The latest restrictive regulations on the European Forex market surprised many traders and Forex Brokers. The changes resulted from the introduction of the next EU directive “Markets in Financial Instruments Directive II (MiFID II)” issued by The European Securities and Markets Authority (ESMA), updating the European legal framework on financial markets.
What is MiFID II related to?
The changes introduced by ESMA will be severe both for brokers as well as for clients using their services. In this case, the issue of lowering the maximum leverage level is particularly important, because the main attractiveness of the Forex market and CFDs contracts was largely due to the high level of the lever (up to 100: 1).
ESMA is the European Securities and Markets Authority, which performs a similar role in the European Union as much as the Polish Financial Supervision Authority (KNF) in Poland. ESMA is tasked to provide protection for European investors and to ensure stability and quality of services offered on financial markets.
What are the main changes introduced by ESMA?
ESMA introduces an absolute prohibition on offering individual investors binary options which due to their specific nature led to significant losses for customers.
The most important change is the reduction of the maximum leverage ratio from the current 100:1 to the range from 30: 1 up to 2: 1, depending on the volatility of the underlying instrument.
Negative balance protection, which forces the brokers to close the customer’s transaction automatically when the level of the security deposit falls below 50% of its required value at the opening of the position.
Necessity to provide protection against negative balances – the client will not be able to lose an amount higher than the value deposited on the account.
It is forbidden to offer bonuses and incentives to clients in order to eliminate aggressive advertising campaigns.
Standard and uniform warning about investment risk, which is a change beneficial for the transparency of services offered by brokers.
Consequences – outflow of Forex clients to States with jurisdiction outside the EU.
Seeing the limitations of a new directive entails, it is no wonder that customers focused on higher profits and those who like risk seek opportunities to circumvent the order.
After the introduction of the directive, the leverage restrictions apply only to EU-registered brokers, therefore, when creating an account with a broker in, for example, Australia, you can trade with a much higher leverage – in some cases even 500:1.
So, the gateway to circumventing the directive is registration outside the EU. This is certainly a tasty morsel for people who are determined to take risks, which is enormous in this case, because the lack of security in the form of protection against negative balances will cause people to lose all their assets due to inattention or ignorance or lack of inhibitions. For this reason, traders are increasingly wondering how to choose a Forex / CFD broker.
The almost unambiguous opposition of investors to lowering the level of maximum leverage suggests that a significant part of them will be willing to give up the protection provided by European regulations in favor of more favorable trading conditions, outside the EU.
When deciding to change the market for higher leverage and smaller constraints than those on the EU markets, it should be remembered that the use of non-European services or not clearly regulated brokers is associated with a much lower level of protection – or even lack of it.
The best example of this is the protection against the negative balance mentioned earlier, which is compulsory only in European Union countries. What’s more, you should be aware that it may be difficult or impossible to seek possible brokerage from a non-EU broker, which is caused by the fact that sometimes brokers create certain regulations in such a way that they do not protect entities from other jurisdictions / prevent them from pursuing their claims. rights with possible losses.