Although CFD trading could represent a good opportunity to profit from short-term price movements, there are some important changes that took place in Europe in the summer of 2018, changes that impact how retail investors can invest in CFDs. The European Securities and Markets Authority (ESMA) adopted under Article 40 of the Markets in Financial Instruments Regulation new measures that started to apply since August 1st, last year.
Steven Maijoor, the chair of ESMA acknowledged that:
“The measures ESMA has taken today are a significant step towards greater investor protection in the EU. The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors. “
What does that mean for retail investors?
Trading conditions for retail investors interested in CFD trading, which have their citizenship in one of EU’s country members, suffered significant changes. Leverage limits on opening positions had been capped as follows:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold, and major indices;
- 10:1 for commodities and non-major equity indices;
- 2:1 for cryptocurrency-related CFDs;
Trading CFDs based on cryptocurrencies seems to be more suitable for retail investors and now that leveraged had been capped, spikes in volatility could cause smaller damages. In terms of regulation for cryptocurrencies there still a lot of work to do. At a global scale, we still do not have licensing and supervision procedures for exchange platforms, which leaves security issues under a question mark.
ESMA also decided to take measures for a standardized margin closeout rule at minimum 50% required margin and negative balance protection on an account basis. There’s also a standardized risk warning which will make transparent the percentage of investors losing money with any particular brokerage company.
All of the above-mentioned measures will apply to retail investors with limited or no experience at all. Investors able to provide proof of experience will be able to benefit from the same trading conditions prior to the new rules set by ESMA.
Overall, the new restrictions provide a safety net for inexperienced investors and will require any brokerage company to apply the rules for any European citizen. Interestingly, though, until the present time, no other regulator decided to implement similar measures.