The European Securities Markets Authority (ESMA) continues to receive responses to its new rules limiting the sale of risky trading bets to retail investors.
GAIN Capital said it does not agree with “every aspect of ESMA’s new rules,” namely the proposal to cap the maximum leverage. However, the listed firm shows a less concerned reaction compared to its industry peers who mostly described the new limits as highly restrictive and discriminates against retail traders.
GAIN indicated that it operates a broadly diversified business, which includes a retail FX/CFD business spanning eight regulatory jurisdictions. As a result of this diversification across business lines and geographies, the company does not expect the anticipated changes to regulation to have a material adverse effect on its overall financial results.
More specifically, less than 5 percent of GAIN’s total revenue, which comes from retail customers in UK and EU, will be at risk.
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ESMA announced today a range of product intervention measures such as leverage restrictions, banning binary options, guaranteed limits on client losses and/or restrictions on the marketing and distribution of these products.
The leverage restrictions for retail clients will be introduced in several tiers. CFDs on major FX pairs will be traded with 30:1, indices, non-major currency pairs and gold will be traded at 20:1, while other commodities and non-major indices will be provided with a 10:1 gearing. Brokers will be able to offer individual equities at a 5:1 leverage and cryptocurrencies at 2:1.
Thus far, the common conclusion among Europe’s regulated forex brokers is that ESMA is setting up an anti-competitive environment as the proposed leverage is an arbitrary, low number.
Despite its stated aim to protect individual investors from losing money, some brokers say that the proposed 1:30 to 1:2 leverage will increase the traders’ risks, because they will need to deposit more capital upfront that they could potentially lose. In addition, those not able to deposit the necessary margin capital might be tempted to use offshore market makers in loosely regulated jurisdictions.