Breaking: ESMA finalizes new rules to govern leveraged trading

Ouch ... my broker has a negative balance protection @ 20% margin close-out, 80% margin call, and 100:1 leverage ...
@ 50% margin close-out and 30:1 leverage, it means the maximum drawdown is $1666 / lot / trade ...
I guess, retail traders should have more “discipline” in determining the stop-level before opening a trade ...

UK brokers get their orders from FCA not ESma. cyprus brokers like tickmill get theirs from Cysec.
Unless FCA or Cysec gives instruction, there is no change as far as the brokers are concerned.

FCA & Cysec won't have given the instruction the day ESMA statement came out. They are all on the way out for the easter holiday weekend.

Will hear something in one or two weeks from UK and Cyprus brokers.

4for4,

How does one get the above calculations? In MT4 are they readily available or does need to calculate manually?

Thanks

Spreadbetter is the only one who seems to be able to gather facts.....

The ESMA rules will apply to rolling spot forex contracts.

Definition from FCA:

rolling spot forex contract
either of the following:

1. 1. (a) a future, other than a future traded or expressed to be as traded on a recognised investment exchange, where the property which is to be sold under the contract is foreign exchange or sterling; or
   1. (b) a contract for differences where the profit is to be secured or loss avoided by reference to fluctuations in foreign exchange; and

in either case where the contract is entered into for the purpose of speculation.

Based on that an on further sources of regulators like the "europäische Werpapieraufsichtsbehörde" rolling spot forex contracts, what most of retail traders use to trade, are contracts for differences (CFD).

„Rolling Spot Forex“: Ein CFD, der sich auf den Wechselkurs einer Währung bezieht, wobei aber kein fixer Fälligkeitszeitpunkt vereinbart ist. Er kann unendlich erneuert werden bis eine der Vertragsparteien einseitig von sich aus die Schließung der Position festlegt. Es sind daher beide Vertragsparteien hochspekulativen Kursschwankungen ausgesetzt.

ESMA did not extra mention that rolling spot forex will be included - they probably think that brokers and traders should know that rolling spot forex is a CFD and that this doesn't have to be mentioned explicitly. However, it is interesting that people claiming to trade 5 or even more digit accounts don't know that. Looks like an other desaster waiting to happen.....

For or the gamblers gambling with their pocket money.... well, the only thing that will change is you lose slower and have entertainment for longer.
How is that a bad thing? ;-)

30:1 leverage of $100,000 contract / lot = $3333 ...
It means you have to have at least $3333 in your account to open a 1-lot trade ... (for mini-lot, just divide by 10)
@ 50% margin close-out (= $1666), the position will be automatically closed if the drawdown reaches that level ...
Taking commission and swap into consideration, that amount will be less ...

To: Darwinex Info
From: K
Date: 20/03/18
With regards recent ESMA leverage announcements can you kindly clarify if Darwinex spot forex is classified under the CFD currency 30:1 leverage.
Will Darwinex be implementing 30:1 leverage for currency majors, ie., EURUSD, GBPUSD, USDJPY etc.
Thank you - regards

Good morning!
Thank you for getting in touch with us.
I recommend that you take a look at this article which we published yesterday regarding the announcement.

From their recent announcement, these restrictions would also include the forex which we offer.
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To: ActivTrades Info
From: K
Date: 20/03/18
With regards recent ESMA leverage announcements can you kindly clarify if Activtrades spot forex is classified under the CFD currency 30:1 leverage.
Will ActiveTrades be implementing 30:1 leverage for currency majors, ie., EURUSD, GBPUSD, USDJPY etc.
Thank you - regards

Thank you for your e-mail. We will have to comply with the ESMA proposals, meaning that the new leverage for Forex majors will be 1:30 indeed. We will inform all clients beforehand.
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Edit: Above dates should be 29/03/18
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Via Dukscopy chat

Dukascopy Swiss -> No
Dukascopy EU -> Yes

1:30 is a draconian leverage restriction. It should be minimum 1:50.

I'll have to transfer my funds from LMAX to an ASIC regulated broker.

What will you do Phylo?

For various reason I am unable to comment further.

For the benefit of new traders: ( may be some obvious typos - adjust accordingly )

Here calculations re implications: (a spread sheet can be used for automatic calculations - see image for basic/simplified illustration)

For simplicity of calculations a single instrument - GBPUSD - is considered, commissions excluded and lowest lot volume used - multiply up for larger volumes.
Accuracy has not been carried to 5 decimal points as it becomes distracting for illustrative purposes.
Minor rounding errors exist that are deemed acceptable for illustrative purposes.

