold. At the time of this writing only eight major online retailers accept payment in Bitcoin:
- Microsoft (for Windows and Xbox)
- Expedia.com (for hotel bookings)
- Overstock.com
- eGifter.com (may be used to purchase gift cards valid at a wide range of outlets)
- Foodler
- Newegg (for a limited range of transactions)
- Shopify
- Dish
Another question you may have is how cryptocurrency technology works.
National currencies are created and managed by central banks and governments that determine how much new money should be printed and what the base rate of interest should be. Sometimes central banks even intervene by buying and selling currencies in the market to influence exchange rates. It is clear who oversees currencies like the U.S. dollar or the euro. How does it work with cryptocurrencies? Very differently!Unlike fiat currencies, and even unlike commodities such as gold which are semi-currencies with a “store of value”, the supply of each currency is theoretically finite, and usually known in advance. Blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system. At the current time, it is known exactly how many Bitcoins exist because every Bitcoin ever created is listed within the Bitcoin blockchain ledger. It is also known that there will never be more than 21 million Bitcoins in existence ever, because the Bitcoin blockchain technology is programmed to halt the creation of new Bitcoins at 21 million, although it is possible that Bitcoin miners could create a new offshoot of Bitcoin (from a “hard fork”) that would have a higher supply limit. The blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system.
I will discuss more about blockchain technology in my next article – sign up for our Android or iOS app to read these Bitcoin articles and others comfortably from any mobile device.
Source
What is Cryptocurrency (and How Does It Work?) | Trading Forex
What is Cryptocurrency?
“Cryptocurrency” is digital currency which uses cryptography to create new units of the currency and to secure and manage all transactions. Cryptocurrency is created and managed by computer software, and has no physical existence at all. Another way to think of it is as currency used within, and created, by computer software, as opposed to having a distinct physical form. As opposed to cryptocurrency, the U.S. dollar is created by the U.S. government and used within the United States as the official means of exchange. Its creation and maintenance is regulated under license from the U.S. government in accordance with the laws of the country. The U.S. dollar is a “fiat currency”, like almost all national currencies, backed by the country’s government and national bank. In contrast, Bitcoin, currently the largest and most important cryptocurrency, is created by and used within the Bitcoin blockchain software, and is entirely regulated and managed using Bitcoin blockchain technology. There is one distinct similarity between fiat currencies and cryptocurrencies: Just as fiat currencies can be used as a currency in many cases outside their country of origin, so too, Bitcoin can be exchanged in transactions completely unrelated to use of the Bitcoin blockchain technology.There are many other cryptocurrencies besides Bitcoin. They are all created by and used within other computer software platforms that utilize similar blockchain technology. The most notable examples are, based on the market capitalization of 1st September 2017: Ethereum, Bitcoin Cash, Ripple, and Litecoin. We will look at how cryptocurrencies are created, stored and managed in detail later, but you probably have more important questions in mind that need to be answered first.
Are cryptocurrencies “real money”?
Believe it or not, the answer to this question can be both “yes” and “no”. Money, or “currency”, to use the correct term, is defined as an accepted “means of exchange”. The national currency of the country where you live is legal tender by law – providers of goods and services, with a few exceptions, must accept payment in that currency. If you have a job, you would expect to be paid by your employer in that currency. If you have a debt, or are issued with a bill, you can always pay it off with your national currency. It is truly a “means of exchange”. With cryptocurrencies, the situation is very different as most goods and services cannot be purchased with cryptocurrency. This might change in the future, but it is the case now.In other words, if you own a cryptocurrency such as Bitcoin, you can exchange it for a fiat currency any time there is an open and accessible market but you cannot go out and spend it in most stores at your local mall or market (although there are a few stores and online retailers that DO accept the larger cryptocurrencies, such as Bitcoin, as payment). In this sense, owning a cryptocurrency is the same as owning shares or a commodity such as gold. At the time of this writing only eight major online retailers accept payment in Bitcoin:
- Microsoft (for Windows and Xbox)
- Expedia.com (for hotel bookings)
- Overstock.com
- eGifter.com (may be used to purchase gift cards valid at a wide range of outlets)
- Foodler
- Newegg (for a limited range of transactions)
- Shopify
- Dish
Another question you may have is how cryptocurrency technology works.
