The retail brokerage industry was rocked this week by the announcement that the European Securities & Markets Authority, ESMA Bans Binary Options and Restricts CFDs For Retail Traders.
Binary Options Banned From Retail Market
According to the ESMA press release, the measures agreed upon by the Authority include a total prohibition on the marketing, distribution or sale of binary options to retail investors and a restriction on the marketing, distribution or sale of CFD’s to retail investors. The restrictions include: leverage being limited to 30:1, a margin close out rule on a “per account” basis, 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.
Binary options and CFD trading have surged in popularity over recent years but there has been growing concern about the level of risk in the market and the lack of protection around for retail clients. Regarding CFD’s, ESMA’s main concern regards the level of complexity in the product as well as the lack of transparency.
Restrictions on CFDs
In terms of the specifics of the restrictions being placed on CFD’s trading, the following will now apply:
- Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying instrument:
30:1 For major currency pairs. 20:1 For non-major currency pairs, gold and major indices 10:1 For commodities other than gold and non-major equity indices 5:1 For individual equities and other reference values 2:1 For cryptocurrencies
- A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
- Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
- A restriction on the incentives offered to trade CFDs; and
- A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
NCA Analysis Highlights Retail Weakness
The National Competent Authorities (NCA) has also been involved in the decision. The analysis conducted by the group indicates that, over different EU jurisdictions, roughly 74% to 89% of retail trader accounts lose on money on CFDs trading, with account losses ranging from an average of 1600 EUR to 29000 EUR. These figures are clearly not the usual information shared between a broker and it’s traders. The analysis also shows consistent losses on binary options trading too.
After the decision whereby ESMA bans binary options and restricts CFDs for retail traders, due to the high levels of loss, the new rules require brokers to include figures to indicate the percentage of loosing traders within their disclaimer. In an effort to fully inform potential clients of the dangers of trading.
It seems that in this day and age, in the Forex industry, a few brokers bad intentions have influenced the restrictions that are placed on the many. As lots of traders will be aware; there are a large number of brokers who look to target inexperienced traders who open an account, lose their investment and then move on to the next firm, pushing the average loss figures up significantly.
Orbex however, targets a different type of clientele. As a firmly established, regulated and client centric broker we aim not only to raise awareness about the underlying risk of online trading, but also prepare traders to manage that risk properly and reduce it when possible by enabling access to a number of tools that would enhance a trader’s skills.
With superfluous educational material, spanning from articles and analysis to workshops and webinars, Orbex traders are able to access a wealth of information, which should facilitate effective learning and trading skill development. Finally, in an industry which has been able to milk traders and then discard them, like a financial version of the dairy industry, brokers will have to make efforts to genuinely improve their client’s abilities to succeed.
Clearly the business model that a brokerage works with has an impact on their treatment of their clients. An STP broker who benefits from their clients trading volume, as opposed to their losses, will be far more inclined to provide high standards of education and support to ensure that the trader can maintain their trading volume – rather than losing their investment.
Comments From ESMA Head
Chair of ESMA Steven Maijoor, said “The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. 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 a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics”.
“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.
“A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.”
A new age begins for the Forex industry now that ESMA bans Binary Options and restricts CFDs for retail traders, brokers need to make every effort to ensure that trading skill and success reigns supreme over short-term client acquisition and loss – developments in investor protection at it’s finest.