Current margins for GBPUSD against deposit currency of GBP.

0.01 lot.

300:1 - £ 3.33
200:1 - £5.00
100:1 - £10.00
50:1 - £20.00
30:1 - £33.33
20:1 - £50.00
10.1 - £100.00

Trade A - 300:1 at 0.01 lot
Trader A trades with a leverage of 300:1 against an initial SL risk of 2% relative to balance - (less) margin.

Note: As margin is dead meat - non trading equity - margin is excluded from initial SL 2 % risk stress test calculation.

Under current market conditions a trader requires a maximum SL at 200 points against current exchange rate of 1/1.40770

The value of the SL is -> lots*exchange rate*points = 0.01*1/1.40770*200 = £1.42

Any number multiplied by 50 will be 2% of the product.
Any number multiplied by 100 will be 1% of the product.

£1.42 x 50 = £71.00 and 1.42/71.00 x 100 = 2%.
£1.42 x100 = £142.00 and 1.42/142.00 x 100 = 1%.

Trade A is using 2% SL against balance - (less) margin. Trader will need £71.00 before adding margin.

Margin is now included -> £71.00 + £3.33 = Total balance £74.33.

This implies - should the broker operated linear margins and not margins as percentage of remaining equity - trader A can sustain a stress test of 50 consecutive 200 point stoplosses before the balance is 100 % margin. 74.33 - (1.42 x 50 = 71.00) = £3.33

A 1,000 point profit = 0.01 x 1/1.40770 x 1,000 = £7.10.

£7.10 profit against a total balance of 74.33 = 7.10/74.33 x 100 = 9.55 %.

Trader A - 30:1 at 0.01 lot

To maintain the above initial 2% SL stress test risk factor trader A will need total balance = 1.42 x 50 = £71.00 + £33.33 margin = £104.33.

The following should be clear - trader A can sustain a stress test of 50 consecutive 200 point stoplosses before the balance is 100 % margin. 104.33 - (1.42 x 50 = 71.00) = £33.33

A 1,000 point profit will be 0.01 x 1/1.40770 x 1,000 = £7.10.

£7.10 against balance 104.33 = 7.10/104.33 x 100 = 6.80 %.
-
At 30:1 relative to 300:1 trader A will need to increase balance by 104.33/74.33 = 1.4036.

ie. if trader A trades 1 standard lot -> 300:1 increased to 30:1 -> balance £7,433 vs 7,433 x 1.4036 = £10,433 .
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At 300:1 trader A needs £74.33 balance. Margin cut off is 100% and trader A looses all tradeable equity. Trader A looses £71.00 and retains £3.33 margin.
At 30:1 trader A needs £104.33 balance. Margin cut off is 100% and trader A looses all tradeable equity. Trader A looses £71.00 and retains £33.33 margin.

To lose the same amount trader A must invest more capital. Where will traders find extra funds to service higher margins? If beyond financial means, the sensible and responsible will drop out and the irresponsible will do the irresponsible - source funding from personal and family savings, child education reserves, second loan against mortgage, max credit cards and other high interest debts.

Traders stand to benefit from negative balance protection.
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Trader B - 300:1 at 0.01 lot

Trader operates at SL = 200 points and wants to increase risk stress test to sustain 40 consecutive SL before 100 % margin.

40 x £1.42 = £56.80. 1.42/56.80 x 100 = 2.5 % risk against balance - margin.

£56.80 + £3.33 margin = total balance = £60.13.

Trader B can sustain a stress test of 40 consecutive 200 point stoplosses before the balance is 100 % margin. 60.13 - (1.42 x 40 = 56.80) = £3.33

1,000 point profit = £7.10.

£7.10 against balance of 60.13 = 7.10/60.13 x 100 = 11.80 %.

Trader B - 30:1 at 0.01 lot

40 x £1.421 = £56.80. 1.42/56.80 x 100 = 2.5 % risk against balance - margin.

£56.80 + £33.33 margin = total balance = £90.13.

Trader B can sustain a stress test of 40 consecutive 200 point stoplosses before the balance is 100 % margin. 90.13 - (1.42 x 40 = 56.80) = £33.33

1,000 point profit = £7.10.

