Earlier today, Finance Magnates reported that the CySEC is proposing new national product intervention measures. The regulator has surprised the market by introducing three tiers of leverage for different types of retail clients.
The step is creating an upper tier category, which is reserved for more experienced traders that are more aware of the risks of trading with higher leverage. The CySEC is also clarifying a gray area and introduces a lower leverage tier for clients that don’t fully understand CFD products, underestimating potential losses arising from their positions.
In a circular distributed to Cyprus Investment Firms, the regulator is elaborating further on what the different criteria for different tiers are. While MiFID II regulations are only creating a distinction between retail and professional clients, CySEC states that in practice, retail clients exhibit different levels of sophistication and wealth.
Sophisticated Retail Clients
In the views of the Cyprus-based regulator, some retail clients are falling within the upper tier of the positive target market. Such clients have a better ability to bear losses and a superior trading experience. In the views of the regulator, provided that such a client initiates communication with the brokerage about increasing the amount of leverage he/she can use, they might be able to get a small bump to 50:1 in the case of major forex pairs.
Looking at the rest of the product mix, these clients can also get 30:1 on other FX pairs, gold, and major indices. When it comes to other commodities and stock benchmarks, the level drops to 20:1. Finally, if they are willing to trade single stock CFDs, they may use up to 10:1 gearing. While the CySEC is discouraging advertising leveraged CFD products on cryptocurrencies, clients will be able to use 2:1 if they so choose.
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While clients will be able to request their reclassification to brokers, the final result will be contingent on a predetermined set of criteria. Customers who would be able to use 50:1 leverage provided that the new proposed product intervention measures take effect in their current form will need to have at least €40,000 of income per year or at least €200,000 of liquid assets.
In addition, such clients will need to demonstrate that they are fully aware of the risks associated with trading CFDs. Every client will have to submit a proof to the broker that he/she carried out 10 CFDs transactions in significant size, every quarter over the previous four quarters.
This step taken by the CySEC is reminiscent of a tiered leverage discussion which is going on at the Polish regulator. Back in April, Finance Magnates reported that the local regulator is considering to introduce different tiers of retail clients in a similar fashion to what the CySEC is doing.
Excessive Leverage Limits
The CySEC is the first European regulator to openly address the move of many risk-seeking clients to offshore jurisdictions, where they are much less protected. While the regulator is opening the doors to higher leverage, the mild combination between the level and the requirements attached to the reclassification could strike the right balance for the market.
One thing which the CySEC made clear in its announcement this morning is that the regulator is actively observing industry trends and is aware that there are clients who are looking for more risk.
The EU’s approach to limit options for risk-takers has prompted a wide-ranging shift in the industry to jurisdictions outside of the EU. If the CySEC’s proposal goes through, brokers could still welcome customers that are looking for a more balanced ratio between regulatory protection and risk-taking.