Lower trading leverage on Forex and CFD for European traders


Forex and CFD traders who expected that after public consultation and strong opposition from investors, the European Securities and Markets Authority (ESMA) would change its position on lowering leverage on Forex and CFDs, were wrong. ESMA’s official position indicates that starting from August 1st, 2018, the maximum leverage level in Forex market will be capped at 1:30, 1:20 for main indices and only 1:2 for CFDs on cryptocurrencies!

The crucial question arises – are Forex traders in Europe on a lost position and have to accept Forex leverage reduction to 1:30, or, by any chance, there is an opportunity for European Forex traders to continue trading Forex with high Forex leverage? The answer is simple – Australia.

Leverage reduction on Forex in Europe – how did it happen?

In December 2017, ESMA issued a statement in which the authority initially announced that it was preparing to implement new regulations, in particular concerning the limitation of leverage in Forex and CFDs. By definition, ESMA’s regulations for Forex and CFDs markets were designed to provide greater security and protection to clients trading Forex and CFDs markets. ESMA’s official statement of 15 December 2017 reads as follows:

ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area. Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.”

At the same time, ESMA opened a public consultation, which was to last throughout January 2018. As expected, ESMA’s new regulations for Forex and CFDs markets, and in particular its plans to reduce leverage on Forex and CFDs, had met with a very negative response from investors and brokers. A good example of this was the official position of the Chamber of Brokers, the French Association of Financial Markets (AMAFI) or the Italian Association for the Intermediaries of Financial Markets (ASSOSIM), which had clearly indicated that a reduction in leverage may not lead to a strengthening of the protection of the retail investor and in some cases even to the opposite effect to what was expected. In its announcement, the Polish Chamber of Brokerage Houses indicates that:

For conscious investors, the level of financial leverage offered is a criterion for choosing an investment firm. Higher leverage, i.e. lower margin requirements for transactions, means that many customers can create effective trading strategies and increase their potential return on their investment.

Waldemar Markiewicz, President of the Polish Chamber of Brokerage Houses, adds: “The reduction of leverage proposed by ESMA is contrary to the expectations of many investors. Polish Chamber of Brokerage Houses supports the solution proposed by the Polish Ministry of Finance, which combines the size of the leverage with the experience of the client. This optimal solution protects inexperienced traders while at the same time provide experienced traders with the opportunity to effectively leverage Forex market products in their trading portfolio.

ESMA regulations for Forex and CFDs – what will exactly happen?

Despite the considerable opposition of the Forex and CFD investors community, the pan-European financial market regulator ESMA decided to introduce the proposed restrictions. Did ESMA have the right to do so? Unfortunately yes, as under Article 40 of MiFID II/MiFIR, ESMA has a right of temporary product intervention and has exercised this right with regard to the Forex and CFD markets. In accordance with the product intervention in Forex and CFDs, the following measures will be introduced as of August 1, 2018:

1/ Maximum leverage limits:

  • 30:1 for major currency pairs;
  • 20:1 for non-major currency pairs, gold and major indices;
  • 10:1 for commodities other than gold and non-major equity indices;
  • 5:1 for individual equities and other reference values;
  • 2:1 for cryptocurrencies;

2/ A margin close-out rule on a per account basis with the aim to standardize the percentage of margin (at 50% of the minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

3/ Negative balance protection on a per account basis in order to provide an overall guaranteed limit on retail client losses;

4/ A restriction on the incentives offered to trade CFDs;

5/ A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

ESMA President Steven Maijoor said: “The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide a risk warning for investors.

Will the changes required by ESMA regulations have a significant impact on investor protection in the EU? This is quite doubtful. In July 2015, an amendment to the Act on Trading in Financial Instruments was voted in Poland, which set a maximum leverage level of 1:100. Before these changes in law, Forex and CFDs brokers offered leverage up to 1:500. Has the profitability of Polish investors changed significantly since the introduction of the Forex leverage restrictions? No one seemed to have carried out these tests thoroughly. Therefore, the question remains, what is the purpose of interfering in the trading process of investors and traders in Forex and CFDs, if the introduced restrictions have a doubtful impact on their profitability?

