Exclusive: EU Brokers Working on a High-Leverage ESMA-Compliant Product

Some companies are working on a product for retail traders that keeps them protected while offering leverage

EU-regulated brokers are working on a new product for retail traders that is compliant with the new ESMA regulations, Finance Magnates can confirm. Sources with knowledge of the matter have shared that the ban which is strictly concerning CFD contracts leaves leeway for brokers to offer alternative products to retail investors that are allowing them to use high leverage.

Earlier this spring, the European Securities Markets Authority (ESMA), published a set of guidelines for retail brokers on the products that they are allowed to offer to retail clients. As they await the final formulation of the details related to the pan-European financial regulator’s announcement, brokers are looking to diversify their product offering with new ESMA-compliant offerings for retail traders that are looking for higher leverage.

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The development is welcome news for retail traders that are looking for ways to trade with higher leverage without reclassifying to professional clients.

Navigating the ESMA’s Regulatory Framework

As of right now, we can only speculate about the ways which brokers have chosen to deliver new products to their clients. The ESMA’s regulatory framework has been well constructed, but its emphasis has been on limiting risks for clients. Foreign exchange transactions executed via multi-lateral trading facilities might be exempt from the new regulation, as some already have been in France.

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The ESMA focused its attention on CFDs when it made its announcement back at the end of March. The definition which of CFD which the pan-European regulator used is: “Any derivative other than an option, future, swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level or value of an underlying asset.”

“Irrespective of whether the asset is traded on a trading venue, or not it must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event,” the definition continues.

If we are to follow this paragraph, the products which brokers are working on might be devising solutions that are based on futures or other derivative contracts than CFDs. The ESMA has been working hard to limit risks for retail investors, but it didn’t limit leverage on many other high-leverage products like warrants or turbo certificates which are offered by commercial banks to many European retail clients.

Risks of Reclassifying a Retail to a Professional Client

European brokers have identified several changes for clients that are willing to reclassify to professionals to access higher leverage. Aside from losing coverage by the guaranteed deposit schemes across Europe, the customers will also be losing several benefits that have become a given for retail investors in the EU.

Other key points include the waiver of the client’s right to demand information about the company, its services, financial instruments, investment strategies, execution venues and arrangements through which the broker is remunerated. Brokerages of professional clients are also not required to provide reports to the client on the execution of his/her orders.

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