As of August 1, 2018 new rules have come into effect in Europe for retail CFD trading. These rules from the European Securities Markets Authority are not the first time an authority has stepped in the heavily regulate leverage amounts. Just a few years ago Japan adjusted their leverages limits for CFD traders to 25:1. In saying this it wont be long until ASIC does the same.
The rule states:
1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:
30:1 for major currency pairs;
20:1 for non-major currency pairs, gold and major indices;
10:1 for commodities other than gold and non-major equity indices;
5:1 for individual equities and other reference values;
2:1 for cryptocurrencies.
2. A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
4. A restriction on the incentives offered to trade CFDs (such as deposit bonuses); and
5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.of 30:1 from previously 400:1.
Remember this applies to all retail clients. to bypass these rules and have the formally standard leverage limits of up to 400:1 you must now pass one of three conditions to prove you are professional trader:
You have carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters.
Your financial instrument portfolio, defined as including cash deposits and financial instruments exceeds 500 000 euro.
You work or worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
IS this going to change the character of trading?
This is a good question: some say probably not. Not much happened when the Japan change their limits. But of course Japan had smaller trading volume than Europe. Some are fear that lower volume on the market is going to reduce volatility but this is not the case. If there is lower volume across the board then this means it is still on both legs of the markets and price should move just the same.