National currencies are created and managed by central banks and governments that determine how much new money should be printed and what the base rate of interest should be. Sometimes central banks even intervene by buying and selling currencies in the market to influence exchange rates. It is clear who oversees currencies like the U.S. dollar or the euro. How does it work with cryptocurrencies? Very differently!Unlike fiat currencies, and even unlike commodities such as gold which are semi-currencies with a “store of value”, the supply of each currency is theoretically finite, and usually known in advance. Blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system. At the current time, it is known exactly how many Bitcoins exist because every Bitcoin ever created is listed within the Bitcoin blockchain ledger. It is also known that there will never be more than 21 million Bitcoins in existence ever, because the Bitcoin blockchain technology is programmed to halt the creation of new Bitcoins at 21 million, although it is possible that Bitcoin miners could create a new offshoot of Bitcoin (from a “hard fork”) that would have a higher supply limit. The blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system.
I will discuss more about blockchain technology in my next article – sign up for our Android or iOS app to read these Bitcoin articles and others comfortably from any mobile device.
Source
What is Cryptocurrency (and How Does It Work?) | Trading Forex
What is Cryptocurrency?
“Cryptocurrency” is digital currency which uses cryptography to create new units of the currency and to secure and manage all transactions. Cryptocurrency is created and managed by computer software, and has no physical existence at all. Another way to think of it is as currency used within, and created, by computer software, as opposed to having a distinct physical form. As opposed to cryptocurrency, the U.S. dollar is created by the U.S. government and used within the United States as the official means of exchange. Its creation and maintenance is regulated under license from the U.S. government in accordance with the laws of the country. The U.S. dollar is a “fiat currency”, like almost all national currencies, backed by the country’s government and national bank. In contrast, Bitcoin, currently the largest and most important cryptocurrency, is created by and used within the Bitcoin blockchain software, and is entirely regulated and managed using Bitcoin blockchain technology. There is one distinct similarity between fiat currencies and cryptocurrencies: Just as fiat currencies can be used as a currency in many cases outside their country of origin, so too, Bitcoin can be exchanged in transactions completely unrelated to use of the Bitcoin blockchain technology.There are many other cryptocurrencies besides Bitcoin. They are all created by and used within other computer software platforms that utilize similar blockchain technology. The most notable examples are, based on the market capitalization of 1st September 2017: Ethereum, Bitcoin Cash, Ripple, and Litecoin. We will look at how cryptocurrencies are created, stored and managed in detail later, but you probably have more important questions in mind that need to be answered first.
Are cryptocurrencies “real money”?
Believe it or not, the answer to this question can be both “yes” and “no”. Money, or “currency”, to use the correct term, is defined as an accepted “means of exchange”. The national currency of the country where you live is legal tender by law – providers of goods and services, with a few exceptions, must accept payment in that currency. If you have a job, you would expect to be paid by your employer in that currency. If you have a debt, or are issued with a bill, you can always pay it off with your national currency. It is truly a “means of exchange”. With cryptocurrencies, the situation is very different as most goods and services cannot be purchased with cryptocurrency. This might change in the future, but it is the case now.In other words, if you own a cryptocurrency such as Bitcoin, you can exchange it for a fiat currency any time there is an open and accessible market but you cannot go out and spend it in most stores at your local mall or market (although there are a few stores and online retailers that DO accept the larger cryptocurrencies, such as Bitcoin, as payment). In this sense, owning a cryptocurrency is the same as owning shares or a commodity such as gold. At the time of this writing only eight major online retailers accept payment in Bitcoin:
- Microsoft (for Windows and Xbox)
- Expedia.com (for hotel bookings)
- Overstock.com
- eGifter.com (may be used to purchase gift cards valid at a wide range of outlets)
- Foodler
- Newegg (for a limited range of transactions)
- Shopify
- Dish
Another question you may have is how cryptocurrency technology works.
National currencies are created and managed by central banks and governments that determine how much new money should be printed and what the base rate of interest should be. Sometimes central banks even intervene by buying and selling currencies in the market to influence exchange rates. It is clear who oversees currencies like the U.S. dollar or the euro. How does it work with cryptocurrencies? Very differently!Unlike fiat currencies, and even unlike commodities such as gold which are semi-currencies with a “store of value”, the supply of each currency is theoretically finite, and usually known in advance. Blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system. At the current time, it is known exactly how many Bitcoins exist because every Bitcoin ever created is listed within the Bitcoin blockchain ledger. It is also known that there will never be more than 21 million Bitcoins in existence ever, because the Bitcoin blockchain technology is programmed to halt the creation of new Bitcoins at 21 million, although it is possible that Bitcoin miners could create a new offshoot of Bitcoin (from a “hard fork”) that would have a higher supply limit. The blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system.
