European Securities and Markets Authority (ESMA), the EU-wide financial markets regulator, has recently announced that it is intending to propose to lower the leverage to as low as 30:1, ban binary options and restrict incentivizing promotions as such deposit bonuses.

Bad news, indeed! Even though, the proposed measures will be just in the degree of recommendation which means that each member country’s own watchdog will make the final decision to endorse or not, it is believed that political pressure will lead many regulators to adopt those new rules. In addition to 30:1 leverage cap, ESMA is considering to recommend local regulators to restrict marketing of forex and related products and impose negative balance protection on forex accounts.

It did not take long for proposed measures to receive backlash from the brokers and other industry members. GAIN Capital, one of the industry leaders, warned that the ESMA’s proposed changes may lead to ‘’unintended consequences’’ while IG Group described the measures as ‘’disproportionate’’. 30:1 leverage cap and binary options ban will certainly bring about profound unfavorable effects for the industry in Europe however there is one good thing coming out of bad situation; negative balance protection (NBP).

ESMA to Propose 30:1 Leverage Cap
ESMA Headquarters in Paris, France

The proposed NBP rule is going to remove the risk of owing to a forex brokers more than the investors deposited which was the case for many traders after Swiss National Bank’s decision to remove 1.20 EURCHF floor almost three years ago.

Another good thing that I see which is coming out of this bad situation is the smile on the faces of off-shore forex brokers. Being offered leverage as high as 3000:1, traders who bargain for higher leverage than proposed 30:1 will make their way to the off-shore brokers scattered from Central America to Indian Ocean.

FCA Response

FCA’s response to the ESMA’s statement was most looked for and it was swift. UK is in the process of breaking up with EU and London is the home for some big retail forex brokers. FCA indicated that it supports ESMA in its consideration of the new measures however its own domestic policy work on permanent product intervention measures applicable to firms offering forex and binary options is ongoing. It is known that FCA is considering a leverage cap of 50:1 for forex and to regulate binary options market rather a ban.

I have been in trading business for almost 30 years and the latest 15 years of this period has been devoted to foreign exchange trading. After the boom of forex brokers offering lucrative features like leverage, 24/5 trading hours and wide diversity in pair instruments, I have tried and traded with more than thirty forex brokers in several different countries.

Risk Warning:

Trading Forex and CFDs involves significant risk and can result in the loss of your invested capital. You should not invest more than you can afford to lose and should ensure that you fully understand the risks involved. Trading leveraged products may not be suitable for all investors. Before trading, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.