£7.10 against balance 90.13 = 7.10/90.13 x 100 = 7.88 %.

At 30:1 relative to 300:1 trader B will need to increase balance by 90.13/60.13 = 1.4989.

ie. if trader B trades 1 standard lot -> 300:1 increased to 30:1 -> balance £6,013 vs 6,013 x 1.4989 = £9,013 .
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At 300:1 trader B needs £60.13 balance. Margin cut off is 100% and trader B looses all tradeable equity. Trader B looses £56.80 and retains £3.33 margin.
At 30:1 ..trader B needs £90.13 balance. Margin cut off is 100% and trader B looses all tradeable equity. Trader B looses £56.80 and retains £33.33 margin.

To lose the same amount trader B must invest more capital. Where will traders find extra funds to service higher margins? If beyond financial means, the sensible and responsible will drop out and the irresponsible will do the irresponsible - source funding from personal and family savings, child education reserves, second loan against mortgage, max credit cards and other high interest debts.

Traders stand to benefit from negative balance protection.
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sources:
1. Dukascopy margins calculator - https://www.dukascopy.com/swiss/engl...counts/margin/
2. Tickmill margins calculator - https://tickmill.com/forex-trading-t...ex-calculator/
3. Margin calculations - https://www.forexfactory.com/showthr...25#post8896625

THIS 100%

Hello all,

Stop worrying, the above answers of brokers : off course they will comply to ESMA rules, BUT ONLY FOR CFDS.

CFDS ARE NOT SPOT FOREX !

Wrong!

"On the other hand, spot Forex are still CFDs, so the restrictions will apply."

source: Darwinex

PS: Furthermore I am pretty sure they would keep the conditions if possible, as they are going to loose a bunch of income once funds are transferred out of the EU. Unfortunately so far the replies I received from my brokers were not that promising.

Esma prohibits the products in effect only for 3 months, because their power - renewable though - is reserved just for emergency cases (whatever it is right now...)
Its still not clear the stupid-rules, as national regulators should implement them, but in my opinion non Mifid-regulated brokers can continiue everything as before for eu-based clients (except marketing). Seems it is not such orwellian yet as Europeans would be prohibited to buy any service from overseas providers. I suggest to change for Australian brokers. Swiss brokers also not under Mifid legally. One also could move from "retail" status to "professional" under certain conditions. Comments welcomed

today i got email from my broker ICmarkets Australia. of course they will not be affected by ESMA rules (for now). but whats interesting is there a New Client Money Reforms announced by the Australian Government. apparently their ECN spot forex offering is categorized as CFD.

for those who are interested to read here is the pdf link:
https://cdn.icmarkets.com/uploads/CFD-PDS.pdf

Face palm. In fact this requires double face palm

Subs. Thanks and
Regards

guys, honestly dont you think this new rules doesnt make sense without forcing it to EU citizen?
i think there is always possibility that there will be new rules to apply the leverage limitation to EU citizen sooner or later.

i personally think the limitation should be capped at 1:100. 1:30 is pushing it too far. what people do to their money should be their personal discretion. people need higher leverage for various reasons, one is not putting too much money in the brokerage account.

i mean aside from trading business, people still do stupid things and "gamble" their money to brick and mortar business without adequate knowledge and resource anyway. if you say 90% traders lose money then thats the same ratio as people starting "regular" business.

but the damage has been done anyway, so either adapt or die.

btw i heard AUDUSD will be marked as non major.

Yes CFDs aren't spot forex but ESMA considers spot FX as a type of CFD.

Er, firstly; when using leverage it isn’t “your money”. Secondly; by your analogy the authorities shouldn’t intervene in any form of reckless gambling, were and when there’s absolute proof that hopelessly addicted gamblers are simply and easily, being parted with their money. ESMA have calmly and forensically analysed all the available data and decided enough is enough. They haven’t banned CFD/FX/spreadbetting, they’ve judiciously applied well overdue checks and balances to a process that required intervention.

There is only one ‘class’ of retail gambler bleating about this decision; the undercapitalised, unprofessional, out of control loser and fantasist. If you can’t exist under this new environment then you had no place being in this business. So if that’s anyone reading this post, then use this decision as a line in the sand, to reevaluate your reasons for trying to gamble on markets and your relationship with it.

RIP Cyprus FX brokers they won't survive this, people use those brokers for the leverage basically.
they going to move out of EU?