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?
Top Forex Brokers 2016 – 2017: How Do They Fare? | Trading Forex
When it comes to ranking Forex brokers, broker review sites make their rating selections for the top spots using a variety of different criteria. Investors use these reviews to help them decide which broker offers the features they need before opening a trading account and these reviews can save traders hours of untold stress as well as research time. With the start of each new year, listings of the top brokers are selected and posted online and the first round of recommended brokers for 2016/2017 have now been published. Due to the issues below the top brokers can change throughout the year, so it’s a good idea to do your research carefully close to the time you expect to start trading.
Changing Regulations
There have been some important changes in relation to Forex regulation in 2016 and many more regulatory updates that will come into effect into 2017. One place in which regulatory crackdowns have hit especially hard is the binary options arena. Many brokers have been investigated in 2016 and many have closed, with more closures expected in the coming months. More countries are banning the promotion of binary options and life is going to get harder for binary options brokers. This is hopefully going to be good news for traders though, if scammers are driven out of business and increased regulation keeps the field honest.
In the UK, the FCA has proposed capping the maximum leverage which may be offered in trading Contracts for Differences (CFDs) to 50 to 1, or 25 to 1 in cases where the trader is a retail client with less than 12-months experience in trading such instruments.
Belgium has banned all trading in CFDs, Binary Options and Forex, in the most draconian regulatory move made in modern times by any OECD member state. It remains unclear how this can be enforced fully against brokers located outside Belgium that decide to ignore Belgian regulations. This came shortly after France banned all advertising by spot Forex, CFD and Binary Options brokers.
Finally, the offering of bonuses to traders is becoming increasingly frowned upon. The FCA is banning all such incentivization in the U.K. and in Cyprus bonuses have already been banned, or at least new schemes may not be introduced and existing ones must be allowed to lapse after a reasonable period. However, there is some speculation that the ban in Cyprus is just intended as a “cosmetic” ban and brokers there may be able to find a way to work around it, at least for some considerable time to come.
To be quite frank, we think that action against bonuses is long overdue. They act as a distraction from the real issue at hand and are an invasion from the online gambling world, looked upon with total contempt by real traders. Even worse, the conditions which brokers always attach to the bonuses are often not examined closely by depositors, and often make it impossible to withdraw winnings until a large number of trades are taken, unknown to the clients if they do not read the small print.
Popular Trends
The two trends of the year that really stand out are the increasing popularity of ECN brokers and brokers offering social trading elements. ECN brokers are nothing new, but it seems that retail traders have an ever-increasing awareness of the inherent conflicts of interest present in market-making brokerage models. This might be, at least partly, a delayed effect of the spectacular losses suffered by some brokers due to the 2015 Swiss Franc crisis, which lead to a greater focus on the inner workings of Forex brokerages and the true nature of their exposures to the market.
As for social trading, it is a feature that more and more traders are looking to brokers to offer – it is really something that must be included within trading platforms to work fully. The features offered in the market are becoming more intelligent beyond the obvious incentives brokers must get their clients more trigger-happy. Notable winners in this field this year include eToro and Tradeo.
Trading Platforms
The typically dull issue of trading platforms became a hot potato this year as MetaQuotes, the makes of the phenomenally successful Metatrader 4 (MT4) platform which became the standard tool of millions of retail traders around the world, have again amazed the Forex community by casually announcing that MT4 would no longer be supported, implying that traders are going to be gradually forced into giving up this platform against their will.
What happened at MetaQuotes is a mystery, but it seems that after the runaway success of MT4 they decided to conquer the world by a new platform they called MT5. However, although MT5 has some similarities with MT4, it is very different and was overwhelmingly rejected by the trading community, with its various add-ons seeming to offer little advantage for traders but plenty of advantages to brokers and MetaQuotes. After this resounding failure, it seems MetaQuotes has simply given up and are going to try to force-feed their unpopular product to retail traders. If MT4 really does become unavailable, it is likely to open an opportunity for newer trading platforms, and we are already seeing an increase in the confidence with which brokers offer their own web-based trading platforms which probably is not a coincidence.
