What will change for European brokers following ESMA’s provisions?

If you are used to speculating online in various financial markets using CFDs, be aware that the trading conditions applied to European brokers are changing. Indeed, ESMA, an organization responsible for the protection of users of financial services, has recently put in place new provisions to improve this security and will have inevitable repercussions on the way of investing online. Through this detailed article, we offer you more about these new regulations and their consequences on your trading experience.

What are the new ESMA provisions concerning brokers?

The official European body in charge of investor protection ESMA, also known as the European Securities and Markets Authority, recently studied the risks and practices of online trading through CFDs. Based on this study, ESMA has decided to put in place new provisions to strengthen security and further protect users of online trading platforms in the context of their investments. Let’s find out in detail what will change for you.

First of all, if you trade on the financial markets with binary options, from July 2, 2018, this mode of speculation deemed too risky will be prohibited for European brokers. Certainly, you will still be able to invest online using other types of instruments, such as CFDs, with some significant changes.

The first major change, in the use of CFDs online, concerns leverage. Indeed, from now on, the maximum leverage that you can use will be 30:1 against levers that previously could reach ten times more. The cap on this leverage also depends on the type of asset you want to invest in. Thus, the 30:1 cap only concerns trading on the foreign exchange market and major currency pairs, the others being capped at 20:1 just like gold and major stock indices. A 10:1 cap will be applied to other indices and commodities. Finally, stocks on the stock market can only benefit from a maximum leverage of 5:1 and cryptocurrencies from a leverage of 2:1.

Another major change this time concerns the available capital. Indeed, the funds present in the investor’s trading account must now reach at least half of the locked-in margin. Otherwise, the position will be automatically closed to reduce the risk of excessive losses.

Likewise, ESMA wishes to protect investors against negative balance risks. However, this is already applied by many regulated European brokers. All brokers will now have to guarantee their users that the amount of their losses cannot, in any case, exceed the amount of their capital.

What are the advantages and disadvantages of these changes for investors?

As we have just seen, many changes will soon operate on your favorite trading platforms. But what will be the positive and negative repercussions for traders?

First, note that regulatory changes regarding leverage will have a direct impact on the investment capital required for profitable speculation. Therefore, it will now be necessary to rely more on a higher deposit to benefit from favorable trading conditions.

But this negative aspect which could discourage certain investors or push them to turn to non-European brokers and allowing greater leverage is, in reality, an advantage in the sense that it acts as a security. If the profits promised by brokers offering a significant leverage effect can be attractive, we must not forget that the risk of loss is also greater and can be expensive for the trader.

By imposing maximum leverage on European brokers, ESMA will prevent some unfortunate or inexperienced investors from rapidly losing their capital and sometimes their savings. The negative balance protection also reinforces this change and helps prevent traders from getting into debt when trading online.

Finally, this radical change in the practice of trading CFDs online will undoubtedly have other positive repercussions for individuals since it will oblige brokers regulated in the EU to put in place better trading assistance tools to support their users. And thus enable them to carry out interesting operations on the markets.

Switch to professional investor status:

One of the peculiarities of these changes is that they do not concern professional investors. Also, if you wish to continue to benefit from the leverage conditions before this reform, you must meet certain requirements, including:

  • Carry out transactions with a nominal value greater than €50,000 with an average of 10 transactions per quarter and during the last four quarters.
  • Possess a portfolio of financial instruments comprising cash deposits and financial assets at least equal to €500,000.
  • You must work or have worked in the field of finance for a minimum of one year and in a position requiring a good knowledge of the transactions or services in which you plan to invest.

How to choose your broker according to these new regulations?

Now that you know everything about the new regulations put in place by ESMA for European brokers. You are probably wondering whether it is in your interest to stay with your usual broker or change to an off-shore broker and, therefore, not – required to respect these rules.

It can indeed be tempting to register on the platform of a broker located outside the European Union and which continues to offer essential levers. However, we strongly advise against giving in to this temptation for several reasons.

First, be aware that off-shore brokers who continue to offer such trading conditions do not benefit from European approvals. However, by using the services of an unregulated broker, you expose yourself to many risks, including the risk of significant losses and a lack of security concerning your funds, deposits, withdrawals, or even them. Transactions carried out on the platforms involved.


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