Trade with high Forex leverage – Professional Client

Many traders are now probably asking themselves – how can I trade Forex with leverage than 1:30? There are two solutions.

The first is to change the status of the client from a retail client to a professional client with the broker you are currently trading with. ESMA’s regulations apply only to retail clients. A professional client is another category of client, as defined by the EU financial law, which by definition has more knowledge, experience, and capital than the ‘average Smith’. With this exception, clients who meet broker requirements will be able to use leverage higher than 1:30 without hindrance. The opt-up transition from a retail to a professional client requires at least two out of three of the following criteria to be met:

  • The volume criterion means that the investor has conducted at least 10 transactions a quarter in the last 4 quarters, with the nominal value of 50,000 units of the base currency. In other words, your broker will ask you to provide a trading statement that will include at least 10 transactions of 0.5 lot per quarter, a total of 5 lots per quarter, 20 lots per 12 month period;
  • Portfolio criterion, which requires the investor to present an investment portfolio value exceeding 500,000 EUR (or the equivalent in another currency). The investment portfolio includes financial instruments and bank deposits but does not include real estate.
  • The criterion of professional experience, which requires the investor to provide proof of employment for at least 12 months in the financial sector in a position requiring knowledge of transactions in financial instruments or brokerage services.

Is it feasible to meet these requirements? It all depends on the personal circumstances of each investor and Forex trader. While for an active Forex trader and a CFD investor meeting the volume criterion should not pose many problems, the criterion of the investment portfolio and professional experience remain under considerable question. The amount of 500,000 EUR is quite ‘prohibitive’ and probably not many of the active Forex and CFD market traders will be able to provide the statement from such a portfolio, given that real estates are not included in this portfolio.

Diversification is one of the basic elements of conscious investing, and the real estate market has been providing a predictable and relatively stable rate of return for centuries. Therefore, many investors have probably allocated their significant financial surpluses in properties which they do not intend to liquidate just for the needs of an opt-up process to become a ‘professional client’. As far as the criterion of professional experience is concerned it is very straightforward – either we have ever worked in the financial industry or not. Probably trading on own account will not be recognized by brokers as an experience in the industry, even though it is de facto a real profession, requiring the investor to focus and paying attention to market moves for many hours every day.

A reclassification from retail to professional would appear to be a good solution to maintain its current level of Forex leverage. However, before changing this status, it is worthwhile to carefully read the details of the agreement between you and the broker, as it may turn out that as a professional client you are risking the part of the protection you are entitled to as a retail client. So what can I lose? Everything depends on the provisions of the contracts, but these may include, among others, no negative balance protection policy in place or a different order execution policy. Therefore, it is worth considering whether a higher level of Forex leverage is worth taking additional risks, in particular legal risks.

High leverage on Forex – CFD and Forex Broker Australia

If you do not decide to opt-up as a professional client or simply do not meet the conditions to change your status from a retail client to a professional client, you have another solution – to open an account with a Forex broker from Australia.

Which Australian Forex broker should I choose? It must certainly be a regulated broker under the supervision of the Australian Securities and Investments Commission (ASIC), the Australian financial market regulator. ASIC supervision ensures that the broker complies with the required legal regulations, client funds are separated from the broker’s funds, and the company reports on an ongoing basis and is subject to periodic ASIC inspections.

There are only two Forex brokers in Australia that meet these requirements while at the same time are highly valued, recommended and trusted by FX investors – IC Markets and IFM Trade. Both Forex brokers are growing dynamically and although they are not yet well known in our part of the world, they are doing very well in global markets, especially on the markets of South-East Asia. The main advantage of trading Forex with IC Markets and IFM Trade is that there are no ESMA limits with regards to maximum Forex leverage – a trader can choose the leverage he trades with up to 1:500.

The product offer and spreads are excellent – spreads of majors can be as low as 0.0 pips. If you add o that very low capital requirement for opening a real account – only 200 USD and the availability of 0.01 lot trades, offers both of IC Markets and IFM Trade will meet the requirements of the most demanding Forex traders and CFDs traders – especially those Forex traders who appreciate the high level of Forex leverage.