In an industry awash with regulation, brokers are always on the lookout for ways to increase their revenue. Following ESMA’s extension of its CFD leverage restrictions, it’s becoming ever more clear that the industry is going in a stricter direction.

Since last August, regulated brokerages in Europe are no longer able to offer their clients high-risk leverage on CFDs, with restrictions ranging from 30:1 maximum for major  Forex  Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Read this Term pairs, to no more than 2:1 for  Cryptocurrencies  Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities. By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities. Read this Term.

But ESMA did leave one major opening in its regulatory structure. These CFD restrictions only apply to “retail traders”, not to “professional traders”. The latter would still be able to trade CFDs with much higher leverages.

That leaves room for brokers to reclassify their existing customers as “professionals” and continue to offer them the same trading conditions.

The question of who can be classified as a professional is one of the key issues that ESMA, and EU brokerages, are currently wrestling with.

In November of 2018, ESMA asked European brokers to supply data on the number of retail and professional clients with whom they traded CFDs.

As with anything related to financial regulation, definitions are proving to be difficult.

This is largely due to the vague language used for terms such as “relevant experience” and “significant size”, in addition to whether clients had to provide evidence of their occupation within the financial industry.

So which traders can be classified as Elective Professional Clients, or EPCs?

ESMA’s classification demands involve three subjects: Trading Experience, Trading Knowledge and Portfolio Size. According to ESMA, professional traders must satisfy at least two of the following three criteria:

1. Carried out 10 transactions of “significant size” per quarter over the last year
2. Have one year of relevant experience in the financial sector
3. Have a portfolio worth at least €500,000

Traders who wish to be classified as EPCs must first state their request in writing and provide documentation to support their claims.

Afterwards, they must sign a waiver, declaring that they understand and are aware of the measures of protection they are losing with their status change.

The reclassification process culminates with a test, designed by the broker himself, which the client must go through to demonstrate his trading abilities, and his market understanding.

Naturally, in most brokerages, EPCs will be responsible for the majority of the broker’s revenue, due to their high net worth portfolios. In one famous case, a known brokerage published that 12% of its clients account for no less than 75% of its revenue.

According to other industry veterans, the general rule among brokers is the 10/90 rule, where 10% of clients generate 90% of revenue.

That means that a smart classification of wealthy clientele can maintain the same level of profits for most brokerages, even in the age of increased regulation.

So, with such a strong potential, it’s no wonder that brokers all over the continent will be trying to take advantage of this this so-called “loophole”.

Industry people are reporting attempts by brokers to lure traders with very little connection to finance to reclassify as pros and get higher leverage.

Other efforts go towards sending their clients to online “trading academies”, where they will allegedly gain more knowledge and “experience”.

Some brokerages even open specially designed “VIP brokerage services”, that cater specifically to EPCs and offer high leverage trading.

On the other hand, other brokers view these attempts as unscrupulous, and as an abuse of the regulator’s intentions.

In fact, it is safe to assume that ESMA is fully aware of this bending of the rules, and it is only a matter of time before the loophole closes. Furthermore, it seems that RegTech and compliance services providers explicitly discourage such behaviors.

Mr. Yasha Polyakov, CEO of Leverate, a leading brokerage technology and services provider which provides clients with a CySEC licensed Forex brokerage, has expressed his aversion to these practices in a recent interview: “A lot of brokers have decided to reclassify everyone as professional so the rules won’t apply to them. We are against it. If you think the regulators are stupid, they’re not. There is no way a housewife, sitting in front of the computer, watching YouTube videos and sometimes making a few clicks, is a professional trader”.

Currently, brokers working in the EU zone have some measure of flexibility on how they classify their retail and professional customers.

A status of “professional” will certainly make the trading relationship easier, but the current window of opportunity on how this status is defined may be about to close.

Disclaimer: The content of this article is sponsored and does not represent the opinions of Finance Magnates.