The Forex industry is adapting to the new regulations imposed by ESMA with mixed feelings. Forex brokers are getting ready for the new limitations on leverage, the new demands for transparency and other changes taking place in Europe.
Preparations for the new regulations are going well, and brokers brace for keeping their traders happy. However, uncertainty about the business implications that goes with the move remains elevated.
There are obvious benefits of trading in a regulated environment that offers protection in case of issues with the broker. This should outweigh the leverage limits imposed by the new rules.
Some regulated brokers have raised concerns that the change may push traders to choose offshore brokers offering higher leverage over regulated ones.
Stick to regulated brokers
The new rules will help brokers focus on their audiences, and traders pick the right broker for them. So far, it was sometimes not too easy to see a clear distinction between the three types: the big brands offering multi-market financial instruments, the Forex brokers that are experts in marketing and conversion, and the offshore ones.
We would strongly discourage a move to offshore brokers. Brokers that trade in a regulated environment are more likely to refrain from subpar practices. And in the less likely case of a dispute with the broker on a trade, a problem with withdrawing funds or the collapse of a broker, trading under a reliable framework enables protection in an adverse scenario.
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Trading with an offshore broker risks the safety of funds and unacceptable tricks that are disadvantageous to the trader such as slippage. Traders should ask themselves if they are willing to take these substantial risks for large leverage that offshore brokers flash. Our position is a strong no.
Some traders may demand higher leverage due to lower volatility in currency markets that weighs on the industry as a whole. Similar trading conditions have been seen in the past and were followed by episodes of enhanced movements in markets. Patience is warranted.
A chance for self-regulation
For concerned or skeptical brokers, it is important to remember that Japan has enacted a leverage limit of 25:1, stricter than the new ESMA regulation, several years ago. The Forex industry continues thriving in the new framework. The Japanese example is encouraging as we await the fallout from the new set of rules in the European Union.
Perhaps the new set of ESMA regulations is an opportunity to consider self-regulation. A body that sets best practices for the Forex industry would facilitate a better environment for traders and would deem strict external regulation unnecessary.
In the broader scheme of things, sensible regulation of the industry helps turn foreign exchange into a fully-fledged asset class. Bringing Forex to the mainstream of the investment community and uprooting the rogue players should be a common goal of all players in the Forex industry.
Francesc Riverola is the founder and president of FXStreet.