Important Regulatory Update (ESMA)


 

European regulators (ESMA) have announced new rules for Contracts for Difference (CFDs) and Margin FX trading in the European Union (EU) that will affect how you can trade.
ESMA has announced the new rules will apply from the 1st of August, 2018.
The restrictions that will impact your trading include:

1. A maximum leverage limit on opening positions by a retail

30:1 when the underlying currency pair is composed of any two of the following: US Dollar (USD), Euro (EUR), Japanese yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD) or Swiss Franc (CHF)

20:1 when the underlying index, currency pair or commodity is:

a) any of the following equity indices: Financial Times Stock Exchange 100 (FTSE 100); Cotation Assistée en Continu 40 (CAC 40); Deutsche Bourse AG German Stock Index 30 (DAX30); Dow Jones Industrial Average (DJIA); Standard & Poors 500 (S&P 500); NASDAQ Composite Index (NASDAQ), NASDAQ 100 Index (NASDAQ 100); Nikkei Index (Nikkei 225); Standard & Poors / Australian Securities Exchange 200 (ASX 200); EURO STOXX 50 Index (EURO STOXX 50);

b) a currency pair composed of at least one currency that is not listed under 30:1 definition

c) Gold

10:1 when the underlying commodity or equity index is a commodity or any equity index other than those listed above

5:1 when the underlying is a share or any other instrument not listed above

2:1 when the underlying is a cryptocurrency

2. A margin close out rule on a per account basis, at 50% of minimum required margin;

3. Negative balance protection on a per account basis, providing a guaranteed limit that your balance will not drop below zero.

4. Standardised Risk warning
CFD providers will include in their risk warning a percentage of losses on a CFD provider’s retail investor accounts for 12-month period preceding the date on which the calculation is performed.

5. Restriction on incentive offered to retail clients
These apply to monetary and non-monetary benefits used to attract and encourage retails clients to trade in CFDs,
You may be eligible to qualify to become a Professional Client with INFINOX (subject to eligibility criteria) and therefore maintain existing preferred leverage.

ESMA has concluded that there is a significant investor protection concern for CFDs (including rolling spot FX) and Binary Options. ESMA believes that the current leverage available to Retail Traders is excessive due to the complexity and low level of transparency of these instruments. Many industry respondents - including Retail Traders - in consultations with ESMA urged that some changes were too restrictive, in particular the changes to leverage. Nevertheless, ESMA has chosen to enforce these changes.

THE TABLE BELOW DEMONSTRATES THE IMPACT OF THE LEVERAGE CHANGES AND ADDITIONAL MARGIN REQUIREMENTS:

  Product Current Leverage New Leverage Extra margin required for Retail clients  
  Major FX pairs 100:1 30:1 3 x  
  Minor FX pairs 100:1 20:1 5 x  
  Major Indices 100:1 20:1 5 x  
  Gold 100:1 20:1 5 x  
  Commodities 100:1 10:1 10 x  
  Cryptocurrenices 5:1 2:1 3 x  

EXAMPLE 1 FX

Client X opens a 1 lot EUR/USD trade open at 1.1667 market price. Assuming their account is denominated in GBP and he has a 1:100 leverage, the margin required would be 1166.70 USD. Converting this amount to GBP with an exchange rate of 1.3304, the margin required in the client’s account currency would be 876.95 GBP.

The formula to calculate required margin is: contract size / leverage x market price.

e.g. 100,000 / 100 x 1.1667 = 1166.70 USD or 876.95 GBP

Now let’s take a look and see how their margin would change should their leverage change from 1:100 to 1:30.
100,000 / 30 x 1.1667 = 3888.99 USD or 2923.18 GBP

As we can see from the example above, the margin has required has doubled.

EXAMPLE 2

Client X opens a 1 contract size on GER30 at 12557.34 market price. Assuming their account is denominated in EUR the margin required would be €60.

Margin calculation is as follows:

Lots x initial margin x percentage / 100 (1 x 60 x 100 / 100)

Note: percentage = 100
100% = 1:100 leverage equivalent

When ESMA takes into effect, the percentage will change in order to reflect a 1:20 leverage. New percentage would be 500%.
Therefore, margin calculation will be:

1 x 60 x 500 / 100 = €300

If the same client would now like to open a 1 contract size on GER30 at 12557.34, the margin required would be €300.
If client had an account in USD, the margin required would need to be converted to USD. If we were to use a EUR/USD exchange rate of 1.1664, the margin required would be 300 x 1.1664 = 349.92USD

How do I qualify to be a Professional Client with Infinox Capital Ltd?

For us to consider your application, we will require some further information from you to help us decide whether you fulfil the criteria appropriate to become a Professional Client.
Under the Markets in Financial Instruments Directive (MIFID II), we may treat you as an Elective Professional Client if you satisfied at least two of the following criteria:
- you carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter, over the previous four quarters;
- the size of your financial instrument portfolio exceeded €500,000;
- you worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
This is known as the “quantitative test”.
In making our assessment we may rely on information we already possess about you and/or request additional information from you. We may also call you to discuss your investment experience.


 
Trading FOREX and CFD’s is high risk. Losses can exceed deposits.