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FX: CFD firms prepare for regulators to take aim

Providers of contracts for difference (CFD) trading services have launched a robust defence of their business, suggesting that traders are made fully aware of the risks involved and calling for regulators to support compliant CFD providers.

The European Securities and Markets Authority (ESMA) stated recently it was discussing the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation to address what it termed “investor protection risks” in relation to CFDs.

Richard Perry,
Hantec Markets

Regulators in Australia, Germany, Norway and Ireland have followed their counterparts in Belgium and France in expressing concerns about this market and in some cases imposing restrictions. Many providers have welcomed increased interest from regulators.

Chris Alfred, IG Group spokesperson, says regulatory scrutiny of the retail leveraged trading industry is overdue, while a spokesperson for XTB suggests that a reduction in regulatory arbitrage – where a broker regulated in one EU country can acquire clients from another EU country under the European passporting regulations – would create a level playing field.

Ryan Novak, head of sales for FX Junction, reckons increased transparency regarding price discovery, order execution and financial suitability of the broker could be helpful and that standardizing leverage limits would be a positive development.

According to Hantec Markets analyst Richard Perry, there was always an acceptance within the industry that regulatory intervention was going to happen at some point, a feeling exacerbated by the set-up of multiple firms in Cyprus and the introduction of binary trading.

Too many providers

There is a sense across the industry that too many providers have been allowed to enter the market in recent years, embodied most by an influx of providers based in offshore regimes taking advantage of unsophisticated or unwary individuals through misleading advertising.

XTB has called for a uniform set of guidelines to govern how the risks of CFD trading are presented across every step of client interaction for all firms, and other providers say they have revised their client on-boarding processes.

IG’s Alfred says: “Following a review of on-boarding criteria and processes, we altered various elements, including raising our self-imposed wealth hurdles and minimum deposit.”

IG has also rolled out a new appropriateness test, which means that prospective clients who were previously allowed to proceed at their own risk can no longer have a leveraged account unless they can demonstrate they understand the potential risks and rewards of such an account.

Matteo Cassina,

Matteo Cassina, CEO of Saxo Capital Markets UK and global head of sales for Saxo Bank Group, says the bank made a clear strategic decision not to compete on high leverage, and that while some experienced traders are trading with higher leverage, a large majority of its clients already trade within the caps proposed by the Financial Conduct Authority (FCA).

FxPro takes a number of steps to ensure that clients are aware of the risks involved in online CFD trading, such as making sure that all applicable risk warnings are displayed throughout its website and in all client communications, explains spokesperson Vasily Sukhotin.

“In addition, we have implemented an appropriateness test that we ask traders to take during the registration process to ascertain that they meet the required standards in terms of financial knowledge and experience,” he says.

All regulated FX/CFD websites include a risk warning, and many brokers keep this warning on the screen at all times, observes Hantec’s Perry.

“To get an account you will be required to confirm you have read and understand the risk disclosure notice each firm provides and should you be deemed on the lower end of suitability and experience you will be required to read and confirm further additional warnings.”

ESMA says the measures it is discussing will take account of ones that have been adopted or publicly consulted on by EU national competent authorities. The FCA has indicated that changes to its conduct rules for CFDs will not be finalized until ESMA has taken action.

Uniform parameters

According to Dáire Ferguson, CEO of AvaTrade, it is essential that ESMA sets uniform parameters for regulation across Europe and that individual regulators are discouraged from making country-specific changes.

“We are a strong proponent of regulation across Europe and all markets globally,” he says. “However, country-specific changes would only lead to further confusion for clients and additional disparity amongst regulated brokers, which will encourage clients to go to unregulated brokers.”

Ferguson reckons the threat of over-regulation might have the effect of driving customers to non-regulated brokers, where they can receive the conditions that they require for their trading style or preferences.

The XTB spokesperson agrees, suggesting that a European ban on CFDs would present a risk to retail traders as they would likely move their accounts to non-European brokers and would therefore lose crucial consumer protections such as segregated client money rules.

AvaTrade’s Ferguson believes that clients must be allowed to make decisions for themselves after being provided with clear risk warnings.

“Restricting brokers to a point where it becomes unfeasible to serve the market will only have negative consequences,” he concludes.

“Meaningful regulatory changes may lead to consolidation and ultimately make those who have the capabilities and capital required to operate under these conditions even stronger.”