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Russia is working on regulatory amendments, under which the maximum leverage for retail forex clients would be limited to 50:1, according to a notice published on Friday by Russian self-regulatory organization (SRO) for over-the-counter (OTC) financial instruments CRFIN.
The change aims to protect inexperienced investors by limiting losses caused by the use of leverage and to increase the lifespan of traders’ accounts in case of unfavorable market conditions, the CRFIN said. Leverage is a type of virtual borrowing that traders can get from brokers. It allows investors to operate with higher amounts and to increase their profit. High leverage means higher buying power and presents wider trading opportunities, but it also presents higher risk.
According to the CRFIN, however, putting a tight restriction on leverage can lead to stagnation of the forex market in Russia since leverage is a key characteristic for attracting investors. In addition, it could affect the quality of services provided by retail forex brokers.
The CRFIN seems to be in favor of setting up a maximum leverage, but it doesn’t agree with the proposed rate. According to it, the setting of such tight maximum cap on leverage presents inconvenience for traders since they constantly have to ensure higher margin or else their trades would be forcibly closed. Margin rates indicate the minimum amount clients need to have in their account balances when using leverage. All this reduces the efficiency of the use of additional trading capital. The CRFIN proposed a leverage of 200:1 would be more suitable having in mind the market conditions and the specifics of the retail forex trading.
Recently, Japan also announced it considers to introduce a maximum leverage of 25:1, only for corporate forex trading. The country already has a leverage cap of 25:1 for retail traders.
In most countries, there are no legislative restrictions regarding how much leverage brokers can offer their clients. However, in some countries there are certain restrictions on leverage, mainly for retail trading. In the US, for instance, the leverage cap is 50:1, while in Poland it is 100:1. Meanwhile, in Turkey trading accounts with balance of less than TRY 20,000 cannot offer leverage rates of more than 50:1 for trading of gold and popular currency pairs such as the EUR/USD, USD/TRY, and EUR/TRY, and the maximum leverage for other pairs is 25:1. Leverage for popular pairs traded via accounts with more than TRY 20,000 is set at a maximum 100:1, while for other currency pairs the cap is 50:1.
Usually, leverage of about 500:1 or up is considered quite high. Recently, the number of forex brokers that offer leverage on the higher end has been increasing. FxGlory and FBS are the only retail forex brokers to offer leverage as high as 3,000:1, while Exness recently became the first broker to offer unlimited leverage.
This is one of many changes Russia has made in the past year regarding the retail forex market. As of 1 January this year, Russia-based forex brokers are not allowed to target local citizens, unless they are CBR-licensed. Currently there are four licensed brokers – Finam Forex, TeleTrade, and TrustForex, while the two largest ones, Alpari and Forex Club, were denied license. However, foreign forex brokers can still target Russian citizens even without a local license and many brokers operate via their foreign branches.