I will discuss more about blockchain technology in my next article – sign up for our Android or iOS app to read these Bitcoin articles and others comfortably from any mobile device.
Source
What is Cryptocurrency (and How Does It Work?) | Trading Forex
What is Cryptocurrency?
“Cryptocurrency” is digital currency which uses cryptography to create new units of the currency and to secure and manage all transactions. Cryptocurrency is created and managed by computer software, and has no physical existence at all. Another way to think of it is as currency used within, and created, by computer software, as opposed to having a distinct physical form. As opposed to cryptocurrency, the U.S. dollar is created by the U.S. government and used within the United States as the official means of exchange. Its creation and maintenance is regulated under license from the U.S. government in accordance with the laws of the country. The U.S. dollar is a “fiat currency”, like almost all national currencies, backed by the country’s government and national bank. In contrast, Bitcoin, currently the largest and most important cryptocurrency, is created by and used within the Bitcoin blockchain software, and is entirely regulated and managed using Bitcoin blockchain technology. There is one distinct similarity between fiat currencies and cryptocurrencies: Just as fiat currencies can be used as a currency in many cases outside their country of origin, so too, Bitcoin can be exchanged in transactions completely unrelated to use of the Bitcoin blockchain technology.There are many other cryptocurrencies besides Bitcoin. They are all created by and used within other computer software platforms that utilize similar blockchain technology. The most notable examples are, based on the market capitalization of 1st September 2017: Ethereum, Bitcoin Cash, Ripple, and Litecoin. We will look at how cryptocurrencies are created, stored and managed in detail later, but you probably have more important questions in mind that need to be answered first.
Are cryptocurrencies “real money”?
Believe it or not, the answer to this question can be both “yes” and “no”. Money, or “currency”, to use the correct term, is defined as an accepted “means of exchange”. The national currency of the country where you live is legal tender by law – providers of goods and services, with a few exceptions, must accept payment in that currency. If you have a job, you would expect to be paid by your employer in that currency. If you have a debt, or are issued with a bill, you can always pay it off with your national currency. It is truly a “means of exchange”. With cryptocurrencies, the situation is very different as most goods and services cannot be purchased with cryptocurrency. This might change in the future, but it is the case now.In other words, if you own a cryptocurrency such as Bitcoin, you can exchange it for a fiat currency any time there is an open and accessible market but you cannot go out and spend it in most stores at your local mall or market (although there are a few stores and online retailers that DO accept the larger cryptocurrencies, such as Bitcoin, as payment). In this sense, owning a cryptocurrency is the same as owning shares or a commodity such as gold. At the time of this writing only eight major online retailers accept payment in Bitcoin:
- Microsoft (for Windows and Xbox)
- Expedia.com (for hotel bookings)
- Overstock.com
- eGifter.com (may be used to purchase gift cards valid at a wide range of outlets)
- Foodler
- Newegg (for a limited range of transactions)
- Shopify
- Dish
Another question you may have is how cryptocurrency technology works.
National currencies are created and managed by central banks and governments that determine how much new money should be printed and what the base rate of interest should be. Sometimes central banks even intervene by buying and selling currencies in the market to influence exchange rates. It is clear who oversees currencies like the U.S. dollar or the euro. How does it work with cryptocurrencies? Very differently!Unlike fiat currencies, and even unlike commodities such as gold which are semi-currencies with a “store of value”, the supply of each currency is theoretically finite, and usually known in advance. Blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system. At the current time, it is known exactly how many Bitcoins exist because every Bitcoin ever created is listed within the Bitcoin blockchain ledger. It is also known that there will never be more than 21 million Bitcoins in existence ever, because the Bitcoin blockchain technology is programmed to halt the creation of new Bitcoins at 21 million, although it is possible that Bitcoin miners could create a new offshoot of Bitcoin (from a “hard fork”) that would have a higher supply limit. The blockchain technology keeps a record of every Bitcoin in existence, including who owns it (or the ownership key, to be more exact), and issues a fixed quantity of new Bitcoins approximately every 10 minutes to a computer which has successfully contributed a minimum amount of work towards maintaining the blockchain technology acting as Bitcoin’s operating system.
I will discuss more about blockchain technology in my next article – sign up for our Android or iOS app to read these Bitcoin articles and others comfortably from any mobile device.
Source
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