Source
Top Forex Brokers 2016 – 2017: How Do They Fare? | Trading Forex
When it comes to ranking Forex brokers, broker review sites make their rating selections for the top spots using a variety of different criteria. Investors use these reviews to help them decide which broker offers the features they need before opening a trading account and these reviews can save traders hours of untold stress as well as research time. With the start of each new year, listings of the top brokers are selected and posted online and the first round of recommended brokers for 2016/2017 have now been published. Due to the issues below the top brokers can change throughout the year, so it’s a good idea to do your research carefully close to the time you expect to start trading.
Changing Regulations
There have been some important changes in relation to Forex regulation in 2016 and many more regulatory updates that will come into effect into 2017. One place in which regulatory crackdowns have hit especially hard is the binary options arena. Many brokers have been investigated in 2016 and many have closed, with more closures expected in the coming months. More countries are banning the promotion of binary options and life is going to get harder for binary options brokers. This is hopefully going to be good news for traders though, if scammers are driven out of business and increased regulation keeps the field honest.
In the UK, the FCA has proposed capping the maximum leverage which may be offered in trading Contracts for Differences (CFDs) to 50 to 1, or 25 to 1 in cases where the trader is a retail client with less than 12-months experience in trading such instruments.
Belgium has banned all trading in CFDs, Binary Options and Forex, in the most draconian regulatory move made in modern times by any OECD member state. It remains unclear how this can be enforced fully against brokers located outside Belgium that decide to ignore Belgian regulations. This came shortly after France banned all advertising by spot Forex, CFD and Binary Options brokers.
Finally, the offering of bonuses to traders is becoming increasingly frowned upon. The FCA is banning all such incentivization in the U.K. and in Cyprus bonuses have already been banned, or at least new schemes may not be introduced and existing ones must be allowed to lapse after a reasonable period. However, there is some speculation that the ban in Cyprus is just intended as a “cosmetic” ban and brokers there may be able to find a way to work around it, at least for some considerable time to come.
To be quite frank, we think that action against bonuses is long overdue. They act as a distraction from the real issue at hand and are an invasion from the online gambling world, looked upon with total contempt by real traders. Even worse, the conditions which brokers always attach to the bonuses are often not examined closely by depositors, and often make it impossible to withdraw winnings until a large number of trades are taken, unknown to the clients if they do not read the small print.
Popular Trends
The two trends of the year that really stand out are the increasing popularity of ECN brokers and brokers offering social trading elements. ECN brokers are nothing new, but it seems that retail traders have an ever-increasing awareness of the inherent conflicts of interest present in market-making brokerage models. This might be, at least partly, a delayed effect of the spectacular losses suffered by some brokers due to the 2015 Swiss Franc crisis, which lead to a greater focus on the inner workings of Forex brokerages and the true nature of their exposures to the market.
As for social trading, it is a feature that more and more traders are looking to brokers to offer – it is really something that must be included within trading platforms to work fully. The features offered in the market are becoming more intelligent beyond the obvious incentives brokers must get their clients more trigger-happy. Notable winners in this field this year include eToro and Tradeo.
Trading Platforms
The typically dull issue of trading platforms became a hot potato this year as MetaQuotes, the makes of the phenomenally successful Metatrader 4 (MT4) platform which became the standard tool of millions of retail traders around the world, have again amazed the Forex community by casually announcing that MT4 would no longer be supported, implying that traders are going to be gradually forced into giving up this platform against their will.
What happened at MetaQuotes is a mystery, but it seems that after the runaway success of MT4 they decided to conquer the world by a new platform they called MT5. However, although MT5 has some similarities with MT4, it is very different and was overwhelmingly rejected by the trading community, with its various add-ons seeming to offer little advantage for traders but plenty of advantages to brokers and MetaQuotes. After this resounding failure, it seems MetaQuotes has simply given up and are going to try to force-feed their unpopular product to retail traders. If MT4 really does become unavailable, it is likely to open an opportunity for newer trading platforms, and we are already seeing an increase in the confidence with which brokers offer their own web-based trading platforms which probably is not a coincidence.
