Forex leverage hits speed bumps in Europe but don't panic just yet
|- The new ESMA regulation imposes leverage limits on forex trading and other instruments alongside protections.
- Here are the details, why you should not panic, and answers to some questions.
The European Securities Markets Authority made its mark on the world of online foreign exchange by imposing new rules for forex trading. It includes a ban on binary options, a demand for transparency, negative balance protections and the most sensitive section for traders: leverage limits.
30:1 for majors: The most popular currency pairs which offer the lowest spreads will still enjoy a high level of leverage. This is not what it used to be but remains a considerable level.
20:1 for non-major pairs, major stock indices, and gold: Stock indices may be more popular in the broader markets but less so for forex traders. Minor pairs offer wider spreads and gold provides more volatility, so the lower leverage limit makes sense.
10:1 for non-gold commodities: oil, natural gas, silver, and other commodities tend to move at a faster clip than the previous group of assets, thus suffering from less volatility.
5:1 for stocks: Trading stocks with a forex broker is not the most common practice, but for those currency traders that venture into individual stocks, the leverage is tighter and goes hand in hand with higher volatility.
2:! for cryptocurrencies: It is no secret that volatility in cryptocurrencies is quite significant to say the least and that is why ESMA imposed the highest restrictions on digital coins. Many traders directly using cryptowallets, but using a forex broker to dive into this world may be a comfortable way to do so.
Don't panic just yet
In Japan, the authorities imposed a maximum limit of 25:1 several years ago. Traders and brokers are still doing quite well. It is just another part of the forex cost structure. The lower speed limit has not stopped Japanese forex traders.
Also, the current regulations are temporary and must be renewed every three months. At the moment, it seems quite likely that ESMA will renew them, but nothing is forever.
Moreover, the new rules are not only about limiting leverage. Forex brokers are required to publish the percentage of traders that are profitable. The new transparency measure allows a better comparison of brokers. A broker with a high percentage loss in comparison to its peers must be doing something wrong. Seeing this and moving to another broker is advantageous for the trader.
Last but not least, ESMA now requires negative balance protection. The events of the SNBomb will not return. When the Swiss National Bank removed its peg, traders at some brokers not only lost all their deposits but were also asked to pay up for the negative balance. This belongs to the past. Cases of such extreme volatility are hard to see at the moment, but they may return.
From now on, a margin call is a limited risk, not an unlimited one.
Questions and Answers
I still want to use higher leverage, what can I do?
Traders outside the European Union do not need to comply with the new regulations. However, this may be forbidden by the rules of the EU country that the traders reside in. Also, trading with an external broker means that there is no protection in case the trader has issues such as withdrawing funds or any other thing that may arise. The regulation also has advantages.
I am in the UK, do these rules still apply?
The UK is leaving the EU on March 29th, 2019, but enters a transition period that runs through December 31st, 2020. During the transition, all the ESMA regulations apply in Britain. The British Financial Conduct Authority (FCA) has welcomed the new guidance. What happens from 2021 onward? The British government is working towards leaving the EU Single Market. If this comes to fruition, the FCA will set its own rules. However, these arrangements are still negotiated and are far from being finalized.
What will the regulations do the forex industry?
Francesc Riverola, the Founder and President of FXStreet said that "this regulation may be a step forward in making forex an asset class." It will also help distinguish between three types of brokers, giving traders a clearer choice. The industry may undergo an adjustment period, but this may certainly be a positive development.
I have more questions, what can I do? You are welcome to Contact us
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