New ESMA Regulations In Forex & How to Avoid Them

Are you confused about the whole ESMA changes that apply to Forex trading? Do you want to avoid the changes altogether? 

ESMA was designed to keep traders like yourself safer and reduce your risk in the market while trading, so the new ESMA rules are a good thing right!? 

Overall and for the long term, yes they are. But there are traders that may find these rules too “tough” and that they will interfere with the way they trade, with leverages of 1:500 being the norm, now going down to 1:30, its a sudden and huge decrease. We have compiled two lists to guide you through ESMA:

  • Brokers that the new ESMA will apply to.
  • Brokers that the new ESMA rules will NOT apply to.

There is also more in-depth information on ESMA and tips on the new regulations down below!

For Even more Information on ESMA and FAQ’s

For many years, generous amounts of leverage have been an attractive aspect of the Forex market. They have provided a lot of profit potential for winning trades, but also increase risk when those same trades go south. 

A trend is emerging among the regulatory agencies that govern the Forex markets around the world. Under the guise of stabilizing the retail Forex and CFD markets, many agencies are beginning to implement limits on the amount of leverage that can be offered to clients, as well as other restrictions.

What is ESMA?

ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.

How Can I Avoid ESMA Regulations?

Trade with a broker that is not regulated under any regulator that falls under the EU ( European Union). See our list below…

Another way to avoid ESMA regulations is to qualify as an “Professional Client”

Professional Clients must meet at least 2 out of 3 criteria below to qualify as a Professional Client:

  • Placed at least 10 CFD or Forex trades of a significant size on average per quarter in the last year.
  • Investment portfolio of cash and financial instruments over of 500,000 EUR.
  • Do you or have you worked in the financial sector for at least 1 year professionally.
These criteria will be out of reach for most retail clients. You will either have to find a broker thats not affected by ESMA (see chart below) or Trade with a ESMA regulated broker where the bottom rules would now apply (see below).

What Are The New ESMA Rules?

ESMA has agreed on measures in relation to CFDs. The measures restrict the marketing, distribution or sale of CFDs to retail investors, by providing the following protections:

Leverage limits between 30:1 and 2:1, which vary according to the asset being traded:

30:1 for major currency pairs
20:1 for non-major currency pairs, gold
10:1 for commodities excluding gold
5:1 for individual equities
2:1 for cryptocurrencies

  • Margin close-out rule.
  • Negative balance protection for clients
  • Prohibit any Incentive programs ie – Bonuses
  • Standardized risk warnings

WIll ESMA Rules Apply to Me?

If you Live in a country that falls under the EEA  (European Economic Area) and the broker you are with is regulated within the European Union, then yes, the rules will apply to you.

EEA Countries:

Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

The rules will also apply to clients outside the EU Only if the Forex broker is solely regulated by the EU. 

This means a Forex broker that is also regulated outside the EU does not have to follow ESMA regulations. Some Forex broker are regulated in several different countries.

ESMA Rules Do Apply To These Brokers

Think Market
Broker TypeMarket Maker Non-Dealing Desk
RegulationsASIC, FCA
Min Deposit$250.00
Account Base CurrencyUSD AUD SGD GBP EUR NZD CAD CHF JYP
Max Leverage 400:1
Trading PlatformsMetatrader 4, Trade Interceptor
xm trading
Broker TypeMarket Maker
RegulationsFCA, CySec, ASIC
Min Deposit$5.00
Account Base CurrencyUSD, EUR, GBP, JPY, CHF, AUD, RUB, PLN, HUF, SGD, ZAR
Max Leverage 888:1
Trading PlatformsMetatrader 4/5, Webtrader
tickmill
Broker TypeNon Deal Desk (NDD)
RegulationsFCA FSA
Min Deposit$25.00
Account Base CurrencyUSD, EUR, GBP, PNL
Max Leverage 500:1
Trading PlatformsMetatrader 4, Webtrader
pepperstone
Broker TypeECN
RegulationsASIC FCA
Min Deposit$200.00
Account Base CurrencyUSD, AUD, EUR, GBP, CAD, JPY, NZD,CHF, SGD, HKD
Max Leverage 500:1
Trading PlatformsMetatrader 4/5, cTrader, Webtrader, API Trading, MAM / PAMM

