Following the recommendations and guidelines of the European Securities and Markets Authority (ESMA) from mid-October in regards to forex and binary options regulation, the Cyprus Securities and Exchange Commission (CySEC) and now the Financial Conduct Authority (FCA), the two leading forex regulatory destinations in Europe, have announced they are to alter the standards for key forex trading conditions.
The ESMA document tapped several topics, but margin requirements and bonus practices were the most widely-discussed ones.
Both the CySEC and the FCA are setting a new leverage cap of 50:1 (25:1 for inexperienced traders with less than 12 months of trading under the UK framework). They are both banning bonuses or other benefits to promote risky trading instruments. While the new requirements set by the CySEC sounds rather recommendation, the UK watchdog uses a more compulsory tone.
How do the new rules affect UK brokers?
The new rules are aimed at increasing consumer protection, but they also may have a strong effect on brokers’ business operations. The news made investors nervous and affected negatively the stock price of listed forex brokers.
The top forex brands in the UK – CMC Markets, Plus500 and IG Group saw earlier in the day their shares open the market by a double-digit drop as a result of the recent FCA news. Plus500’s shares plunged 28%, while CMC Markets and IG Group saw even higher drop of 34.6% and 38%, respectively.
The three brokers have come out with statements regarding the new industry changes, showing mixed reactions to the proposed regulatory changes.
Plus500 was the first to assess the situation and express a firm stance on the matter.
“The topics covered in the [FCA] note will have a material operational and financial impact on the UK regulated subsidiary which represents approximately 20% of [Plus500’s] revenues,” the broker said in a statement issued shortly after the FCA’s new requirements were announced.
IG Group raised a question, asking why the new FCA proposals “do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state” and assured it will carefully consider the implications of the new rules and will respond accordingly.
Meanwhile, CMC Markets seems to feel unbothered by the new requirements. The broker noted that the proposed rules concern inexperienced retail investors and the broker “has consistently focused on higher-value experienced premium clients who understand the markets and products they are trading”.
Trading conditions in other countries
Leverage is a type of virtual borrowing that traders can get from their brokers. While in most countries there is no limit, in others regulators set a cap in an attempt to mitigate risks associated with the usage of it.
The US has long before set the maximum leverage cap at 50:1. The country is known as having very strict forex regulation, but the restrictions have played a bad trick on the market. The number of retail forex brokers operating in the US has shrunk to just five and as a result the market is also continuously shrinking in terms of client deposits.
Some EU countries present much softer regulatory requirements. Poland’s regulatory framework allows brokers to offer a leverage of 100:1. In Bulgaria there is no limit as to what leverage locally-regulated brokers offer to clients.
Japanese brokers cannot offer retail traders leverage exceeding 25:1. The local regulator also considers a 25:1 cap for corporate forex trading, as well.
Also earlier in 2016, Russia announced it was working on regulatory amendments, under which the maximum leverage for retail forex clients would be limited to 50:1.
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.