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Foreign Exchange

CFD providers prepare for potential client shift to unregulated entities

Providers of FX contracts for differences will be monitoring their trading volumes closely over the coming weeks to see whether warnings of clients moving to unregulated providers come to pass.

Providers of FX contracts for differences will be monitoring their trading volumes closely over the coming weeks to see whether warnings of clients moving to unregulated providers come to pass.

The European Securities and Markets Authority (ESMA) measures restricting the marketing, distribution or sale of contracts for difference (CFDs) to retail investors took effect from 1 August.

The measures include leverage limits on opening positions (30:1 for major currency pairs and 20:1 for non-major currency pairs); a margin close-out rule on a per-account basis; a negative balance protection on a per-account basis; preventing the use of incentives by a CFD provider; and a firm-specific risk warning delivered in a standardised way.

Trading platform Capital.com says analysis undertaken following its decision to reduce its default rates across currencies from 1 June reveals that users who traded using the lower leverage limits were significantly less likely to face a margin call.

The proportion of users facing a margin call within the first 15 days of trading fell from approximately 30% in the months before the platform introduced the ESMA limits, to 5% in June. The size of the average loss fell by more than 80%.

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