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Foreign Exchange

Esma’s retail forex regulation opens up opportunities for larger market players

The regulation recently adopted by the European Securities and Markets Authority (Esma) around the provision of contracts for difference (CFDs) and binary options to retail investors has raised a furore among retail traders and brokers.

By Anna Fedorova

The new rules prohibit the marketing, distribution and sale of binary options and place notable restrictions on the distribution of CFDs to retail investors.

Peter Hetherington,

The latter consists of strict leverage limits on opening positions; a margin close-out rule and negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and an obligation to include a firm-specific risk warning on the marketing material.

The original proposals divided opinion in the market, with some companies supporting the new rules, while many retail traders called the measures “draconian”.

For firms that used to rely on high leverage for profits, the new rules are likely to hit profitability in the short run. For example, UK retail trading platform IG Group has warned in its latest set of results that the new rules could reduce its revenue by around 10% in 2019.

Peter Hetherington, IG chief executive, says: “As Esma’s product intervention measures are focused on the CFD industry, they risk creating an unlevel playing field by giving an advantage to other forms of leveraged trading products which are offered to retail clients.”

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