Changes to the ESMA regulations that affect European brokers

If you speculate online on the different financial markets using CFDs then it is important you understand the changes to the trading conditions that apply to European brokers. The ESMA, the organisation responsible for the protection of financial service users, recently implemented new regulations aimed at improving security that will however have certain repercussions relating to online investments. With this detailed article on the changes to ESMA regulations we offer you the opportunity to learn more about these new regulations and the possible consequences for your investments.  

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Changes to the ESMA regulations that affect European brokers

What are the new ESMA regulations for brokers?

The ESMA, or European Securities and Markets Authority, which is the official European entity responsible for the protection of investors, recently studied the risks and practise of trading online using CFDs. From the results of this study the ESMA decided to implement new procedures with the aim of strengthening security and providing increased protection for online trading platform users and their investments. Let us now examine these changes in detail.     

Firstly, if you trade on the financial markets using binary options then you should know that since the 2nd July 2018 this speculation method has been judged as too risky and therefore forbidden to European brokers. However it is still possible to trade in them online using other types of financial instruments such as CFDs but with certain significant changes.

The first major change when using CFDs online relates to the leverage effect. Now the maximum leverage that you can use is 30:1 whereas before it could reach ten times that. The limit of this leverage effect also depends on the type of asset in which you wish to invest. The 30:1 limit only relates to foreign exchange trading on the major currency pairs, the others will be limited to a 20:1 leverage effect as will gold and the major stock market indices. A limit of 10:1 is applicable to other indices and commodities. And finally, investors trading in shares on the stock markets can only benefit from a maximum leverage of 5:1 and crypto currencies from a 2:1 leverage effect.

Another major change concerns the available capital. In fact, the funds present in the trading account of the investor must now cover at least half the locked in margin. In the case to the contrary the position will be automatically closed in order to reduce the risk of excessive losses.

In the same way, the aim of the ESMA was to protect investors against the risks of a negative balance. Although this is already implemented by numerous regulated European brokers all brokers need to now guarantee their investors that the amount of their losses cannot exceed that of their capital.


What are the advantages and disadvantages of these changes for investors?

As we have just examined, numerous changes have taken effect on the popular trading platforms. So what are the positive and negative effects of these changes for traders?

Firstly it should be noted that changes in the regulations relating to the leverage effect have a direct impact on the investment capital necessary. You should therefore make use of a higher deposit to benefit from preferable trading conditions.

However this apparently negative aspect that could discourage certain investors or incite them to turn to non-European brokers that offer higher leverage is in fact an advantage as it offers increased security. Although the profits promised by brokers that offer a high leverage effect can be tempting it should be remembered that the risk of losses is also higher which could incur serious consequences for the trader.

By imposing a maximum leverage effect on European brokers the ESMA is thereby preventing certain unlucky investors, or those less experienced, from rapidly losing all their capital and sometimes even their savings. The protection against a negative balance will also reinforce this change and assists traders to avoid falling into debt when trading online.

Finally, this radical change in the online trading of CFDs will undoubtedly have other positive effects on individuals as they will require brokers approved in the European Union to implement better trading tools to assist their users and thereby enable them to complete beneficial operations on the markets.


Becoming a professional investor:

One of the particularities of these changes is that they do not apply to professional traders. Therefore, if you wish to continue benefitting from high leverage conditions such as before this reform then you will need to fulfil certain conditions such as the following:

  • Complete transactions of a nominal value of at least €50,000 with an average of 10 operations per quarter for at least the last year.
  • Hold a financial portfolio with cash deposits and financial assets of at least €500,000. 
  • You should work or have worked in the financial sector for at least a year at a post that requires a good understanding of the transactions and services in which you wish to invest.


How to choose your broker in relation to these new regulations?

Now that you know all you need to about these new regulations implemented by ESMA for European brokers you are probably wondering if it is worth staying with your present broker or if you should change to an offshore broker and thereby avoid these new regulations.    

It can be tempting to subscribe to a brokerage platform that is outside the European Union that continues to offer high leverage however we strongly recommend you not to do so for several reasons.

Firstly, you should be aware that off-shore brokers that continue to offer such trading conditions do not benefit from European authorities approval. Using the services of such a broker can therefore expose you to certain risks including that of major losses and a lack of security relating to your investment funds, your deposits and withdrawals as well as financial transactions completed on the related trading platforms.      

This is the reason why we only recommend European brokers on our website that benefit from European authority approval that guarantees you can invest online in a reliable way. You can find details of these brokers and their particularities in our full comparison.

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Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail CFD accounts lose money. You should consider whether you can afford to take the high risk of losing your money.

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