Retail Traders Start to Look Outside of Europe as ESMA Regulation Bites
- A number of sources in the industry say their clients are planning to move to non-EU regulated brokers
In the wake of the European Securities and Markets Authority’s (ESMA) latest Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Read this Term, a lot of time has been spent examining how brokers are going to have to change their behaviour. Here at Finance Magnates, we predicted some time ago that we would see industry consolidation alongside brokers shutting up shop or moving offshore.
Less attention has been paid to the people who actually make the retail industry’s existence possible - clients. Last month, yours truly wrote an article, which - thanks for asking - you can read here, covering professional reclassification and how it could affect the makeup of the industry’s client base.
The conclusion of that piece was that, alongside industry consolidation, there would be client consolidation. European brokers are going to start focusing on dealing solely with a smaller, wealthier, professional segment of the public who, prior to ESMA’s regulation, generated the bulk of their revenue anyway.
Mathieu Ghanem, Global Head of Sales and Marketing at ADSS, told Finance Magnates that this was not a bad conclusion to have drawn. ESMA’s regulation, Ghanem said, “has meant that brokerages in countries covered by ESMA are all looking to work with professional traders.”
His statement was also of note as it reflected another change in the dynamics of the retail industry. Confirming the suspicions of other industry insiders, he said that retail traders, who formerly used EU-regulated brokers, are starting to trade using the firm's United Arab Emirates-regulated (UAE) brokerage services.
Chasing Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term
As noted, many predicted that brokers would move offshore after the implementation of ESMA’s regulation. Less certain was whether or not clients would follow them there.
The reason for this uncertainty was simple: brokers working offshore do not have the greatest of reputations. As we at Finance Magnates have written about frequently, regulatory warnings against offshore brokers are issued on a nearly daily basis.
Prior to ESMA’s regulation, however, traders had access to high leverage trading without the need of offshore brokers. This was vital given that access to high leverage has been one of the main marketing appeals for brokers since the industry’s beginning.
With high leverage gone in Europe, however, it seems that some clients, who aren't based in Europe, are indeed going to be moving. Thankfully, it is not to those dodgy offshore brokers but, instead, to non-EU regulated entities. In its statement on Wednesday, ADSS noted that its Middle East and North Africa-based (MENA) clients are starting to trade with local, rather than European, brokers.
“We have seen a lot of new traders on-boarding with us, and we expect this to continue,” Ganem noted. “MENA traders who have been using European based providers are moving back to regional brokerages which have the capitalisation, levels of service and technology they want, but are not restricted by the ESMA rules.“
Fears assuaged
This state of affairs will certainly be a blow to European brokers - after all, no one wants to lose clients. For the industry as a whole, however, it may indicate that fears of a mass migration to dodgy, unregulated brokers were unfounded.
ADSS’ statement does not indicate that clients are flocking to an unregulated jurisdiction. Instead, former clients of European brokers are moving to a broker regulated by the UAE’s central bank.
The firm was also keen to note that it's UK-regulated business will continue to onboard retail and professional clients. Mifid and ESMA regulated clients will not onboard European clients or Mifid based clients in the UAE
How long this state of affairs will last looks set to be determined by the behavior of non-European regulators. We could be at the beginning of a cat-and-mouse game in which retail traders move from jurisdiction to jurisdiction as regulators clamp down on high leverage trading.
This hasn’t happened yet and, for now, it seems European brokers will continue to consolidate and focus their efforts on attracting professional clients. Concurrently, the average Joe trader, who can’t meet professional reclassification requirements, is going to look offshore.
In the wake of the European Securities and Markets Authority’s (ESMA) latest Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry.In its most basic sense, regulators help ensure the filing of reports and transmission of data to help police and monitor activity by brokers. Regulators also serve as a countermeasure against market abuse and malpractice by brokers. Brokers adhering to a list of mandated rules are authorized to provide investment activities in a given jurisdiction. By extension, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation.Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors.In terms of reporting, brokers are also required to regularly file reports about their clients’ positions to the relevant regulatory authorities. The most-recent regulatory push in the aftermath of the Great Financial Crisis of 2008 has delivered a material shift in the regulatory reporting landscape.Brokers typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.Beyond FX, regulators help reconcile all matters of oversight and are watchdogs for each industry. With ever-changing information and protocols, regulators are always working to promote fairer and more transparent business practices from brokers or exchanges. Read this Term, a lot of time has been spent examining how brokers are going to have to change their behaviour. Here at Finance Magnates, we predicted some time ago that we would see industry consolidation alongside brokers shutting up shop or moving offshore.
Less attention has been paid to the people who actually make the retail industry’s existence possible - clients. Last month, yours truly wrote an article, which - thanks for asking - you can read here, covering professional reclassification and how it could affect the makeup of the industry’s client base.
The conclusion of that piece was that, alongside industry consolidation, there would be client consolidation. European brokers are going to start focusing on dealing solely with a smaller, wealthier, professional segment of the public who, prior to ESMA’s regulation, generated the bulk of their revenue anyway.
Mathieu Ghanem, Global Head of Sales and Marketing at ADSS, told Finance Magnates that this was not a bad conclusion to have drawn. ESMA’s regulation, Ghanem said, “has meant that brokerages in countries covered by ESMA are all looking to work with professional traders.”
His statement was also of note as it reflected another change in the dynamics of the retail industry. Confirming the suspicions of other industry insiders, he said that retail traders, who formerly used EU-regulated brokers, are starting to trade using the firm's United Arab Emirates-regulated (UAE) brokerage services.
Chasing Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term
As noted, many predicted that brokers would move offshore after the implementation of ESMA’s regulation. Less certain was whether or not clients would follow them there.
The reason for this uncertainty was simple: brokers working offshore do not have the greatest of reputations. As we at Finance Magnates have written about frequently, regulatory warnings against offshore brokers are issued on a nearly daily basis.
Prior to ESMA’s regulation, however, traders had access to high leverage trading without the need of offshore brokers. This was vital given that access to high leverage has been one of the main marketing appeals for brokers since the industry’s beginning.
With high leverage gone in Europe, however, it seems that some clients, who aren't based in Europe, are indeed going to be moving. Thankfully, it is not to those dodgy offshore brokers but, instead, to non-EU regulated entities. In its statement on Wednesday, ADSS noted that its Middle East and North Africa-based (MENA) clients are starting to trade with local, rather than European, brokers.
“We have seen a lot of new traders on-boarding with us, and we expect this to continue,” Ganem noted. “MENA traders who have been using European based providers are moving back to regional brokerages which have the capitalisation, levels of service and technology they want, but are not restricted by the ESMA rules.“
Fears assuaged
This state of affairs will certainly be a blow to European brokers - after all, no one wants to lose clients. For the industry as a whole, however, it may indicate that fears of a mass migration to dodgy, unregulated brokers were unfounded.
ADSS’ statement does not indicate that clients are flocking to an unregulated jurisdiction. Instead, former clients of European brokers are moving to a broker regulated by the UAE’s central bank.
The firm was also keen to note that it's UK-regulated business will continue to onboard retail and professional clients. Mifid and ESMA regulated clients will not onboard European clients or Mifid based clients in the UAE
How long this state of affairs will last looks set to be determined by the behavior of non-European regulators. We could be at the beginning of a cat-and-mouse game in which retail traders move from jurisdiction to jurisdiction as regulators clamp down on high leverage trading.
This hasn’t happened yet and, for now, it seems European brokers will continue to consolidate and focus their efforts on attracting professional clients. Concurrently, the average Joe trader, who can’t meet professional reclassification requirements, is going to look offshore.