ESMA has plans to reduce leverage even to 1: 5

ESMA, the pan-European regulator of financial markets, issued a statement on December 15 that may worry traders from all over Europe. The plans of European supervision include total ban on binary options and limitation of leverage to 1:30 or even 1: 5.

Lever reduced even to 1: 5

The joy of Polish traders could prove premature. The bill of the local MF, which saw the light of day last week assumed reduction of leverage to 1: 50 but only for inexperienced traders. In practice, it would be enough to make 40 transactions within two years, so that we would not feel the changes and could enjoy the 1 leverage: 100. But then we mentioned that the final vote will belong to the European Union. Already in June plans to regulate the OTC market were announced in Europe. However, the scale of restrictions may be shocking. ESMA in its new statement plans to "clean up" not only the CFD market, but also the binary options market.

Statement by ESMA from 15 December

Extract from the statement:

"ESMA is concerned about the speculative industry, such as CFD, including the Forex spot market, and binary options, and has already implemented appropriate regulatory actions in this area. Some of the supervisory committees at the national level implemented their own measures aimed at limiting the activity of retail investors in this area. "

Already 3 January 2018, the MiFID II Directive enters into force, which will allow ESMA to have greater control over brokerage houses and brokers. The supervisor clearly indicates that she is willing to use new powers to bring order to the OTC market. The plans are:

• Prohibition of marketing, distribution and sale of binary options to retail customers,
• Limiting CFD marketing, distribution and sales, including FX spot instruments to retail clients.

ESMA is considering introducing, among others:

• Limit the maximum lever in the range from 30: 1 to even 5: 1. The variability of a given financial instrument may determine the value of a lever.
• Introduction of the margin close-out principle (the situation in which the stock exchange or broker closes all open positions - this happens when the net asset value falls to the pre-determined value of the margin deposit),
• Introduction of compulsory protection against the creation of a negative balance,
• Limitation in the promotion of the benefits of trading,
• Standardizing risk warnings.

Some EU regulators have introduced some of the above conditions on their own (e.g. prohibition of advertising and binary options in France, protection against debit in Germany).

The Polish law is irrelevant in the face of ESMA

In the bill of the Ministry of Finance known to us, there are definitely fewer restrictions and they are much more favorable to the further development of the Forex market in Poland than in the case of ESMA's ideas. Unfortunately, all this may not matter because the legal requirements imposed by the pan-European regulator must be implemented by national financial supervision committees (i.e. also the Polish KNF).

The date of introduction and the final shape of ESMA's regulatory "novelties" is not known at the moment. Meanwhile, the proposed changes are extensively commented on by the President of the Chamber of Brokerage Houses.

Waldemar Markiewicz, President of IDM:

ESMA's proposal is in line with the current direction of changes taking place on the Polish capital market. The solutions proposed by ESMA have been functioning on our market for some time. For example, with regard to advertising activities, national supervision guidelines specify the scope of marketing activities, forms of promotion and the use of bonuses for customers. In addition, brokerage houses operating on the forex market, IDM members adopted a marketing code in which they undertake advertising activities according to specific standards in line with the direction of changes proposed today by ESMA. For example, the code standardizes - in advertising materials - the format and volume of information about risk for the client. Moreover, several IDM members adopted the solution already mentioned by ESMA to protect clients against negative debit, which significantly reduces the risk for investors.

The reduction in the level of leverage proposed by ESMA is contrary to the expectations of a large part of investors who use the possibilities of investing in the forex with higher leverage. Moreover, market practice shows that the level of leverage is not an effective tool to protect the investor. The solution currently proposed by the Ministry of Finance, which combines the amount of leverage with customer experience, will work better. It is a better solution that protects inexperienced traders while giving experienced traders the opportunity to effectively use forex market products in their investment portfolio.