The European Securities Markets Authority on Wednesday issued its opinion on the product intervention measures proposed by Poland, Germany, Hungary, and Malta. All of the attention, however, has been focused on the pan-European regulator’s decision regarding the 100:1 client category proposed by the Polish financial regulator, the KNF.

According to the decision published by the ESMA today the Polish KNFs proposal to allow certain qualified retail clients to trade forex with 100:1 leverage is not justified and proportionate. The news comes amid a looming lapse of the product intervention measures adopted at a pan-European level on July 31.

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The Polish regulator proposed the policy due to the significant capital requirement for professional reclassification at a European level. The KNF has stated in its analysis that the €500,000 assets requirement is prohibitively high for the country’s residents.

Client Offshore Moves a Factor

The Polish regulator stated that it has been looking at available data and concluded that too many customers have moved their accounts to jurisdictions that allow higher leverage trading. The solution proposed by Polish authorities was a category which is enabling brokers in Poland to allow 100:1 leverage to a group of traders that meet a set of predetermined criteria.

The KNFs sound judgment deserves kudos here, as the country was the first one to take into account data about clients moving to trade offshore. The regulator did recognize the demand on the part of clients and aimed to allow them to make riskier bets with higher leverage provided that they meet a strict list of requirements.  

Qualifying Traders

The measure was to apply only to clients who are residents of Poland, have accumulated at least two years of experience and were well acquainted with derivatives trading. The KNF also required the client to meet any of the following trading volume requirements to be considered an experienced trader:

– at least ten transactions in CFDs with a nominal value of at least the equivalent in Polish zloty of EUR 50 000 each within the quarter in at least four quarters

– at least 50 transactions in CFDs with a nominal value of at least the equivalent in Polish zloty of EUR 10 000 each within the quarter in at least four quarters

– at least 40 transactions in CFDs within the quarter in at least four quarters, where the total nominal value of all opened transactions for the 24 months period under assessment is at least the equivalent in Polish zloty of EUR 2 000 000.

Knowledge of derivatives was also specified in another set of criteria for the traders:

– the client holds appropriate professional certificates (CFA, FRM, PRM, ACI, Investment Advisor (DI), Securities Broker (MPW, etc.) or completion of a specialist field of study;

– the client completed at least 50 hours of training in the last 12 months in the area of derivatives, including CFDs, to be confirmed either by the relevant certificates or confirmation issued by the relevant organiser of the training or , in each case provided that the organizer of the training has verified the client’s knowledge before any such certificate or confirmation is issued;

– at least one year of work experience at a position which requires professional knowledge of transactions regarding CFDs or other derivatives.

Meeting either of the three criteria listed above is sufficient ground to meet the derivatives knowledge point.

Cold Water on CySEC’s Proposed 50:1

Overall, except for the KNF’s proposed experienced trader category, ESMA’s opinions in relation to Germany, Malta, and Poland conclude that the proposed measures are justified and proportionate.

When it comes to Hungary however, the ESMA’s opinion is that while the national measures adequately protect retail clients when dealing with the specific providers to which the national measures apply, these measures are not justified and proportionate because they are addressed only to individual firms and do not have a general application.

The four ESMA opinions also conclude that it is necessary for NCAs of other Member States to take product intervention measures that are at least as stringent as ESMA’s measures. This effectively pours cold water on the CySEC’s proposed 50:1 leverage category.

Tiered leverage for different retail clients is not something which the ESMA appears to be happy with, considering data it has accumulated about the performance of higher value traders.