Analysis

ESMA Regulations End Game: One Size Fits All

If there was any doubt remaining about the way European countries will handle regulation, it is all gone.

Following the FCA last week, this week the German financial regulator announced that it is making the temporary ESMA restrictions permanent. The news shouldn’t come as a surprise since last cycle the FCA also took the lead with its European counterparts catching up shortly.

Today’s BaFin decision to make the leverage, negative balance protection, and marketing and bonus promotions measures permanent, follow up on the regulator’s prohibition of binary options.

The decisions are signaling to the industry that there is a very small likelihood that any countries choose to detract from ESMA’s guidance. It is EU’s policy to direct its member states to adopt a single standard, and in the case of financial regulation, that standard is governed by the pan-European regulator.

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Denial of One Size Fits All

The regulatory regime for retail brokers which was designed to minimize the financial damage to retail clients with regulated brokers is clearly working at first glance. Trading volumes with EU-domiciled brokers and hence client losses have indeed declined.

Despite knowing what the EU typically does, a number of firms from the industry have not been planning for the worst. It was as recently as the middle of November in London when I heard that the ESMA can’t extend the restrictions permanently.

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Denial is the mother of all business failures. Blackberry didn’t see the iPhone early enough, neither did GM see Tesla coming for a long way back in the grid.

The same way, brokers who haven’t taken steps to change their business are finding themselves in a tough spot.

A Way Out (or Off)

The way out of these new regulatory conditions in Europe has clearly been to move offshore. Those companies who have managed to diversify their client base at the right time and provide their customers with a decent offering with an offshore subsidiary are picking the fruits from their labor in the middle of a cold winter for the EU-regulated industry.

While EU-regulated firms have officially been widely welcoming of the new regulatory regime, behind the scenes, almost everybody took the necessary measures to save their business. Unfortunately for those who have chosen to just adhere to the official regulatory framework, they are now too far behind the curve when compared to companies who made their way out from under the EU’s umbrella.

Reports of volumes falling between 20 and 70 percent depending on the number of clients who chose to reclassify as professional were floated around last month in London during the annual Finance Magnates London Summit.

One thing is clear, the last bits and pieces of hope that EU-regulated brokers were holding on to tanked like the mood of Bitcoin HODLers from December 2017.

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