ESMA CFD Leverage rulings and the implications for Retail and Professional Clients
> What are the new ESMA proposals concerning Leverage?
The European Securities and Markets Authority (ESMA), is an EU wide financial markets watchdog who oversees securities legislation and regulation, to improve the functioning of the financial markets in Europe.
ESMA has agreed on the following Leverage Limits on the opening of a CFD position, which vary according to the volatility of the underlying asset:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold and major equity indices;
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and any underlying not otherwise mentioned;
- 2:1 for cryptocurrencies.
> Why has ESMA intervened with these new proposals?
ESMA has decided that by imposing leverage limits, investors are protected from certain risks associated with CFD trading.
> When will the new measures take effect?
The new measures will take effect on August 1st, 2018.
> Who do the new ESMA measures apply to?
The ESMA measures will only apply to Retail Clients trading CFD products with European authorised and regulated Investment firms. As we are regulated by the Financial Conduct Authority (FCA) in the UK, VARIANSE must abide by these rules.
> How will the Leverage limits affect me?
If you are a Retail client, in order to comply with the ESMA regulations, VARIANSE will be required to reduce the leverage to a maximum of 1:30 on our CFD products. Please take note of this as it will affect you in the following ways:
If you are opening a new position
Example, buying 1 lot (100,000 EUR) of EURUSD:
- Previously, at 200:1 leverage, the margin requirement would be 500 EUR.
- Under the new rules, at 30:1 leverage, the margin requirement will be3,333.33 EUR.
If you have existing open positions
Example, you have an open position of 1 lot (100,000 EUR) of EURUSD at 200:1 Leverage:
- Under the new rules, at 30:1 leverage the margin requirement will increase from 500 EUR to 3,333.33 EUR.
- Thus, it is important to ensure that you have sufficient equity in your account to maintain the new margin requirements on your existing positions.
> Are Professional clients subject to the same restriction on Leverage?
No. Professional Clients will not be affected by the new ESMA leverage restrictions, as they are deemed to possess the necessary knowledge, experience and skill to understand the risks associated with CFD trading.
> How do I know if I am a categorised as a Retail or a Professional Client?
Upon opening your account, by default you would have been classified as a Retail client, unless we explicitly notified you in writing that you have been classified as a Professional. If you are unsure of your Client Categorisation please contact us at [email protected].
> I am a Retail Client how can I be re-classified as a Professional Client?
If you would like to be re-classified as a Professional Client please contact us on +44 (0) 203 475 2285, or via email at [email protected]. For further information on the eligibility requirements please see below.
> What is a Professional Client?
There are two types of Professional Clients – ‘Per Se’ and ‘Elective’:
If you are an authorised financial services firm, a large undertaking or a national government, we would classify you as a ‘Per Se’ Professional Client (as per FCA COBS 3.5.2.)
Otherwise we will consider you as an ‘Elective’ Professional Client if you are able to meet the following criteria in the next question.
> What is the eligibly requirements to be an Elective Professional Client?
A Client must satisfy 2 out of 3 of the following criteria:
1. You have traded at least 40 trades in CFD’s or complex derivatives in significant size over the past 1 year (an average frequency of 10 per quarter);
2. You have an investment portfolio, cash investments (or a combination of both) which totals over 500,000 EUR;
3. You are employed or have been employed in the financial sector for over a year in a professional position that requires knowledge of the transactions or services envisaged.
Additionally, we will assess your knowledge, experience and expertise with reference to the nature of the transactions or services envisaged, to ensure that you can make your own investment decisions.
> Will I need to provide proof of the above to be re-classified as a Professional?
If you choose to be re-classified as an Elective Professional Client, we will require the following from you (where applicable):
- A Trading statement displaying 1 years of trading history, with at least 40 trades of a significant size.
- Bank statements / Broker account statements / Investment certificates etc. which displays at least 500,000 EUR in combined investments and cash deposits.
- A document or letter from yourself confirming employment / experience in the financial sector in a professional position, which relates to requiring knowledge of the transactions or services envisaged.
> What will change if I become a Professional Client?
The main differences in FCA regulatory protections afforded to Retail clients vs. Professional Clients are:
- We are not required to provide you with information provisions about VARIANSE, our services, and remuneration.
- Communications, including financial promotions made by us with Professional clients may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client.
- Professional clients are not entitled to the same level of treatment as Retail Clients where we are holding money which could be identified as “Client Money” (see section 12.2 of the Customer Terms and Conditions);
- Professional clients may not be eligible complainants with respect to the Financial Ombudsman Service (“FOS”) or may not be eligible under the Financial Services Compensation Scheme (“FSCS”). Please see further information below;
- In assessing the appropriateness of any transactions or investment it will be assumed that you, as a Professional Client have sufficient knowledge and experience to understand the risks associated with that transaction or investment. We are not required to provide you with the written risk warnings that are required for Retail Clients in relation to complex financial instruments such as derivatives.
> What protections can Professional Clients enjoy?
- As per FCA rules we must provide you with “Best Execution”;
- If you are an eligible claimant, and fall under the category of a “Consumer”, you will eligible under the Financial Services Compensation Scheme (“FSCS”) up to £50,000;
- If you are an eligible complainant, and fall under the category of a “Consumer”, you will have access to the Financial Ombudsman Service (“FOS”);
- There are not any restrictions on Leverage for CFD trading.
> What other benefits are there in becoming a Professional Client?
To qualifying clients, we can offer the following benefits:
- We will hold your deposit as segregated Client Money in a separate bank account to our own company funds;