FCA Expects up to £55m Drop in 2019-21 Profit for UK CFD Firms
- The regulator believes UK firms will see a profit drop of c. £38.5m and £55.3m
The Financial Conduct Authority (FCA) has published an impact assessment this Thursday, which examines how the regulatory restrictions on contract for differences (CFDs) offered to retail clients are impacting the sector.
Overall, the British regulator expects that firms offering CFDs to retail clients in the UK will see a reduction in profit of between c. £38.5 million and £55.3 million from 2019-2021.
This range is based on information collected from reviewing two UK based CFD firms before and after the implementation of ESMA’s temporary measures. Although not named in the assessment, the FCA highlighted that the two firms together contributed 43 percent to the UK CFD market based on client money.
For these two firms, the British watchdog said that the reduction in net income for the financial years 2019 – 2021 is close to £17 million per year on average. This represents a 6.7 percent decline in net income (approximately 6 percent for the first firm and 10 percent for the second).
The CFD rules introduced by the FCA limit leverage to between 30:1 and 2:1 depending on the Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders of the underlying asset, make Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place protection mandatory, and also require a standardized risk warning, among other restrictions.
Furthermore, the UK regulator’s restrictions go one step further than ESMA’s as they apply to a wider range of products. Namely, CFD-like options fall under the restrictions, and leverage for CFDs referencing certain government bonds has been limited.
FCA: CFD providers faced little implementation costs
Besides a reduction in revenue, the authority found that there were little one-off implementation costs for CFD trading providers, as, by the time the FCA implemented its restrictions, firms had already been subject to ESMA’s measures, which were mostly the same, so the damage had already been done.
In terms of negative balance protection and risk warnings, the regulator found that there would be minimal on-going costs.
“Consequently, in our cost benefit analysis we explained that ongoing costs to firms would be nil. Whilst some firms suggested that there would be additional costs from requiring firms to display a risk warning at the top of the webpage, we did not receive any quantification of these costs. Because the net benefits of this measures are far greater than the expected costs, we do not think it was proportionate to assess these costs,” the FCA said in its assessment.
The Financial Conduct Authority (FCA) has published an impact assessment this Thursday, which examines how the regulatory restrictions on contract for differences (CFDs) offered to retail clients are impacting the sector.
Overall, the British regulator expects that firms offering CFDs to retail clients in the UK will see a reduction in profit of between c. £38.5 million and £55.3 million from 2019-2021.
This range is based on information collected from reviewing two UK based CFD firms before and after the implementation of ESMA’s temporary measures. Although not named in the assessment, the FCA highlighted that the two firms together contributed 43 percent to the UK CFD market based on client money.
For these two firms, the British watchdog said that the reduction in net income for the financial years 2019 – 2021 is close to £17 million per year on average. This represents a 6.7 percent decline in net income (approximately 6 percent for the first firm and 10 percent for the second).
The CFD rules introduced by the FCA limit leverage to between 30:1 and 2:1 depending on the Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders of the underlying asset, make Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place protection mandatory, and also require a standardized risk warning, among other restrictions.
Furthermore, the UK regulator’s restrictions go one step further than ESMA’s as they apply to a wider range of products. Namely, CFD-like options fall under the restrictions, and leverage for CFDs referencing certain government bonds has been limited.
FCA: CFD providers faced little implementation costs
Besides a reduction in revenue, the authority found that there were little one-off implementation costs for CFD trading providers, as, by the time the FCA implemented its restrictions, firms had already been subject to ESMA’s measures, which were mostly the same, so the damage had already been done.
In terms of negative balance protection and risk warnings, the regulator found that there would be minimal on-going costs.
“Consequently, in our cost benefit analysis we explained that ongoing costs to firms would be nil. Whilst some firms suggested that there would be additional costs from requiring firms to display a risk warning at the top of the webpage, we did not receive any quantification of these costs. Because the net benefits of this measures are far greater than the expected costs, we do not think it was proportionate to assess these costs,” the FCA said in its assessment.