What is the benefit of this ESMA CFD intervention for retail investors?

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Analyzing retail trading accounts ESMA concluded that 74-89% of clients lose on their investments. The average loss per client amount is substantial, ranging from €1,600 to €29,000.

High leverage leads to oversized positions, especially in the case of novice traders who have little discipline in following general risk management rules.

For example, a trader with only a €1000 deposit is able to open an fx position worth of €100.000. Given the market moves only 1% against the trader (typical major currency daily range) the entire investment goes underwater.

The stricter leverage settings imposed by the new ESMA CFD regulation will create better survival chances for novice traders, and separate CFD trading from pure gambling.

What additional changes are planned?

Besides the leverage cap other changes are:

• Negative balance protection, providing an overall guaranteed limit on retail client losses.
• This feature came to the spotlight after SNB announcement of letting the CHF to appreciate, where an instant 20% move wiped out several retail traders and even pushed brokerages (FXCM, Alpari UK) to the brink of bankruptcy.
• Margin close-out rule. If the position drops below 50% of the margin deposit value, a broker has to close the position(s) automatically. Such rules existed but at various levels. This gets standardized as well.
• A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

Reprinted from Brokerchooser, the copyright all reserved by the original author.