The European Securities and Markets Authority (ESMA) sent shock waves through the forex trading community last week, posting leverage restrictions that will impact business practices at top European brokerages including IG Trading, IronFX, Dukascopy and Saxo Bank. The new rules, set to go into effect later this year, mandate that leverage on major currency pairs be reduced to 30: 1 from current levels, which typically run as high as 200:1.

The directive will introduce tiered leverage for retail clients, dropping CFDs on major pairs to 30: 1 while other CFDs shrink to 20: 1. Commodities and non-major indices will trade with 10: 1 or lower leverage while cryptocurrencies take the biggest hit, dropping to 2: 1. The decision also mandates negative account protection, ensuring that customers can’t lose more than their trading stake, avoiding a repeat of the debacle following the 2015 Swiss Franc collapse. Finally, the rules will forbid bonuses and other incentives that may have encouraged overtrading in recent years. 

Social media lit up following the news, with American traders nervous that the CFTC will follow suit, lowering the current 50: 1 leverage limitation. Many also expressed concerns that rules will raise trading costs, possibility introducing forex commissions to supplement shrinking profits. Finally, a common consensus expects that small brokers will have trouble staying afloat once the regulations go into effect later this year. 

Gain Capital Holdings Inc., owner of Forex.Com and City Index, as well as white label solutions for dozens of European brokerages including Barclays Trading Hub, commented on the new regulations saying, “the Company believes that ESMA's new regulations place less than 5% of full year 2018 total revenue at risk, based on an anticipated implementation date of the end of the second quarter of 2018.”  That analysis could be could be conservative, given the profit-dampening impact expected at smaller operations using Gain’s introducing broker program.

Cryptocurrency Trading

Cyprus-based IronFX has rolled out full-featured cryptocurrency trading that utilizes the broker’s Metatrader 4 platforms. Account holders can trade Bitcoin, Ethereum, Litecoin and Ripple cryptocurrencies against the Euro and U.S. Dollar, accessing real time quotes for the BTC/USD, BTC/EUR, ETH/USD, ETH/EUR, XRP/USD and LTC/USD currency pairs. This trading program is not available to U.S. residents.

New Security Rules

AvaTrade is now fully compliant with MiFID II/MiFIR regulations that went into effect in January 2018. The ESMA rules require that brokers doing business in the United Kingdom verify new accounts with a picture ID or passport that proves current residence. This can be an arduous process for new traders, often forcing them to submit bank statements and talk to a company representative through live chat. The rules are intended to enhance homeland security and shut down clients from countries not regulated by the UK’s financial authorities.

Pepperstone’s New Hire and Interactive Brokers New Newsletter

Australia’s Pepperstone has hired Melbourne financial and technical analyst Chris Weston from competitor IG Australia. He’s following the lead of former boss Tamas Szabo, who defected to the popular brokerage house in October. Weston, formerly at Morgan Stanley, Credit Suisse and Merrill Lynch, will provide daily forex market analysis through the broker’s comprehensive research and education facilities. 

Interactive Brokers has partnered with iShares by Blackrock to offer account holders free access to the pilot of Recognia’s new daily technical signal newsletter. While the pilot is limited to ETFs, the company is well known to the forex community, providing technical analysis and daily forex signals through Metatrader 4 and other platforms. The company boasts more than 20-million users worldwide. 

The Bottom Line

New leverage restrictions will alter the face of the European forex industry later this year, raising challenges to profitability that could result in brokerage closures.