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Position of the Chamber of Brokerage Houses against ESMA's proposal
In December of last year, the currency industry was frozen by the ESMA message, which assumes the implementation of revolutionary changes on the retail market of binary options, CFDs and Forex. The European regulator is considering, inter alia, reduction of leverage for selected derivative instruments to the 1 level: 30, and even 1: 5.
Until 5 February investors and industry representatives could send their opinions on the changes proposed by ESMA, about which we reported here. The interest in the action on the part of retail traders was huge. The position was also published by the Chamber of Brokerage Houses (IDM), which is the largest independent organization representing brokerage houses and brokers in Poland.
IDM position regarding changes
IDM has endorsed some of ESMA's ideas. According to the organization, actions aimed at increasing the protection of individual investors are most needed. Improving the safety of market participants is an element that requires refreshing and adapting to current market conditions.
At the same time, IDM strongly opposes a radical reduction in leverage. According to the organization, lowering the leverage alone will not affect the protection of customers. In addition, such action may exceptionally strongly reduce the attractiveness of the European brokerage services market and, as a consequence, cause the migration of clients to institutions outside the European Union.
In his opinion, the Chamber of Brokerage Houses argues for the solution presented by the Polish Ministry of Finance, which assumes the dependence of the amount of leverage depending on the investor's experience.
Waldemar Markiewicz, President of IDM
Waldemar Markiewicz, President of IDM:
“We are in favor of solutions that will realistically increase the protection of retail investors. We can see that the biggest challenge for the industry and European supervisors is the illegal activities of companies from outside the EU. This requires intervention first, as the actions of these entities are beyond the control of national supervisors. And these companies are the source of a lot of market abuse. "
Leverage is the foundation of the Forex market
Leverage is one of the key elements that increases the attractiveness of the Forex market. In fact, the amplitudes of exchange rate changes are much lower in percentage terms than in the case of equity markets. In the case of aware investors, very often the amount of leverage is a decisive criterion when choosing a brokerage company. Smaller deposit requirements due to the use of leverage are an opportunity to create various, unique and effective investment strategies.
Waldemar Markiewicz:
“The reduction in the leverage level proposed by ESMA is contrary to the expectations of many investors. IDM supports the solution proposed by the Ministry of Finance, which combines the amount of leverage with customer experience. This optimal solution protects inexperienced investors, at the same time giving experienced players the possibility of effective use of forex market products in their investment portfolio. "
A radical reduction in leverage will significantly reduce the attractiveness of the European CFD market. Transferring investments to distant corners of the world, eg to Australia, Russia, or exotic islands (so-called tax havens) in this scenario seems almost certain. It is also an increased probability of migration of traders to markets with increased volatility (less leverage will be compensated by a greater exchange rate change), eg cryptocurrency. According to IDM, reducing the leverage of such low values will not meet the main objective of ESMA, which is to improve the safety and security of retail customers.
Adjustment of the Stop-Out mechanism
Another ESMA proposal refers to the mechanism known to us as Stop-Out, i.e. Margin Close-Out (MCO). It is an element of the transaction system, whose task is to minimize the risk of creating a debit on the trader's account. Its task is to close all transactions when our balance falls below a certain level depending on the degree of leverage.
According to IDM, the idea of harmonizing the operation of this mechanism and the levels of its activation through top-down regulations is good. Setting the MCO at 50% of the total deposit, taking into account the value of the entire account, is an element that will certainly have a positive effect on increasing security, and more precisely reducing the chance of an overdraft. Currently, the levels at which the MCO is activated are set individually by brokers. The range of values is very large - from 90% to only 5%.
In its communication, the Chamber also refers to permanent protection against the creation of a negative balance on the trader's account. According to IDM, the introduction of this element to the offer should be voluntary on the part of brokers who recognize that their capital resources are able to provide it regardless of market conditions and events.
In the vast majority of cases, the Stop-out mechanism effectively protects traders from debit. Nevertheless, an increasing number of brokers have independently decided to introduce a guarantee before the negative balance is created.
Check it out: Brokers and protection against debit - Statement 2018
Increase customer awareness
The Brokerage House Chamber also expressed support for ESMA in relation to marketing and information marketing regulations. In advertising and promotional activities brokers should avoid any actions encouraging to increase the involvement of invested funds in CFD instruments, or aimed at making more risky investments.
Waldemar Markiewicz:
“Standardizing the risk warning message is one of the activities that increase the protection of retail customers. A precise risk message is a showcase that distinguishes Polish investment companies in terms of quality, operating on the basis of higher standards of customer protection than companies from other regulatory areas, where customer protection is lower. "
The final shape of the changes that will be introduced by ESMA is still unknown. Experts say the decision will come to wait until April this year.
