In early 2018, the European Securities and Market Authority decided to change the rules regarding leveraged trading in Europe. The decision was met with mixed reactions, and while most traders thought it would hurt the industry, the opposite seems to be true.
The idea behind the change was to create a safer and more attractive market space where traders could thrive without being subject to much risk, and so far it looks like it is working. In fact, as industry professionals, we have witnessed an impressive and very positive shift in the market since the rules took effect in August.
All regulated Trading Platforms had to adjust to the new guidelines.
What Do the New ESMA Rules Look Like?
When ESMA decided to update the regulations surrounding leveraged trading, they focused on two aspects: limiting the risks and improving trader safety.
- Limited Leverage
In order to limit the risks, ESMA decided to impose restrictions on the amount of leverage that online brokerages were allowed to offer European traders and the change was rather drastic.
Before the new regulations, brokers were allowed to offer leverage of 200:1 on certain assets, especially for major currency pairs. However, the new rules dictate that a broker can offer a maximum of 30:1 on a select number of currency pairs. All other assets have even lower maximum leverage levels with cryptocurrencies being the most limited at 2:1.
- Improved User Protection
ESMA also ordered all online brokerages to be more transparent and to improve their safety measures. This included a mandatory protection against negative account balances as well as improved educational materials especially aimed at beginners.
What Are the Results from the Changes?
Naturally, many professional traders that rely on high leverage to enhance their exposure for each trade were reluctant about the changes. And in some ways, the limited leverage has made it a tad harder for day traders to make the same profits they used to make. However, as professionals, they have managed to adapt to the new system, and the negative effect on day traders has not been as serious as first expected when the rules were introduced in April.
For beginners, on the other hand, the changes have been more dramatic. Since the new regulation was put in effect in August of this year, the CFD and forex trading industry has become much more beginner-friendly.
Today, traders cannot lose more money than they invest since there is a ban against negative account balances. Also, traders’ money lasts for longer since they can’t use high leverage anymore. Moreover, improved educational material and guides aimed at beginners have created a fairer market space for everyone.
In turn, this has resulted in a more inviting market that has the potential of attracting traders that had previously avoided CFD and forex trading due to the risks. And when the brokers get more clients, they make more money which will allow them to refine their products and services which we all can benefit from.
ESMA’s new rules regarding leveraged trading and user-protection have only been active for about four months, and it is still a bit too early to evaluate how it has changed and improved the market. However, as market experts, we do see the benefits of the new regulation, and as long as it’s done to help protect traders and update the industry, we’re all for it.
Finally, this is not the first time ESMA has decided to change their regulations and limit leverage. Every time it has been done in the past, it has been met with protest from professionals for a short period of time until they get used to it and we see no reason why it would be different this time.