In line with the flurry of regulatory moves made by the European Securities and Markets Authority (ESMA), Cyprus – the “Kingdom of Forex Brokerages” in the eastern Mediterranean, is following suit with its own much-anticipated financial legislation. The Cyprus Securities and Exchange Commission (CySEC), has proposed a range of innovative leverage measures to protect retail clients and brokers who trade with Cypriot financial institutions.
As a Forex broker, or retail client, you can become punch-drunk trying to follow all of the financial regulatory news that have been coming in the last three to five years. Naturally, all of these initiatives have been well-intentioned with the primary aim of protecting investors and member firms from bankruptcy. However, more and more regulatory pressure can sometime lead to the opposite result, with markets becoming less liquid and hurting retail trade.
For this reason, policymakers in Cyprus decided to try a little more flexible approach to their leverage system. This move is aimed directly at the amount of leverage that member firms can offer to their retail clients. ESMA has set a slew of regulations to this effect, but while the regulators at CySEC had to abide by the European regulations, they also wanted to add a layer of flexibility to encourage more retail business.
CySEC proposed a risk-based approach to the leverage of trading in multiple financial instruments. Clients would initially be assessed on a range of criteria, after which they would be assigned to specific leverage tiers. These criteria include risk appetite, experience, knowledge, market volatility history, and their annual income or net worth.
Tiers were defined for different segments of retail clients, and according to those tiers they will be qualified for different leverage measures in various financial asset groups. Those tiers would be labeled as ‘Positive’ or ‘Negative ‘, in general. There will also be clients who fall between the two stools, and will be categorized as ‘Grey’.
The last thing regulators wanted to do was to provide the top leverage terms to clients who were unsuited to high-risk trading activity. For that reason, upper tier clients are required to earn a minimum of 40,000 euros per year or have net liquid assets in excess of 200,000 euros. Upper tier clients would receive leverage of 50:1 on major currency pairs as opposed to the 30:1 proposed by ESMA. Clients who fell in the “grey” tier would only be able to leverage 20:1 for those same major currency pairs in accordance with ESMA’s leverage instructions.
Segmentation is clearly an area that would be strongly supervised by Cypriot regulatory bodies, knowing that other European countries would be watching this experiment with the intention of following suit if CySEC’s plans were successful.
CySEC proposed further regulatory measures such as the curtailment of all binary option business, as well as restricting trade in high-risk assets such as cryptocurrencies, to those who qualified for the upper levels of the positive tier.
How to stay ahead of the curve?
In addition to these original measures, CySEC will also hold its member firms to regulations such as closing out positions beyond 50% margin calls, protecting clients from negative balances, and the banning of all financial market incentives. Risk warnings would be mandatory, as would the clear presentation of the percentages of successes and losses of company clients.
With all these new changes on the near horizon, it seems that what most brokers are looking for is a trusted provider who can manage their compliance needs wherever these turn up. A good option would be to combine regulatory coverage with other technological and peripheral needs brokers have, such as incorporation and PSP integration.
“Forex regulation requirements keep changing across Europe, and Cyprus is no exception”, says Alkis Hilton, an expert on CySEC regulation and Executive Director of Leverate Financial Services, the Cypriot regulatory branch of tech provider Leverate. “It is extremely important to be aware of the changes, and to prepare correctly to the new regulatory environment. As part of the LXLite package that Leverate offers, we provide complete regulatory preparation and ongoing coverage, so that our brokers can always be sure that they comply with the most recent demands”.
Praiseworthy as CySEC’s initiatives may be, there will have to be a period of testing to see if their flexible risk-based leverage trading will work. This is where the Cypriot Forex industry as a whole can speak its mind about the planned changes. Traders, brokers, and retail clients have until June 14 to make their feelings known before final proposals are published. All of that in preparation for the implementation date of ESMA’s intervention measures all over the EU, on July 30.