CFDs - FCA Regulation

The UK regulatory authority the FCA (Financial Conduct Authority) and the ESMA (European Securities and Markets Authority) have been looking at CFDs and Binary Options (Up/Down bets) for a while now.

Over the last year or so new rules have been introduced and the main players in the market are starting to file their trading updates for the periods affected by them.

The big changest change from my perspective is the limit of 5 times leverage on equities.

The general theme is a big drop in use of CFDs by retail client, these drops ranging from a 30% to a 65% drop in revenue.

FCA/ECMA Regulation - The Steps.

Dec 2016 - The UK's FCA says
We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.

Aug 2018 - ESMA Introduces temporary rules,
The main points being
  1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:
    1. 30:1 for major currency pairs;
    2. 20:1 for non-major currency pairs, gold and major indices;
    3. 10:1 for commodities other than gold and non-major equity indices;
    4. 5:1 for individual equities and other reference values;
    5. 2:1 for cryptocurrencies;

  2. 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;
  3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
  4. A restriction on the incentives offered to trade CFDs;
  5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
Dec 2018 - FCA
Issued discussion document on making the rules defined by the ESMA permanent in the UK but broaden the definition of CFDs to catch products that are similar such as Turbo Certificates.

Feb 2019 - ESMA
The temporary rules shown above are renewed for another three months.

CFD Regulation - The Consequences.

The restrictions imposed on retail clients have been in force long enough for their affects to be start being seen.

Mar 2019 - IG Group (IGG)
Reports for the 3 months up to end of Feb 2019 show a drop of from $278 million to $202 million or about 27% over the same period in 2018.

Apr 2019 - CMC Markets (CMCX)
Reports an expected drop for the whole of 2018-2019 of around 37% to £110 million for both CFD and spread betting.

Apr 2019 - Plus 500 (PLUS)
Reports for the 3 months up to end of Mar 2019 show a drop of from $298 million to $54 million or about 65% over the same period in 2018.

All three providers mentioned here have seen signifcant drops in CFD revenues and the one affected the most, Plus 500, is the one that in my experience has been the most aggressive in its marketing of CFDs to new customers.

CFD Regulation - Professional Trader.

Retail Clients can be exempted from these restrictions by contacting their CFD provider and asking to be treated as a Professional Investor.

During Q3 IGG reported 1,425 Retail clients applied to be classified as Professional but only 14% of these applications were accepted as the requirement for Professional Status are quite stringent.

These standards are the same across providers and you need to meet two of them.
  • Sufficient trading activity in last 12 months - You have performed an average of at least 10 transactions per quarter, of significant size, over the previous four quarters on the relevant market.

  • Financial instrument portfolio of over €500,000 - The size of your financial instrument portfolio exceeds €500,000.

  • Relevant experience in the financial services sector - You work/have worked in the financial sector, for at least one year in a professional position which requires knowledge of the related transactions or services.