Breaking: ESMA to Mandate Tiered Leverage and Retail Clients Loss Disclosure

An outright EU-wide ban on binary options is a virtual certainty now that MiFID II is in place.

The European Securities Markets Authority has issued a statement on the final measures that it is proposing for the retail forex and CFDs industry. The news comes amid expectations for a finalization of the new regulatory framework in the EU in the first quarter of the year.

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The supranational European regulator is seeking opinions from industry participants on the measures that it is proposing to protect retail clients. ESMA is also proposing a full ban on binary options and is still considering whether to include cryptocurrency CFDs as a separate category.

Tiered Leverage and Standardized Margin Close Out

ESMA is proposing that the margin requirements on different instruments vary from 1:5 to 1:30. The rule of thumb here is that the more volatile an instrument is, the less leverage the brokerage will be offering on it. The Canadian regulator IIROC has been approaching the FX market in a similar way and is regularly updating brokers and clients on any margin changes as volatility patterns shift.

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Another major change is the introduction of a universal margin closeout percentage. Until now, brokers have been at liberty to choose at their own discretion the automatic close out protection for clients. ESMA is proposing a standardized margin rule that protects retail clients and closes their positions automatically should a given level of margin utilization be reached.

Restriction on Trading Incentivization, Losses Disclosure

Brokers will also be required to introduce negative balance protection on a per account basis. The move is aiming to provide an overall guaranteed limit to client losses.

A total prohibition on any measures that are designed to incentivize trading is also proposed by ESMA. This move is not only related to bonuses, but also to rebates that some brokers are providing on a per volume basis.

Last but not least, brokers will be required to add to their risk disclosure the range of losses which their clients are booking.

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