Wednesday 1 August marked a significant day for traders as the new measures around contracts for difference (CFDs) were implemented by the European Securities and Markets Authority (ESMA).
While the decision has created much noise in the industry, traders want to know how this impacts their ability to trade on the financial markets. Here, we take a look at how traders are affected.
Why is ESMA implementing new measures?
In 2017, ESMA indicated it was concerned about the provision of speculative products such as CFDs. Months later, the regulator detailed plans to increase investor protection in the EU, specifically for retail investors, considered to lack the knowledge, experience, understanding and financial wherewithal to bear the risks of trading CFDs.
What are the new measures?
As part of the new measures, ESMA announced a ban on binary-based products to retail clients. Following this, CMC Markets digital 100s and Countdowns products were restricted to professional clients only in Europe, from 2 July.
Negative balance protection was introduced on 1 August, meaning that any losses made are limited to the funds available in your trading account, regardless of extreme market volatility.
In addition, the leverage available to retail clients for new positions has been limited to between 30:1 and 2:1, depending on the underlying instrument.
Will the new measures impact all traders?
No, traders who are classified as professional clients are not impacted by the changes. In order to be deemed an elective professional client, traders must demonstrate that they are capable of making their own investment decisions and understand the risks involved, in addition to meeting two out of the three following criteria:
- you have carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters
- the size of your financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds €500,000
- you work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged
How will the regulation impact the industry?
CMC Markets has seen tremendous change in the industry over the past 10 years, and the latest regulation implemented by ESMA will help to protect less experienced and potentially vulnerable traders. While the new measures wont be welcomed by all, CMC Markets believe a consistent approach to regulation will ultimately raise standards, and this in turn will be a positive outcome for the industry over the longer term.
CMC Markets is an execution-only service provider. Personal circumstances not considered. Content is not advice.