The European Securities Markets Authority (ESMA) has just issued a clarification related to the use of bonuses by retail forex and binary options brokerages. The supranational regulator of Europe states that all bonus promotions used by brokerages that are tied to trading volumes are to be suspended.

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National regulators are going to have to abide by the rules and monitor the implementation of the European MiFID law.

The elimination of bonuses that are tied to trading effectively eliminates one of the key retention and on-boarding tools

The ESMA justifies its opinion about bonuses by highlighting the psychological impact that a bonus may have on a client’s trading behavior. The EU regulator is advocating that every promotion which is encouraging clients to trade more should be suspended. Traders are starting to take bigger risks, which ultimately results in them losing their account principal.

The ESMA highlights that the main outcome ofsuch bonuses is equal to providing clients with additional leverage.

The elimination of bonuses that are tied to trading effectively eliminates one of the key retention and on-boarding tools which brokers have been using. As is usually the case this year, binary options brokerages are the ones who are going to feel the pinch the most.

The binary options industry has been heavily reliant on supplying its clients with bonuses under conditions which deliver substantial obligations for clients who are willing to withdraw their funds. Clients of binary options brokers are frequently required to make a turnover of 20 to 30 times the amount of their bonus in order to be able to withdraw it.

According to the supranational regulator in Europe, companies that are awarding virtual sums of money as bonuses that are rarely possible (if not outright impossible) to convert to real money do not adhere to the requirement of looking after the best interests of their clients.

As is already standard practice, in cases when bonuses are awarded to clients, the amounts need to be put in a separate balance, which is not merged with the account value of the client.