Regulatory Changes to EU Forex TradersHi, due to the confusion, and in some quarters downright fear 🙂 we have invited Justin Hertzberg* to tomorrows live training session which you can register for here:*

The good news is there is a solution! See the video

*The webinar has ended but you can find a recording at the bottom of the page.

Guests welcome until seating limit is reached so register now!

If you can’t make the session the recording will be available later tomorrow.

If you can attend then you can ask Justin just about any broker question and I have invited him to become more involved with FMP to help members get rebates and the best broker details.

Gavin from Aslan recommends him and I have been working with Justin on a managed fund project recently, so he’s a good guy and knows what he is talking about!

The good news is that there are a number of ways to avoid this issue, so ignore all the people running around with their hair on fire! All explained tomorrow.

We have been asked this question a few times recently so thought it would be a good opportunity to explain what the new regulations mean and how they are likely to affect the forex industry. The European Securities Markets Authority (ESMA) announced significant changes towards the end of March that it was introducing to protect forex retail traders. The most notable is the introduction of restricted leverage, a ban on binary options and brokers are no longer able to offer bonuses on deposits.

Impact on the leverage

The new rules introduced provides for a tiered level of leverage depending on which assets you are trading. At present many brokers offer leverage up to 1:500, I have even seen some as high as 1:1000. Leverage can be a very useful tool if you are trading with a small account to grow the count quickly. However, there are huge negativities that outweigh the positive, which means you can lose money much quicker and can often end up losing more than what was in your original forex account.

What are the new limits?

There are now 5 tiers:

  • 1:30 for major forex currency pairs. So this would be USD pairs;
  • 1:20 for non-major forex currency pairs, gold and major indices;
  • 1:10 for commodities other than gold and non-major equity indices;
  • 1:5 for individual equities;
  • 1:2 for crypto currencies.

1: 30 is stupid in my opinion, but remember: The good news is that there are a number of ways to avoid this issue, so ignore all the people running around with their hair on fire! All explained tomorrow.

These would be considered much safer levels, and the leverage limits increase based on volatility. This is why cryptocurrencies have the highest restrictions. Cryptocurrencies are by far the most volatile, and therefore the leverage has been limited significantly. We often see crypto traders use the term HODL, which essentially means hold on for dear life. This gives you an idea of the mindset of this particular industry, and it is arguable whether crypto traders can genuinely call themselves traders. Cryptocurrencies are a bit like gambling because they still haven’t been around long enough to have any real trading history behind them. Yet with the growth of bitcoin, many see it as the Holy Grail and then come unstuck.

Negative balance protection

Another positive change that has been introduced is that brokers will have to provide negative balance protection meaning that retail traders are protected from some of the biggest volatility movements. Back in 2015 the Swiss National bank removed the peg from the Euro, this sent the pair plummeting. Many people lost huge amounts of money, including brokers, due to the speed that the currency pair collapsed. This wasn’t just restricted to individuals, many brokers, in particular, the smaller ones, also went out of business on the back of this move. This will no longer be possible under the new regulations.

Increased transparency

This is a very interesting rule and has something that has been in the US for several years now. Brokers will now be required to display the percentage of the customers that lose money. This will improve the transparency when it comes to choosing which broker you want to trade with. Regularly we see quoted the 95% of traders fail, this should help contextualise that statement and possibly highlight those brokers who have good educational packages as part of their package.

Ban of binary options

Personally, one of the biggest benefits to the new regulations is the banning of binary options. While it would be unfair to say that the whole industry is a scam it was riddled with unscrupulous people promising traders the world. Admittedly binary options have been reducing in popularity but this is most certainly deserved nail in the proverbial coffin!

No more incentives

The final piece of the puzzle is that bonuses and other incentives offered to traders to come and trade with a particular broker have also been stopped. You regularly saw brokers advertising a percentage bonus to your initial deposit, or perhaps a certain amount of money free, these are now also prohibited.

What do we think

It’s difficult to say at this stage because it is all so new and brokers are still getting their heads around what it means for the business. Also, a lack of understanding of FX, by lumping it in with binary options is quite frankly wrong.

There is also the fact that anywhere in Europe people can gamble all day on sports and just about anything.

I will say personally I think some of the new regulations introduced are very good and designed to protect traders from both unscrupulous brokers and losses caused by naivete. All of these change will most certainly remove some of the scams out of the industry, but it remains to be seen to what level as it is inevitable that the more unpalatable organisations will be looking for ways around the new rules.

However, I feel that the rules on leverage are too extreme and will simply force people to offshore unregulated brokers, so as with a lot of legislation it could quite possibly make matters worse for the more vulnerable aka stupid people who trade without education nor rules.

There are however legal ways to circumnavigate the rules which we will cover in tomorrows live session

One thing to note is that this is a European regulation, and therefore once the UK leaves the EU, this won’t necessarily apply. Said despite these changes generally being intended as a force for good we will have to see what impact it has in the future.

*Justin D. Hertzberg, is the CEO of Forest Park FX, a global introducing broker that specializes in helping traders find the right brokerage solution for their trading needs and reducing their costs of trading in the process through negotiated lower spreads, lower commissions or cash back rebates. Justin has been working in the FX industry for the past 9 years. Prior to that, he practised law as a securities and commercial litigator. Justin graduated from Emory University with a degree in Philosophy and went on to obtain his JD/MBA with a concentration in Finance from the University of Miami.

This is an example of the live training sessions we host every week for members. In the first part of the video I share my trading plans and ideas & Justins section about the EU broker regulations starts around the 15 minute mark. Followed by Pierre du Plessis looking at trades on his method and Judith Waker a brief appearance to discuss fundamentals.