ESMA BANS OFFERING BINARY OPTIONS AND INTRODUCES RESTRICTIONS TO CFDS IN EUROPE
The 27th of March 2018 saw ESMA (European Securities and Market Authority) agreeing on the measures to restrict CFDs and ban Binary Options in order to provide security to the retail investors. The market of Binary Options is experiencing the effect from 2nd July 2018 while that of CFDs will be affected from 1st August 2018.
- Binary Options: The retail investors will no longer be able to trade in Binary Options, and distribution or sale of Binary Options to them are also to be prohibited.
- Contracts for Differences (CFDs): There will be “a restriction on the marketing, distribution or sale of CFDs to retail investors” (ESMA Press Release) The restrictions include putting certain leverage limits on the opening positions. There has to be a margin close out rule and negative balance protection feature for each account. The firm will have to issue a risk warning regarding trading in an acclaimed method.
The ban on Binary Options trading for retail investors means that only the professional traders (within the European Union) will be able to invest and trade in this market. One can expect this measure to reduce the daily trading volume. IQ Option following the norms of ESMA has already implemented it and is now offering Binary Options and Digital Options only to EU professional traders, and non-EU traders.
The new rules say that the restrictions will be severe for cryptocurrency CFDs, and will be strictly followed. As per the Article 40 of the Markets in Financial Instruments Regulation will limit leverage to
- 30:1 for major currency pairs,
- 20:1 for gold, major indices, non-major currency pairs,
- 10:1 for other commodities, non-major equity indices,
- 5:1 for individual equities and other reference values,
- 2:1 for cryptocurrencies.
The CFD leverage will continue to be the same for non-EU traders on IQ Option. For the European Union traders, the regulations will be followed by IQ Option to the point, August onwards. As for cryptocurrency CFDs, IQ Option does not offer any leverage.
In an attempt to standardise the percentage of margin and to stop the investor from losing too much money, the percentage of margin will be reduced at 50% of the minimum required margin. The providers will then have to close one or more retail client’s open CFD trades. There providers will no longer be able to attract retail investors through hyperbolic incentives to trade CFDs. Standardised risk warning is something every provider should give to their clients. It must also include the losses incurred by the retailer.
The implementation of the ESMA regulations shows that the cryptocurrency market will suffer most. The major currency pairs will hopefully not be affected largely and the trading will continue albeit with certain regulations. The advantage is that the open CFD positions will automatically close if the margin goes below the level of 50% of the minimum margin requirement. Negative balance protection will also be guaranteed to all the traders falling under the jurisdiction of the European Union. The negative balance feature has been a part of IQ Option even before the regulations agreed on by ESMA. The regulations will introduce certain other changes too that has to follow by the providers falling under EU.
With the implementation of the ESMA regulations, it is already being observed that many traders are finding it complex. Those who do not have the tagline of being a professional trader will no longer be able to trade Binary Options or benefit from high leverage on CFDs. Changes will also have to be made on the trading strategies. New instruments will have to be developed to understand the new situation and trade. The providers as well as the professional traders will have to be more cautious and strategize properly while the new instruments are being developed. As a bar has been put on the leverage offers, the traders will not be able to take much higher risks as before. This also means that on successful trades they will not receive higher rewards as before. ESMA will certainly take away a big part of their financial freedom. The only option now for the retail investors to trade Binary Options and to enjoy CFD trading as before is to confirm themselves as professional traders under the European Union.