In recent days, the international European Commission ESMA has issued a decision restricting the use of Forex leverage. At the moment, the maximum leverage for Poland is 1:100, which means that an investor can trade capital one hundred times more than the actual funds accumulated on the account. In a few weeks’ time, however, the maximum leverage will be only 1:30. What is the reason for this change? Is it possible to circumvent the restriction and what will be the impact of such a move by ESMA?
Above all, it is worth to understand what was behind the move of the commission issuing the directive to reduce Forex leverage so drastically. According to ESMA, the majority of clients using this type of solution lose money accumulated on the account – this is a calculation which has shown that up to 85% of investors lose money on transactions with the use of leverage. Therefore, limiting the leverage is supposed to reduce the risk of losing all accumulated funds. Transactions with high leverage are considered extremely risky and definitely not recommended for beginner investors. Despite this, beginners reached for the leverage, hoping for a quick, easy profit.
You can ask yourself a question – isn’t the top-down directive prohibiting risky operations too strict? Fortunately, ESMA’s proposal includes the possibility of accessing 1:100 or even 1:500 leverage… but under certain conditions. The investor has to obtain the status of “professional client”. To become such a customer, at least two out of three conditions must be met:
- conduct high value transactions, with a frequency of at least 10 such transactions per quarter, in the last four quarters;
- have accumulated funds on the account with a total value of at least 500 000 (this includes both deposits and financial instruments);
- work for at least one year in the financial sector, on a position requiring specialist knowledge of financial transactions, Forex or instruments.
However, it is not difficult to notice that most of investors have no chance to meet these conditions. It is also unclear what exactly is meant by “concluding high value transactions” – considering that in the next point we speak of half a million euros of accumulated funds, the “high value of the transaction” may turn out to be a huge amount, not achievable for most of the Polish investors.
But is it not possible to bypass the directive in another way? Brokers have already found a solution – to transfer the license to Australia. There is no ban to prevent a European retail client from working with a broker with an Australian license, and due to the overlap between the two licenses to a large extent, such transfers are not particularly difficult.
However, this does not change the fact that those who decide to cooperate with an “Australian” broker may suffer in such a situation – in case of conflict, local financial supervision of the ASIC operates only for residents of Australia. European customers will therefore not be protected against rogue intermediaries. You can also expect a new wave of fraudsters, taking advantage of the loophole.
At this point in time, however, it seems that because of ESMA directive mainly brokers will lose – the shares of most of the large European Forex brokers have already recorded a significant decline, despite the fact that no regulations have yet entered into force. This will take a few more weeks, as the European Union requires the directive to be translated into all official trade union languages. It is difficult to say when exactly the translation stage will end, one thing is certain – big changes on the Forex investment market are coming.
Leave a Reply