ESMA (European Securities Market Authority) will be enforcing a temporary restriction on the Retail FX Market.
ESMA's regulatory capabilities are restricted by time constraints on what it is deemed a temporary intervention that gives them such broad power. The fact that it is a three month intervention that has to be renewed, revised or discontinued creates instability. Businesses like stable regulatory environments and the fact that the regulations can change so swiftly creates an existential crisis in the Eurozone. The intervention will be implemented by ESMA and the biggest change will be the leverage cap and the negative balance protection mandate. However, the leverage policies and protection mandate could just go away three months after it is implemented. This is a hostile and scary proposition for traders, investors, introducing brokers, and brokers themselves. There are initiatives that ESMA could have encouraged that would not jeopardize the business environment.
The Comparison to Japan is Inaccurate and Not Complimentary
Treating these interventionary restrictions like they are permanent regulations going forward is a bad idea. This will only last for three months in its current form (it's as long as it can be assumed to last), which means anything can happen and ESMA wiping out the Binary Options industry from the European Union in a temporary intervention spells a potential for outright prohibition. The Japanese Financial Services Authority installed permanent regulations upon their citizens and residents regarding leverage, ESMA will not.
Stakeholders cannot reduce the super-sovereign regulatory risk given the ease that the regulator can change the environment and the temporary nature of the restrictions. When the rule of law can change so quickly and the participants are not afforded a proper amount of time to adjust, it presents negative consequences.
The problems did not go away in Japan.
If Japan's Retail FX industry was stable, strong and free of the problems that plague smaller traders, why is the Japanese Financial Services Authority (JFSA) looking to reduce the maximum leverage from 25:1 to 10:1?
In fact, the response to the JFSA's regulations in Japan by Japanese traders was to deposit with brokers elsewhere. Japanese traders found refuge in Australia and the JFSA realized this in 2014. The JFSA coordinated with the Australian Securities and Investments Commission (ASIC) to prohibit Australian brokers from accepting Japanese clients.
This did not solve the problem either. Japanese traders ditched the Sovereign Currency Market for the volatile Cryptocurrency Market. Market forces will win out despite the restrictions and protectionist efforts.
Japan's Retail FX industry is not as crippled as the United States', but that is not a standard for success in a post-restriction market.
Proposal #1: An ESMA Broker Summit
Rather than just hammer down interventionist restrictions on the industry, ESMA could have been more conciliatory. Rather than serve as a cold anti-business regulator, there was an opportunity to bring industry executives together to discuss the problems that plague the industry. FCA and CySEC regulated brokers would have participated in this meeting.
The objective should not be to create barriers to entry in the industry, but rather to encourage transparency. Large companies like regulation because they can overcome the barriers easier and stifle upstart competition. Greater, more byzantine regulation will result in the opposite effect that would be conducive to growing business and improving the outcomes of traders in the European Union and beyond.
Unlike the Global Forex Expos, this would be an opportunity to focus on the goal of rehabilitating the industry. The ultimate goal is a form of self-regulation that creates a set of rules for participants with the purpose of better serving clientele and not endangering their own businesses. Quarterly meetings in Paris or Brussels with ESMA would take place among CEOs to ensure that all participants are on-task.
Proposal #2: Minimum Deposit Amounts
Raising minimum deposit amounts does push smaller traders offshore, but it serves to discourage trading activity among the under-capitalized. By tightening the leverage requirements, it increases deposit loads per position held. A minimum deposit amount would maintain deposit loads at a more reasonable level as the trader can have a more flexible true leverage rather than the nominal leverage that exists.
A minimum deposit amount of $10,000 or $20,000 would attract a more discerning trader/investor. It would put less pressure on sales teams to encourage re-loads. ECN Brokers would be able to have a more personal touch with their clients and introducing brokers would be more than just affiliates throwing up banners and hoping for a click-through that results in a deposit. Managed Forex Funds and Financial Advisory would be the norm for those that are less experienced and non-automated.
The objective would be to grow the accounts of larger clientele through earned profits, which would result in a consistent stream of revenues that grow over the course of time for the broker.
When brokers are taking minimum deposits of less than $1,000 USD and proudly promoting it, it is not going to be taken very seriously.
Proposal #3: The Nanny-Brokerage
In this proposal, the brokerage exercises greater discretion in terms of dictating the freedom of trading that a trader has. The objective should not be to have traders lose their money slower because they are still losing their money. Instead, the broker would take a more proactive role with inexperienced traders and introducers. What is included with this approach?
- The inability to place their own trades without a formalized proposal with backtested results.
- Deposit Load restrictions to limit the size of trades rather than a leverage limit for the inexperienced.
- Removal of introducers who refer traders that are disproportionately unprofitable.
- Introducers with more successful clientele would rehabilitate unprofitable traders' accounts.
- Greater access to PAMMs and Copy Trading.
- Free VPS to accommodate investors with multiple sub-accounts and Copy Trading Signals.
How would this be enforced? It could become a business model and it may not need to be enforced. The beauty of market forces and a little bit of forced transparency would accomplish the goal.
ESMA's transparency provision regarding profitability may help with attracting clients as it puts clients into a better position to profit. It would behoove brokers to come up with ways to make Retail Forex Traders profitable based on that provision alone. Brokers not looking to improve client profitability would realize quickly that prospective clientele perceive the poor client track record to be as ugly and discouraging as a graphic warning on a pack of cigarettes.
This industry can change for the better, but there is only one ESMA interventionist provision impacting Retail FX Brokers that would have a positive impact on all stakeholders. Make the profitability transparency provision permanent and remove the other provisions.