New regulation-MIFID II and
it's impact on retail clients
European Securities and Markets Authority (ESMA) will start to apply the new regulation from 1 August 2018 for CFDs.
The new regulation will change the existing setting of clients account regarding margin and leverage.
The new changes will hamper usage of margin for retail clients, the changes are as listed below:
- 30:1 for major currency pairs
- 20:1 for non-major currency pairs, gold and major indices
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and other reference values;
- 2:1 for cryptocurrencies;
- A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
- Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
How do I qualify as a professional client?
The path to become a professional client requires you to meet 2 out of 3 criteria:
- 1. Trading volume: Have you ever made an average of 10 big size transactions per quarter over the last year?
- 2. Does your portfolio includes a financial asset such as a cash deposit that exceeds €500,000 or a currency equivalent?
- 3. Trading/investing experience: Have you ever worked in a professional position in the financial industry, requiring knowledge of the transactions or services envisaged for at least 1+ year(s)?
Trade size and volume
Big size trades are considered to be anything greater than the notional value of €10,000 for equities (stocks) and €50,000 for FX, indices or commodities.
Size of your Portfolio
The size of your portfolio is made of financial assets, including cash deposits and financial assets, and exceeds €500,000, or has the same equivalent in your local currency).
Negative balance protection
ESMA forbids the broker and the retail client to have an account balance that is below zero, regardless of market conditions.
Professional Client vs Retail Client Comparison
The table below highlights the new limits on leverage and account features for Retail Clients and Professional Clients:
|Leverage||Professional Clients||Retail Clients|
|Energy & Metals||400:1||20:1|
|Client Relationship Manager|
|Negative balance protection|
|50% margin close out rule||N/A|
|Client Money Remains Segregated|
|Best Execution & Trade Confirmations
(send once a month)
|Key Information Documents|
|Financial asset||Trade size||Opening price||Margin required for
for Professional Clients
|IT40||0.1 Lot||22000||€1,100 (1:20)||€110 (1:200)|
|EURUSD||0.1 Lot||1.16||€333 (1:30)||€25 (1:400)|
|Unicredit||0.1 Lot||14||€1,400 (1:5)||€700 (1:10)|
|Bitcoin||0.1 Lot||6,000||€2,586 (1:2)||€1,034 (1:5)|
Qualification criteria in detailIn order to be qualified as a Professional Client, you will need to meet at least 2 out of the 3 eligibility criteria outlined by the ESMA. There will be no change to tax status or any additional cost to change to Professional Client status.
The criteria are as follows:Trade size & Volume
You have traded, in significant size, in the spread bet/forex/CFD markets or other leveraged products (e.g. indices, shares, spot FX, futures, options, other derivatives etc.) at an average frequency of 10 transactions per quarter over the previous four quarters (with FXORO and/or other providers).
Significant sized trades are classified as having a notional value of £10,000 for equities and £50,000 for forex, indices and commodities or equivalent in local currency.
Size of portfolio
The size of your financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000 (or equivalent in your local currency).
Appropriate savings and investments: Cash savings, stock portfolio, stocks and shares ISA, trading accounts, mutual funds, SIPP (excluding non-financial instruments).
Inappropriate savings and investments: Company pension, non-tradeable assets, property, luxury cars, jewellery.
You work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Margin close out rules
Margin close-out levels will change considerably under the new ESMA proposals. Initially the body proposed a 50% margin close out level which would have been enforced on a position basis.
This means that under new proposals, a broker will be required to close one or more positions should a client’s account balance drop below 50% of the required margin.
Negative balance protection
Under the new ESMA regulations, all retail traders will be required to have negative balance protection available on their account. This means that their account balance will never be allowed to go below zero, regardless of market conditions.