Breaking: FCA Delays New Forex and CFDs Regulations until 2018

The UK Financial Conduct Authority (FCA) has outlined in a statement that it is delaying the implementation of new rules on forex and CFDs trading. The news follows the European Securities and Markets Authority (ESMA) publishing a brief statement on Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Read this Term, CFDs and binary options brokers, explaining that it is concerned about the effectiveness of the current regulatory framework.

The news brings a small sigh of relief to the financial industry, as the UK FCA had previously aimed to introduce the new regulations before the end of June. The regulator has now decided to skip immediate measures, as the central European supervisory authority looks into the matter.

The EU supranational regulatory authority however is looking into using its new product intervention powers, which allow it to ban certain products for a period of 12 months. A review of any ban should be reviewed every three months.

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The deadline given by ESMA for the announcement of new rules and regulations over retail brokers is the implementation of MiFID II. The biggest change expected from the regulatory framework is the 'product intervention power', whereby ESMA will be allowed to ban certain products and more effectively supervise the industry.

MiFID II and Product Intervention Powers

According to the FCA, the measures in discussion at ESMA are similar to the UK watchdog’s own proposals, that included a cap on leverage and a ban of bonus promotions. Certain changes to client on-boarding procedures are also in the mix as the FCA is looking to protect clients from taking uninformed risks.

Beyond the measures outlined by the FCA, ESMA is considering the introduction of mandated Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. Read this Term protection measures, a step which the German regulator has already implemented.

Should a decision to use product intervention powers be taken by ESMA it will also need to be approved by ESMA’s Board of Supervisors.

The FCA highlights that it is contemplating taking final measures in the first half of 2018.

It outlined in a statement: “As we monitor the progress of ESMA’s product intervention process, the FCA will conduct further policy work in light of consultation feedback. We expect this to include a further request for additional data from a sample of UK firms over the coming months. Information received during the consultation period suggests that lower leverage is associated with better client outcomes across a number of firms.”

“More detailed and comparable firm data are required to provide clarity on the impact of different factors on individual client outcomes. These data and analysis are intended to inform any future policy decisions, and provide a basis on which we can evaluate the impact of any prospective rules. The FCA will continue its focus on the sector through its on-going programme of supervisory work,” the UK regulator concludes.