Key Definitions of Financial Markets Regulators
Without first understanding some key definitions, it might be a struggle to follow the main points of this explanation. So, before we get stuck into this detailed article about product intervention powers and how they will affect the way you trade forex, we will first describe the organizations, the acronyms and other key definitions.
ESMA is an acronym for the European Securities and Markets Authority. ESMA is a supranational watchdog of the financial services industry within the European Union. This body has jurisdiction over any other financial markets regulator in the EU.
NCA is an acronym for National Competent Authority. An NCA is an authority responsible for regulating the financial services of a specific country. For example, CySEC is the National Competent Authority of Cyprus.
MiFIR is an acronym for Markets in Financial Instruments Regulation. This was the specific regulation which introduced product intervention powers for ESMA and other NCAs. The regulation came into effect on the 3rd of January 2018.
MS is an acronym for the Member States of the European Union.
ASIC is an acronym, for Australian Securities & Investments Commission. This is the national competent authority responsible for overseeing the capital markets in Australia.
Introduction to Product Intervention Powers
Since the 3rd of January 2018, ESMA and all NCAs in Europe were given product intervention powers. Naturally, ESMAs authority trumps that of the NCAs and ESMA chose to invoke their powers first. Thus their decision was to be enforced across every territory in the EU. Prior to this, forex brokers and CFD providers in Europe were allowed to offer as much leverage as they desired. 1:5000 would have been acceptable, but no one actually did this since it would have been far too risky and irresponsible. Brokers had a lot of freedom where it came to what products they offered and how they offered them. Each change that a regulator wanted to make had to be debated and put into legislation one change at a time. This was time-consuming and resource-intensive for regulators who were dealing with an industry that posed a high risk to retail investors. The main bombshell that resulted from this scenario was ESMA severely reducing the amount of leverage that can be provided to retail investors.
What ESMA Changed with Product Intervention Powers
With these new product intervention powers, ESMA and all other NCAs in the EU are now able to make changes to which products can and cannot be offered and how they are offered and advertised on the fly. There is no need to push any new rules through the legal system
ESMA’s power to temporarily restrict or prohibit the marketing, distribution or sale of financial products has been applicable from 3 January 2018 as part of a strengthening of investor protection introduced by the new MiFID regime. However, ESMA only has temporary product intervention powers, whereas NCAs have permanent product intervention powers. Even though the temporary product intervention measure only lasts for 3 a month period, any interventions can be renewed an unlimited number of times.
This doesn’t mean that regulators can do whatever they want. For any NCA to introduce any measures they must give at least one months notice to all of the rest of the NCAs within the EU and to ESMA. For example, if CySEC wanted to increase leverage in some circumstances, which they, in fact, attempted to try, they must submit a proposal along with evidence of why those changes are necessary or beneficial. ESMA will issue an official opinion on the proposed changes and will consider how it affects other MSs and the integrity of the EU free market.
How ESMA Changed Forex and CFD Regulations
Besides completely banning the sale of Binary Options products, ESMA introduced a number of changes to how Contracts for Difference are offered. A quick summary of the changes are as follows;
- Significantly reduce leverage given to retail investors. As low as 1:2 on cryptocurrencies for example.
- Brokers must implement specific risk disclosures on all communications.
- Brokers must implement negative balance protection.
- No monetary incentives can be given to traders whatsoever.
ASIC Also Possess Product Intervention Powers
The Australian financial markets regulator recently joined the club albeit a little bit late. ASICs product intervention powers came into effect in April 2019 and by the 26th of June, they had issued a consultation on how they planned to use their new powers. What the regulator proposes is of the same effect as ESMA but in fact much stricter. For example, retail investors will not be able to trade with leverage higher than 1:20 on forex pairs. Other asset classes are even lower. Also, they have increased the requirements for what constitutes a professional trader. Critics have commented that ESMA’s interpretation of what a professional trader was too relaxed.
The Future of Forex and CFD Trading
Unfortunately, the European Union, in particular, the United Kingdom and Cyprus as well as Australia, collectively constituted the major first-world jurisdictions where you could trade forex. However, a number of established firms are now trying to shift their business offshore. Their intention is to move around the harsh restrictions that neither brokers or their clients are in favour of. While the only way forward is to go offshore, this, unfortunately, is easier said than done. For years, brokers have been flaunting their licenses and regulatory jurisdictions as a key element of brand positioning. Regulation and the protection it sometimes offered traders have become a highly desired trait. Those same brokers are now having to make a u-turn on messages they have been hammering in for the past decade. Will traders accept this change? Time will tell.
Noteworthy brokers who have either moved offshore or have always had a presence in an alternative jurisdiction include Axiory (Belize), IC Markets (Seychelles), RoboForex (Belize), Traders Way (Dominica) και Tradeview Forex (Cayman).