The European Securities Markets Authority (ESMA) is preparing to deploy a new set of regulations on the retail trading industry. The move has been widely expected for about a year. The FCA was the first major regulator to signal that changes are coming to the regulatory framework that governs the business of retail brokers.
According to an interim update on the measures, ESMA is considering the heaviest of measures on binary options. The regulator says that it is considering product intervention powers in order to ban the offering altogether.
As to CFDs and forex brokerages, the supranational European regulator is preparing to limit the marketing of such products to retail investors. While some national authorities have already taken measures on a local level, all European regulators will need to adhere to the decision of the ESMA.
Leverage Could be Cut in Tiers to Between 1:30 and 1:5
Under the product intervention powers that the European authority will receive on the 3rd of January 2018 under the MiFIR framework, several limitations on brokerages are possible.
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According to the ESMA statement, it is considering cutting leverage limits to between 1:30 and 1:5. The precise levels will be contingent on the volatility of the underlying asset. In addition, the brokers might need to implement a margin close-out rule, negative balance protection and a standardized risk warning.
Brokers are also facing a restriction on the trading benefits that they offer. ESMA says that it will open a “brief public consultation” in January 2018 in order to determine which measures should be implemented and which not.
Any product intervention measures that ESMA undertakes will have an initial validity of three months, but the action is perpetually renewable. Unless the regulator faces a massive backlash from consumers, there is little likelihood of any measures being reversed once taken. The full statement from ESMA is available for reading below.