ESMA and New Regulations on CFD Trading
The European Securities and Markets Authority (ESMA) has defined a new set of rules and regulations for investment firms, spread betting providers, and credit facilities. The Markets in Financial Instruments Directive (MiFID) is a European Union regulation which provides a legal framework for businesses involved in investments, Forex, shares, bonds and derivative trading instruments like CFDs. As from January 3, 2018, MiFID II/MiFIR came into being, to further enhance the protections offered by ESMA to investors for greater transparency and efficiency in the financial markets.
The latest improvements to MiFID are geared towards enhancing the transparency of all transactions involving spread betting services, with updated reporting requirements, enhanced testing, and greater information dissemination. Rules have been strengthened in favour of the investor and trader, and the onus falls upon management to provide greater protections, greater responsibility, and reporting to the authorities. ESMA has been instrumental in fine-tuning the legal framework, technical requirements, and implementation of MiFID II/MiFIR.
What is ESMA and are its Responsibilities?
ESMA is an acronym for the European Securities and Markets Authority. This independent entity is tasked with protecting the safety and security of the European Union’s financial system. It does this by establishing strict constructs for stability and risk mitigation, via a series of carefully crafted rules and regulations. ESMA compiles all legal constructs and provides a single rulebook for all the financial markets in the European Union. It is the overarching authority vis-à-vis supervision of trade repositories and credit ratings agencies. ESMA works closely with insurance companies, banking authorities, and monetary committees to ensure accountability, investor protection, and stable financial markets.
In summary: ESMA is tasked with promoting the stability of the financial markets, enhancing investor protections, and maintaining an orderly financial system.
What are the measures adopted by ESMA for CFDs?
ESMA – the European Securities and Markets Authority – has ratified its rules and regulations on the provision of CFDs. The new rules were published in the OJ (Official Journal), with an effective date of August 1, 2018, for Contracts for Difference.
According to the measures adopted by ESMA, the following rules come into play:
- Stringent restrictions are now in place on marketing CFDs to retail investors. This includes, but is not limited to: The use of incentives by CFD providers, negative balance protection on per-account bases, closeout rules, leverage limitations on opening positions, et al.
The new rules and regulations adopted by ESMA are geared towards greater protection for retail investors in search of spread betting brokerages. Now, traders/investors will not be able to lose more money than they deposited. Leverage, bonuses & promotional offers will be severely curtailed to prevent clients from losing out.
Several other noteworthy points are addressed by the new measures:
- Leverage is limited to 2:1 for cryptocurrencies, 5: 1 for individual shares, 10:1 for commodities (not gold), 20:1 for minor and exotic currency pairs, major indices including gold, and 30:1 for all Forex majors.
- The margin close-out will be 50% of the minimum required margin for clients with open CFD positions.
- Limitations on retail client losses with negative balance protection.
- Risk warnings on retail investor accounts with CFD providers.
What are the advantages of trading with a regulated broker?
Regulated brokerages are all fully compliant with FCA (Financial Conduct Authority), and ESMA (European Securities and Markets Authority) regulations. Highly regarded CFD providers all comply with regulated trading practices as set out by the UK’s premier authorities. Examples include InterTrader, ETX Capital, and AvaTrade. Each of these brokers is a reputable provider of CFD trading on a wide range of financial instruments, including stocks, commodities, indices, Forex, and cryptocurrency pairs. With regulated UK brokers, clients seeking spread betting brokers are assured of transparency, trust, and fairness.
To whom do ESMA changes apply?
ESMA changes are applicable to all CFD providers operating in the European Union. These changes serve as a blanket rule for EU spread betting companies offering derivatives trading services to UK investors and others across Europe. These are geared towards the protection of retail clients. After investigating the call for evidence from clients and service providers, ESMA balanced business and customer concerns and deemed it necessary to enact the proposed measures with stringent regulation. This is all detailed in Article 40 of regulation #600/2014. The changes apply to Spread betting companies first and foremost, and the benefits are enjoyed by retail traders in the UK and the EU.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.