Upcoming Retail Forex Trading Restrictions from the ESMA will alter a lot of things.

Retail Forex Trading Restrictions from the ESMA have yet to be put in place, but brokers in the European Union and traders in the region are bracing themselves.  Even a firm like Freevestor has much to consider and adjust to when these retail forex restrictions come into place in what is likely to be June or more likely July 1, 2018.  How will the new temporary restrictions take hold?  Keep in mind, these are temporary measures that need to be renewed or revised on a quarterly basis because they are interventions.  What changes will take place?  Let’s explore the likely reactions in the marketplace and the impacted parties.

Forex Trading Restrictions hit Brokers

Brokers with FCA and CySEC licenses are going to be hurt the most.  Now, the smaller depositors will not necessarily be missed and the churn-and-burn routine will probably impact one particular broker, who shall remain nameless.  These restrictions mean that marketing strategies change considerably and how the brokers present themselves is expected to be very different.

It could resemble Japan or South Korea where the traders are not missed, but it is still a functioning industry.  At worst, it could resemble the retail Forex Market in the United States, which was slaughtered in the aftermath of Dodd-Frank.  The retail Forex industry exited the United States as fast as expats were in reaction to FATCA.

Those fears exist, but the small trader only makes up 5-10% of the retail Forex Market revenues in the first place.  It’s an opportunity to gentrify, but it is an opportunity to make use of loopholes.  After all, the ESMA views the trader with less than $1,000 is placing trades under a personal account with no experience at 500:1 leverage as the problem.

Why is a trader with $25,000+ placing trades under a corporate account that is managed/advised at 100:1 leverage considered a problem?

Reducing the leverage to 30:1 for major Forex pairs is draconian measure, but like every regulation that exists, there are exceptions to the rule.  The exceptions have yet to be defined and the brokers themselves are going to figure it out.  Does it mean that they should be courting the bargain-basement audience again by exploiting a loophole?  No, but it does mean that they could exercise discretion and grant more favorable terms to those who deposit more and have more organized plans.  It may mean a new era of Due Diligence in the European Union and Introducing Brokers are going to play a role in helping their partners generate more trading volume from the middle-market as opposed solely focusing on the upper-end and prime markets.

How may it play out so that the higher levels of leverage can be utilized by brokers in the European Union?

The days of 500:1 leverage are dead in this region, but 100:1 leverage could end up being the maximum leverage for those who qualify for an exemption.  Let’s just take Freevestor’s preferred European broker, Orbex, for instance.

Above is Orbex’s current policy when it comes to trading with leverage.  Note that 50:1 or the way Orbex puts it 1:50, is the default leverage, which is in line with the United States’ Commodities Futures Trading Commission (CFTC) maximum leverage for major currencies.  Orbex would have the discretion to accept or deny a client’s request to bump up the leverage to one of those levels.

Retail accounts are different from Professional accounts and ESMA’s language makes it rather clear.  However, with Orbex there are categorizations for what a Professional account is and how to become classified as one.  There’s a lot of discretion here, so let’s review it.

Basically, if you’re managing $2 million in funds or greater, operate a financial institution, or are a governmental body, you receive different treatment and would likely be excluded from the restrictions.  After all, the restrictions are placed on retail clients only as described by the ESMA.

There’s no universal standard as far as what is considered a Professional trader/investor.  Also, consider the following statement from Orbex in the same categorizations document.

This affords a great deal of flexibility and discretion to Orbex and other European Union brokers.  It also means that with great power over definitions comes great responsibility.  If a firm that lacked scruples wished to do so they could define Professional traders with an extremely wide net, but such abuse would result in the end of retail Forex and require anyone who trades Forex to have to earn a license to do so along with a required trading amount of $1 million Euros or more.  ESMA shut down binary options and they can take down retail Forex too.

The Professional Treatment may end up being shifted down to accounts with 100,000 Euros or more, but the level of leverage will likely never exceed 100:1.

It’s an extremely challenging time to be a retail Forex Broker in Europe now because the restrictions can change three months after formalizing one set of laws.  Some aspects may be relaxed while others are tightened.  A moving target does not help.

Brokers will have to move and choose a different regulator, shut down or stay and adapt.

Retail Forex Trading Restrictions Hit Signal Providers

Signal Providers with brokerage accounts in the European Union are going to see a major hit to the returns that they are able to deliver and their deposit loads are going to be negatively impacted.  It will be difficult to follow the trades without making an alteration to the trades with an Expert Advisor.  European Signal Providers will have returns drop by a considerable margin.

It’s an adjustment that must be taken into account when creating a portfolio.  Who is the Signal Provider’s broker and where are they located?  The good news is that this information is readily available.

The bad news is that this cuts down on the number of Signal Providers to choose from in a brand new age.  Some will reclassify their status to Professional Trader.

Retail Forex Trading Restrictions Hit Traders

European Union Traders have lost a lot of trading power.  The small depositor that ESMA is seeking to protect used to enjoy 500:1 leverage on a $500 deposit.  With a 10% deposit load per trade, the depositor could control a trading volume of $25,000.  With the maximum deposit load, the trader could control $250,000.  Losses are magnified significantly and so are gains.

With a $500 deposit, a trader who uses a 10% deposit load per trade, could control a trading volume of $1,500.  This effectively takes this trader out of the market.  A trader who maxes out their deposit load would only control a trading volume of $15,000.  This will result in poor returns in absolute figures and it is simply not worth it for a broker to spend as much as they do to attract a client like this anymore.  However, it will not stop the small depositors from getting a Forex Trading Account.  One way or another, the undercapitalized will lose their meager deposits.    

With greater leverage, there is greater responsibility to handle the true leverage of a position.  Leverage is a tool to help traders exercise flexible positioning without putting their entire account at risk.  However, mandating 30:1 leverage infantilizes the trader in the European Union.  ESMA’s message is that traders are too dumb to make their own decisions and there has to be a way for them to either not enter the market or not lose money as quickly.

Naturally, European Union retail traders with less money to invest/trade are going to go offshore or to a differently regulated broker.  There is no way for these traders to avoid these brokers even with advertising bans, the Internet is a tough place to hide a service provider.  Many of these traders will just blow their money with a firm licensed in Belize, Mauritius, New Zealand or basically anywhere not in the European Union.

The European Union is Hit

The choice is to stay, go or close.  If it can happen in the United States, it can happen in the European Union.

The most badly hit places by these restrictions are the United Kingdom (in the process of exiting the European Union) and Cyprus (had a Financial Crisis in 2012-13 that resulted in bail-ins by banks).

Money flows out of European Union and into different jurisdictions to enrich communities who will treat these escapees best.  It’s an opportunity for new regulators to come about and create an environment that is not draconian, but still fosters Forex firms looking to do best by their clientele.  That happy medium can be created elsewhere and it just may end up happening.

The European Union could soon lose brokerages based in its territory for fairer shores because it starts with a ripple and then it becomes a wave.

ESMA may have started that process.