Forex Brokers That Are NOT Affected By ESMA

fxchoice
Broker TypeECN
RegulationsIFSC
Min Deposit$100.00
Account Base CurrenyUSD, EUR, GBP, AUD, CAD, BITCOIN, GOLD
Max Leverage 200:1
Trading PlatformsMetatrader 4/5
ic markets
Broker TypeECN
RegulationsASIC
Min Deposit$200.00
Account Base CurrencyUSD, AUD, EUR, GBP, CAD, JPY, NZD,CHF, SGD, HKD
Max Leverage 500:1
Trading PlatformsMetatrader 4/5, cTrader, Webtrader, API Trading, MAM / PAMM
blackbull markets
Broker TypeECN
RegulationsFSCL and FSPR
Min Deposit$200.00
Account Base Currency USD EUR GBP AUD NZD SGD CAD JYP ZAR
Max Leverage 500:1
Trading PlatformsMetatrader 4
global prime
Broker TypeECN
RegulationsAFSL
Min Deposit$500.00
Account Base CurrencyUSD, AUD, CAD, SGD, GBP, EUR
Max Leverage 1:100 leverage and up to 1:200 (pending approval)
Trading PlatformsMetatrader 4
fp markets reviews
Broker TypeECN
RegulationsASIC
Min Deposit$200.00 USD
Account Base CurrencyAUD, CAD, CHF, EUR, GBP, HKD, JPY, NZD, SGD, USD
Max Leverage1:500
Trading PlatformsIRESS, Metatrader 4 and 5, MAM, PAMM

How Does it Affects The FCA and CySec

FCA On ESMA

The Financial Conduct Authority, which governs financial markets in the UK, proposed changes to the rules that govern leverage. The response to this from firms and individuals involved in the retail Forex industry was understandably negative. 

ESMA, the European Securities and Markets Authority (ESMA) launched its own inquiry into the issue. FCA subsequently responded by suspending its own, so that it might wait and see what ESMA came up with, while reserving the right to act if they felt that ESMA did not go far enough.
The FCA’s previous proposal, in December 2016, called for a 1:25 limit for CFD traders with less than 12 months experience and a 1:50 for all CFD traders. FCA is a national regulator, while the ESMA regulates financial markets throughout the European Union. 

That means that FCA’s regulations are superseded by those of ESMA and the latest regulations approved by ESMA have led the FCA to become concerned, particularly with the 1:30 leverage cap on major Forex pairs. They fear that such a stiff cap will lead to accounts going offshore in search of higher leverage. 

Brokers have been encouraging their clients to submit comments to ESMA and make ESMA aware of their displeasure with these limits.

CySec On ESMA

The Cyprus Securities and Exchange Commission distributed a circular to inform their clients that even those clients outside of the EU are also bound by the regulations to be implemented by ESMA if they trade through EU-based firms. 

The document also reminded CIFs (Cyprus Investment Firms) that the ESMA regulations supersede any regulations of CySEC and so the ESMA regulations will apply to CySEC members as well. 

The CySEC had previously limited leverage to a default of 1:50 (2%) for both Forex and CFDs in November 2016, with the expectation of being implemented by January 2017. 

Higher leverages were possible if clients requested it and if the clients passed a suitability test. Bonuses were also eliminated.
CySEC, as a national regulator, is superseded by the judgments of ESMA with regard to regulation of financial products. The CySEC has been very supportive of the ESMA’s strict regulation decision, in contrast to the FCA.

Conclusion

Major changes are coming to the Forex and CFD markets, particularly in Europe. It will likely be only a matter of time before regulators in the U.S. and Australia also face this wave. 

Whether the Forex brokers and the regulators can avoid increased limits and regulation is anybody’s guess.

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