ESMA and FCA Inform Regulated Firms About Changes to Capital Requirements

Following the recently announced measures to limit the availability of leverage to retail traders as well as a mandatory Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place Read this Term protection, European regulators have informed licensed retail brokerages of the necessity to review their permits.

According to a letter sent to brokerages, firms are also instructed to carefully reassess their business models. The regulatory changes are expected to impact future revenues across the industry with potential requirements for revision of the capital and the Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term of a number of brokers.

Based on the new conduct rules, firms will have to reflect any changes to their business expectations in their ongoing Internal Capital Adequacy Assessment Process (ICAAP), elaborating on their capital and liquidity requirements.

Negative Balance Protection

One of the key elements of the new regulatory framework devised by the ESMA is related to protecting clients from adverse market moves. All firms trading as principal will need to carefully consider how the provision of negative balance protection impacts the risks they are exposed to and the capital and liquidity they need to hold.

Companies with an IFPRU 125K matched principal license will need to consider whether offering negative balance protection is compatible with their current Part 4a Permission. According to the regulators, their ability to take on market risk is limited by their Matched Principal limitation and IFPRU 1.1.12R.

As exclusively reported by Finance Magnates in January 2018, such companies may need to vary their permission in order to be able to continue to offering their services to retail clients.

Leverage Details

According to the clarification issued by the ESMA to regulated firms, the leverage restrictions only apply to new positions opened from the implementation date. Existing open positions can thus potentially be maintained under the previous leverage arrangements. The regulators are urging brokers to carefully consider how they deal during the transition period to ensure that they act in their clients’ best interests.

Further clarifications from the national regulators are expected in the coming weeks with IFPRU 125K firms mandated to send a response to the UK FCA on whether they plan to upgrade their licenses or increase their capital in order to meet the provision of negative balance protection.