New regulations from the ESMA – Leverage down, Stop-out level up

New regulations from the ESMA – Leverage down, Stop-out level up

In mid-2018, a new set of regulations that are going to regulate the conduct of retail forex trading within the European Union was released by the European Securities and Markets Authority (ESMA).

ESMA is an independent organization that has one of its mandates, the protection of the financial system within the European Union. ESMA is also tasked with creating and compiling the rulebook for financial markets in the EU, assess risks to financial stability in the EU as well as directly regulate entities operating within the financial services industry (including FX and CFD brokers).

What this means is that ESMA can identify potential risks that certain market conditions or certain actions by brokers pose to investors, and it is empowered to take any necessary actions to protect investors. In essence, ESMA therefore oversees the activities of all financial services firms that offer FX, CFD and other derivative traded assets to the retail segment of the trading ecosystem within the EU.

You probably have known about the changes to the leverage that brokers are allowed to offer their traders. However, the changes made by ESMA to leverage provision are not the only changes that have been effected. In fact, ESMA has taken several far-reaching decisions which it says are aimed at protecting unsophisticated investors, who do not have a lot of professional knowledge of how to trade the markets. These are the retail traders, who typically have little or no trader training and are not very versed in the art of risk management. Retail traders also approach the market with little capital, which invariably forces them to use high leverage.

Events of January 15, 2015, which saw the removal of the peg between the Euro and the Swiss Franc, caused traders all over the world to suffer steep losses. This event may have forced ESMA’s hands and caused it to come up with the new regulations so as to prevent a recurrence.

ESMA’s New Regulations

Here is a list of these new regulations and how they will affect the retail traders.

 a) Prohibition of Binary Options

The scandal-hit binary options industry has virtually been given a death knell by ESMA, as the new regulations have prohibited the offering, marketing, distribution and sale of binary options products to retail traders. This prohibition, which has been in effect since July 2018, has recently been extended by three months with effect from April 2, 2019. Many brokers such as 24Option, AnyOption and other major players in the binary options industry of yesteryears, have all dumped this product and moved on to more conventional trading products such as FX and Contracts-for-Difference on stocks, indices and commodities.

For retail traders, this means that the days of betting on Up or Down options in Europe may be gone forever. Those who still want to bet on options will need to do so with providers in offshore locations who are for the most part, unregulated. Therefore, trading binary options for retail traders comes at very terrible risk and may not be worth it.

 b) Reduction of Leverage on All Assets

This is the change that has been harped on the most in almost all the literature out there regarding the rule changes by ESMA. The maximum leverage for assets prescribed by ESMA is as follows:

  • 1:30 for forex majors (EUR/USD, GBP/USD, etc).
  • 1:20 for forex minor pairs (EUR/GBP, GBP/CHF, etc)
  • 1:20 for spot metals, crude oil, indices and non-volatile CFDs.
  • 1:10 for Brent and light crude, cryptos.
  • 1:5 for volatile CFDs.

For the retail trader, it simply means that you will need more capital to be able to place trades like before. Alternatively, trade sizes will have to be reduced remarkably.

 c) Increase in Stop out Levels to 50% of Capital

By increasing the stop out level on a trade that is about to get a margin call from 20% to 50%, bad trades that start to draw on the account capital in order to keep them open will get a margin call once the remaining capital is eroded down to 50% in order to sustain such trades.

 d) Negative balance protection

All EU brokers are now required to protect their clients from incurring a negative balance in times of massive market slippage, by providing what is known as a negative balance protection. That means that all stop loss prices on trades MUST be absorbed by the broker, no matter the market conditions. So the era of seeing the fearful disclaimer “you can lose more than your capital” is gone…at least for now. This is good news for retail traders all around.

 e) Full Disclosure

EU brokers are now required to compile the annual trading performance of their clients, determine the percentage of traders suffer losses within that period, and disclose this on their home page. This is what the disclaimer looks like:

This enables traders know what they are getting into beforehand, and at least enables them get a true picture of how difficult or easy it is to profit from a forex platform.

Further Actions by ESMA

ESMA is only taking steps to either affirm or reject measures taken by individual regulators in EU member states. For instance, the ban on short selling by German regulator BaFIN has received the blessing of ESMA. ESMA has therefore shown its willingness to support national regulators in keeping their financial markets safe for investors.


Concerns exist that despite the good intentions of ESMA to safeguard traders operating with EU brokers, the new rules could create an alternative market to which affected traders could migrate to. These alternative brokerages are in locations where regulation is weak or entirely absent.

There has also been some resistance from some of the EU brokers, who feel that these new measures will simply make them lose clients. It is still too early to measure the impact that these rules have had on traders and brokers alike. Perhaps by the end of 2019, we will have data that will answer some of the existing questions that have arisen from the new legislation.

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