Source
Top Forex Brokers 2016 – 2017: How Do They Fare? | Trading Forex
When it comes to ranking Forex brokers, broker review sites make their rating selections for the top spots using a variety of different criteria. Investors use these reviews to help them decide which broker offers the features they need before opening a trading account and these reviews can save traders hours of untold stress as well as research time. With the start of each new year, listings of the top brokers are selected and posted online and the first round of recommended brokers for 2016/2017 have now been published. Due to the issues below the top brokers can change throughout the year, so it’s a good idea to do your research carefully close to the time you expect to start trading.
Changing Regulations
There have been some important changes in relation to Forex regulation in 2016 and many more regulatory updates that will come into effect into 2017. One place in which regulatory crackdowns have hit especially hard is the binary options arena. Many brokers have been investigated in 2016 and many have closed, with more closures expected in the coming months. More countries are banning the promotion of binary options and life is going to get harder for binary options brokers. This is hopefully going to be good news for traders though, if scammers are driven out of business and increased regulation keeps the field honest.
In the UK, the FCA has proposed capping the maximum leverage which may be offered in trading Contracts for Differences (CFDs) to 50 to 1, or 25 to 1 in cases where the trader is a retail client with less than 12-months experience in trading such instruments.
Belgium has banned all trading in CFDs, Binary Options and Forex, in the most draconian regulatory move made in modern times by any OECD member state. It remains unclear how this can be enforced fully against brokers located outside Belgium that decide to ignore Belgian regulations. This came shortly after France banned all advertising by spot Forex, CFD and Binary Options brokers.
Finally, the offering of bonuses to traders is becoming increasingly frowned upon. The FCA is banning all such incentivization in the U.K. and in Cyprus bonuses have already been banned, or at least new schemes may not be introduced and existing ones must be allowed to lapse after a reasonable period. However, there is some speculation that the ban in Cyprus is just intended as a “cosmetic” ban and brokers there may be able to find a way to work around it, at least for some considerable time to come.
To be quite frank, we think that action against bonuses is long overdue. They act as a distraction from the real issue at hand and are an invasion from the online gambling world, looked upon with total contempt by real traders. Even worse, the conditions which brokers always attach to the bonuses are often not examined closely by depositors, and often make it impossible to withdraw winnings until a large number of trades are taken, unknown to the clients if they do not read the small print.
Popular Trends
The two trends of the year that really stand out are the increasing popularity of ECN brokers and brokers offering social trading elements. ECN brokers are nothing new, but it seems that retail traders have an ever-increasing awareness of the inherent conflicts of interest present in market-making brokerage models. This might be, at least partly, a delayed effect of the spectacular losses suffered by some brokers due to the 2015 Swiss Franc crisis, which lead to a greater focus on the inner workings of Forex brokerages and the true nature of their exposures to the market.
As for social trading, it is a feature that more and more traders are looking to brokers to offer – it is really something that must be included within trading platforms to work fully. The features offered in the market are becoming more intelligent beyond the obvious incentives brokers must get their clients more trigger-happy. Notable winners in this field this year include eToro and Tradeo.
Trading Platforms
The typically dull issue of trading platforms became a hot potato this year as MetaQuotes, the makes of the phenomenally successful Metatrader 4 (MT4) platform which became the standard tool of millions of retail traders around the world, have again amazed the Forex community by casually announcing that MT4 would no longer be supported, implying that traders are going to be gradually forced into giving up this platform against their will.
What happened at MetaQuotes is a mystery, but it seems that after the runaway success of MT4 they decided to conquer the world by a new platform they called MT5. However, although MT5 has some similarities with MT4, it is very different and was overwhelmingly rejected by the trading community, with its various add-ons seeming to offer little advantage for traders but plenty of advantages to brokers and MetaQuotes. After this resounding failure, it seems MetaQuotes has simply given up and are going to try to force-feed their unpopular product to retail traders. If MT4 really does become unavailable, it is likely to open an opportunity for newer trading platforms, and we are already seeing an increase in the confidence with which brokers offer their own web-based trading platforms which probably is not a coincidence.
