One of the biggest developments of the month took place last week with the European Securities Markets Authority’s (ESMA) proposals to mandate more sweeping regulation on CFDs. For its part, Saxo Bank has welcomed ESMA’s proposals, endorsing the group’s work in the retail space.
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Regulation of CFDs has been expected for at least a year. ESMA is hardly the first regulatory authority to draw a line in the sand regarding contracts-for-difference (CFDs) products. Last year, the UK’s Financial Conduct Authority (FCA) also eyed measures to impose a leverage cap on these speculative instruments.
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Fast-forwarding to today, ESMA is now training its focus on CFDs to retail clients. The group unveiled an update last week on its preparatory work though also laid the framework for a coming consultation this January. Overall, the new measures will seek to maintain a more normalized and level playing field in the bloc, dictating leverage caps that brokers can offer.
Saxo Bank backing ESMA
Kim Fournais
Danish brokerage Saxo Bank certainly welcomes these changes, as echoed in a recent company statement from the group’s co-founder and CEO, Kim Fournais. “Saxo strongly welcomes and supports the proposals set forth by ESMA and believes that consistent, harmonised regulation at a European level will be positive for clients and the industry as a whole,” he explained.
“At Saxo, we have been expecting these developments for some time and have provisions in place. We made a clear strategic decision not to compete on high leverage, placing us in a good position to maintain and grow our business in this new regulatory environment,” he added.
Tiered leverage
2018 will see ESMA equipped with newer jurisdiction and authorities. Under the product intervention powers that the European authority will receive on January 3 under the MiFIR framework, several limitations on brokerages will now be possible.
According to the ESMA statement last week, it is considering cutting leverage limits to between 1:30 and 1:5. The precise levels will be contingent on the Volatility of the underlying asset. In addition, the brokers might need to implement a margin close-out rule, Negative Balance protection and a standardized risk warning.
The measures by ESMA will help curb any potential for an arms race on leverage, which could reverberate throughout the retail industry in the bloc. Saxo Bank does note that CFD and foreign exchange (FX) can be a double-edged sword for investors, bestowing several advantages for traders that also come with significant risks.
“It is important to note that this is a leverage problem – not a product problem. Responsible caps on leverage are therefore key to consumer protection. Our approach and business model clearly show that running a profitable business and being a responsible market participant are not mutually exclusive. For its long-term survival, the industry should welcome the move away from competition on leverage and embrace competition on quality of platform, price, product and service,” Fournais reiterated.
CFDs have been one of the most popular instrument to be adopted by several brokerages in 2017, namely in terms of crypto exposure. Bitcoin and other crypto-denominated CFDs have become all the rage as investors have been looking for a way to trade these instruments. However, some brokers have already showed signs of cooling on these instruments, given the
