The late Friday announcement from the ESMA and the FCA about prospective limitations of leverage and product intervention are hitting listed brokers today. All of the London-traded Forex and CFDs brokers are taking a hit as the regulatory changes mulled by European authorities are sinking in.
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The leverage limitation ranging between 1:5 and 1:30, Negative Balance protection, trading incentive limitations and margin close-out rule are likely to change the market materially. Binary options products are to be prohibited altogether.
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The rules that were published late on Friday surprised the market as shares of CMC Markets, and Plus500 opened lower by 15%, while IG Group’s stock was down 10% in early London.
CMC Official Response
CMC Markets outlined in an official statement that it will be quick to adapt to new regulatory requirements. The proposed negative balance protection was already implemented in Germany, and the firm’s UK product offering already offers a limited risk account.
For CMC Markets, binary options products generated £2.1 million in revenue from the UK and Europe in the first half of fiscal 2018. As such, the firm dismissed the prohibition of the product as “immaterial in a group context.”
The firm outlines that the proposed margin changes are likely to impact the trading behavior of clients, but the impact of the changes is not quantifiable.
The company’s refocusing on higher value clients is by design aiming to mitigate the risks to the income of the brokerage, with geographic diversity also helping out to reduce risks.
“While these proposed changes may have an impact on the Group, CMC welcomes a consistent approach to regulation, a 'level playing field' and the raising of standards in the industry. The Group's focus on attracting high value and experienced clients and its strong balance sheet mean that CMC is well positioned to take advantage of market opportunities that will arise from these proposals,” the company outlines in its statement.
IG Group Warns Lower Leverage Could Drive EU Clients Offshore
A statement from IG Group highlights that the company firmly believes in the benefits of enforcing consistent close-out procedures, putting a guaranteed limit on client losses and restricting trading incentives such as bonus offers. A standardized risk warning, which is also in the works, is also welcomed by the firm and already implemented by many providers.
IG Group’s revenues from binary options have been less than 5 percent in the first half of fiscal 2018, with the company offering binary options products in the US under its Nadex brand. Last week, the firm also started working on establishing a Chicago-based subsidiary.
Leverage restrictions are the primary concern for IG group. In the opinion of the company the levels that are discussed risk clients shifting their trading to offshore jurisdictions. The company classifies the margin rules as “disproportionate that go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage.”
Back in November 2017, the company launched an online process that helps retail customers to reclassify themselves as professionals to continue to have access to present trading conditions. Since the program was started, the proportion of IG's UK and EU revenues generated by professional clients has increased from 5% to 15%.
“IG believes that clients representing well over half its current UK and EU revenue are eligible to be categorized as professional and will elect to be treated as such if the products that they can trade and the leverage they can utilize diverges from that available to retail clients,” the firm elaborates in its statement.
While the firm is not stating a firm amount, IG Group says that the financial impact from the implementation of the prohibition on binary options and the restrictions on CFDs that are considered by European regulators are not going to be “significant in the current financial year”.
“It remains difficult to predict what impact regulatory change may have on the business in subsequent financial years. The Company believes that any reduction in historic annual revenue from the implementation of the measures currently being considered by ESMA would have been less than 10% including the impact from lower binary revenue.”
The firm also states that it is flexible in its marketing spending and will adjust it to allocate resources adequately.
Plus500 Awaits Conclusion of Consultations
Plus500 has outlined that it stopped offering bonuses to clients in January 2017 and that it has never provided binary options. The brokerage also states that it already has a maintenance margin level which enables its customers to have additional protection.
The firm prefers to wait until the official conclusion of the consultation period at the end of January to elaborate on the adjustments it is going to make to its business.
Commenting on the ESMA’s late Friday announcement, the CEO of CEO of Plus500, Asaf Elimelech, said: “It is positive to have an update from ESMA, as this provides us with more transparency as to the regulatory changes that may be implemented in January 2018.”
“We look forward to working with our regulators through the consultation period and establishing detailed procedures to ensure the proposed measures operate effectively. Until those details are finalized, it is difficult to assess the impact upon our business. As we have previously stated, we have a flexible business model, and already provide many of the protections suggested by ESMA,” he elaborated.