Source
Top Forex Brokers 2016 – 2017: How Do They Fare? | Trading Forex
When it comes to ranking Forex brokers, broker review sites make their rating selections for the top spots using a variety of different criteria. Investors use these reviews to help them decide which broker offers the features they need before opening a trading account and these reviews can save traders hours of untold stress as well as research time. With the start of each new year, listings of the top brokers are selected and posted online and the first round of recommended brokers for 2016/2017 have now been published. Due to the issues below the top brokers can change throughout the year, so it’s a good idea to do your research carefully close to the time you expect to start trading.
Changing Regulations
There have been some important changes in relation to Forex regulation in 2016 and many more regulatory updates that will come into effect into 2017. One place in which regulatory crackdowns have hit especially hard is the binary options arena. Many brokers have been investigated in 2016 and many have closed, with more closures expected in the coming months. More countries are banning the promotion of binary options and life is going to get harder for binary options brokers. This is hopefully going to be good news for traders though, if scammers are driven out of business and increased regulation keeps the field honest.
In the UK, the FCA has proposed capping the maximum leverage which may be offered in trading Contracts for Differences (CFDs) to 50 to 1, or 25 to 1 in cases where the trader is a retail client with less than 12-months experience in trading such instruments.
Belgium has banned all trading in CFDs, Binary Options and Forex, in the most draconian regulatory move made in modern times by any OECD member state. It remains unclear how this can be enforced fully against brokers located outside Belgium that decide to ignore Belgian regulations. This came shortly after France banned all advertising by spot Forex, CFD and Binary Options brokers.
Finally, the offering of bonuses to traders is becoming increasingly frowned upon. The FCA is banning all such incentivization in the U.K. and in Cyprus bonuses have already been banned, or at least new schemes may not be introduced and existing ones must be allowed to lapse after a reasonable period. However, there is some speculation that the ban in Cyprus is just intended as a “cosmetic” ban and brokers there may be able to find a way to work around it, at least for some considerable time to come.
To be quite frank, we think that action against bonuses is long overdue. They act as a distraction from the real issue at hand and are an invasion from the online gambling world, looked upon with total contempt by real traders. Even worse, the conditions which brokers always attach to the bonuses are often not examined closely by depositors, and often make it impossible to withdraw winnings until a large number of trades are taken, unknown to the clients if they do not read the small print.
Popular Trends
The two trends of the year that really stand out are the increasing popularity of ECN brokers and brokers offering social trading elements. ECN brokers are nothing new, but it seems that retail traders have an ever-increasing awareness of the inherent conflicts of interest present in market-making brokerage models. This might be, at least partly, a delayed effect of the spectacular losses suffered by some brokers due to the 2015 Swiss Franc crisis, which lead to a greater focus on the inner workings of Forex brokerages and the true nature of their exposures to the market.
As for social trading, it is a feature that more and more traders are looking to brokers to offer – it is really something that must be included within trading platforms to work fully. The features offered in the market are becoming more intelligent beyond the obvious incentives brokers must get their clients more trigger-happy. Notable winners in this field this year include eToro and Tradeo.
Trading Platforms
The typically dull issue of trading platforms became a hot potato this year as MetaQuotes, the makes of the phenomenally successful Metatrader 4 (MT4) platform which became the standard tool of millions of retail traders around the world, have again amazed the Forex community by casually announcing that MT4 would no longer be supported, implying that traders are going to be gradually forced into giving up this platform against their will.
What happened at MetaQuotes is a mystery, but it seems that after the runaway success of MT4 they decided to conquer the world by a new platform they called MT5. However, although MT5 has some similarities with MT4, it is very different and was overwhelmingly rejected by the trading community, with its various add-ons seeming to offer little advantage for traders but plenty of advantages to brokers and MetaQuotes. After this resounding failure, it seems MetaQuotes has simply given up and are going to try to force-feed their unpopular product to retail traders. If MT4 really does become unavailable, it is likely to open an opportunity for newer trading platforms, and we are already seeing an increase in the confidence with which brokers offer their own web-based trading platforms which probably is not a coincidence.
Source
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