FCA Will Permit 30:1 Leverage On Government Bonds

Responding to an ESMA legal opinion, the British regulator also justified its proposed rules governing CFD-like options

The Financial Conduct Authority (FCA) released a response to the European Securities and Markets Authority (ESMA) on Tuesday regarding changes to regulations governing contracts-for-difference (CFDs).

On Monday, the British regulator said that it would be making regulations governing the retail industry permanent.

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Those regulations, which are going to be introduced next month, will be largely the same as rules introduced by ESMA last August. As most of our readers will know, those rules include caps on leverage, marketing restrictions, and mandatory risk warnings.

But the FCA said on Monday that it would be altering leverage slightly for one set of products.

Under ESMA’s rules, brokers are only able to offer 5:1 margin trading in government bonds. The FCA, however, said that it would allow brokers to provide clients with 30:1 leverage when it introduces its own set of rules.

The robots respond

ESMA, in its typically robotic writing style, said yesterday that the changes are “not justified and proportionate.”

“The proposed leverage limit would result in divergence from the leverage limits applied by product providers subject to other
national measures,” said the regulator.

“Since the cross-border distribution of CFDs is common in this market and ESMA‘s opinion is that [regulators] should adopt measures that are as least as stringent as ESMA’s measures, allowing higher leverage limits for a new indicated asset class would result in divergence within the Union and potential regulatory arbitrage.”

The FCA responded to this by noting that it had followed ESMA’s own methodology to determine whether or not offering higher leverage in government bonds would pose a risk to investors. Finding that it would not, the financial watchdog also said that it wouldn’t allow British brokers to offer 30:1 leverage to traders outside of the UK.

“As noted by ESMA, 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures,” said the regulator in a statement. “We agree that this mitigates competition amongst providers that are subject to a stricter leverage limit.

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“As retail consumers are afforded protections by the rules of other National Competent Authorities (NCAs), we concluded that our rules will not impact the markets of other Member States or result in harm to their consumers.”

CFD-like options under scrutiny

There was another area of disagreement between ESMA and the FCA surrounding the regulation of CFD-like options.

As Finance Magnates reported on Monday, the British regulator is going to put products that resemble CFDs, like turbo contracts, under the same leverage and marketing-restricting regulations as normal CFDs.

The reason it decided to do this was that it understood brokers were planning on simply swapping their offering to provide CFD-like products to clients instead of regular CFDs.

But the FCA has said that it will not attempt to regulate providers in the European Economic Area that can passport into the UK and offer CFD-like products. The exception to this rule is if a UK subsidiary or tied agent in Britain attempts to attract clients to trade in those products.

Not sufficient

ESMA is opposed to this, saying in a legal opinion that it believes it will not properly protect retail traders in the UK from providers of CFD-like products.

“The FCA has not adequately demonstrated that the fact that providers established in other [EEA states] would not be able to market CFD-like options into the UK would be sufficient to adequately protect UK retail clients from the risk of detriment that the FCA has observed in respect of the trading of those products by UK retail clients,” said the pan-European regulator.

“Therefore, ESMA considers that the restrictions on CFD-like option providers should be applied equally to providers authorised in the UK as well as to providers authorised in other [EEA countries].”

In response to this, the FCA emphasized that it would not permit firms to actively market their products in the UK, adding that it is also not in a position to regulate foreign companies.

“We did not think it would be proportionate, practical or effective to seek to apply our rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction,” said the regulator.

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