ESMA Changes Impact Currency Trading Activity

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August 8, 2018 By: , No Comments

The UK Forex trading industry is rapidly adjusting to the new measures set forth by the ESMA. According to European Securities and Markets Authority, restrictions are now in place to safeguard the interests of retail investors and currency traders. These new measures have been adopted in accordance with MiFIR, and they are applicable for a 3-month period, with the option to extend if necessary. The protection measures are designed to enhance transparency, reduce excessive leverage, and clarify disparities between risk and reward. According to the new measures implemented by ESMA, leverage limits are now in place for major currency pairs, and non-major currency pairs.

Many of these new improvements have been adopted by MiFID and they focus on making Forex trading transparent. The updated reporting requirements, information sharing, and increased testing are designed to assuage investor concerns and standardize industry protections. Now, the responsibility falls on Forex trading brokers to report to regulatory authorities, provide a responsible trading framework, and to offer enhanced protections to customers. Spearheading these initiatives is ESMA – the authority tasked with protecting the integrity of the European Union financial system.


What is the ESMA and what are its responsibilities?

The ESMA is the European Securities and Markets Authority. This regulatory body is charged with the protection, security, and integrity of the EU’s financial system. Through a series of measures, including risk mitigation, legal frameworks, and directives, it acts as the authority for all financial markets in the EU, including Forex trading services. The ESMA cooperates with a wide range of monetary committees, bank and insurance authorities, and other vested interests to guarantee the stability, protection, and transparency of the financial markets.

In short: The ESMA acts as the consumer watchdog vis-à-vis sustainability and stability the Forex markets, the banking and financial system of the EU. It enhances protections and maintains order in the markets.


What are the measures adopted by ESMA for Forex traders?

The ESMA recently ratified various regulations pertaining to the provision of Forex trading services. According to the Official Journal (OJ), the new rules are effective as of August 1, 2018.

  • A strict set of legal rules is effective for Forex trading/investing services for retail investors. This encompasses a wide range of elements, including the provision of leverage, and limitations thereof, incentives used by Forex trading brokers, protection on a per account basis, negative balance protection etc.

These revised regulations by ESMA are designed to protect retail investors and Forex traders from scams, lofty promises, and the risk of loss. Thanks to ESMA protections, Forex traders and investors are limited in the amount of money they can lose on any given trade. These limits are capped at the value of the deposit. Additional limitations are also in place on things like promotions, bonuses, and leverage on Forex majors, minors, and exotic currency pairs. The negative balance protection is designed to limit retail client losses, and retail investors will see risk warnings associated with Forex trading services.

The ESMA regulations also address the following elements:

  • Cryptocurrencies are subject to a leverage limit of 2:1.
  • Individual shares are subject to a leverage limit of 5:1.
  • Commodities excluding gold are subject to leverage limits of 10:1.
  • Minor FX pairs and exotic FX pairs are subject to leverage limits of 20:1
  • Forex major pairs have leverage limits of 30:1.


The advantages of trading with a regulated Forex broker?

Regulated Forex brokers offer many more protections than meets the eye. As a UK Forex trader, the last thing you want is to invest your hard-earned money with an unlicensed, offshore broker. Registered FX brokerages are subject to strict rules and regulations, compliance and mandated reporting requirements. In the United Kingdom and the European Union, multiple authorities ensure the safe, transparent, and effective functioning of the financial system. In the UK, the Financial Conduct Authority (FCA) undertakes this responsibility. In the European Union, the European Securities and Markets Authority (ESMA) is responsible for this. Reputable Forex brokers in the UK currently enjoy access to the EU and vice versa. As such, reputable trading practices are now standard. The UK’s leading Forex trading brokers include InterTrader, and AVATrade. You can read up about the Forex trading services offered at these regulated brokerages, and the benefits available for retail clients. Trading Forex is a high-risk activity, but that risk can be mitigated by selecting a fully licensed and regulated (FCA and ESMA compliant) FX broker.


To whom do ESMA changes apply?

Forex brokers operating throughout the EU are now subject to the updated ESMA rules. Since the European Securities and Markets Authority is the overarching authority for the European Union, this applies to any company offering services to the UK and other European countries. All derivatives trading instruments are covered, including Forex, stocks, indices, commodities, bonds and futures. The ESMA changes are consumer friendly and designed to protect your investments from high-risk activity. While ESMA changes reduce your exposure to risk, they also allow businesses to operate within a structured framework while providing enhanced protections for customers. The changes are applicable to Forex trading companies, and retail investors and traders throughout the EU and the UK.


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