Earlier this year, the European Securities Markets Authority (ESMA) issued new set of rules to govern Forex trading in the European Union. There are five points which are a prime focus to the ESMA. The restrictions of the new rules are as following:
-Ban on the marketing and selling of binary options and prohibition on the distribution of CFDs.
-A retail trader can only lose the amount of money available in his account, not more than that, meaning his account balance can’t go below zero.
-A risk warning system will be prevalent.
-Incentivized trading will be banned
-A limit on the leverage will be applied.
How the new ESMA rules are going to impact traders?
The owner of FXStreet, Francesc Riverola is of the view that although brokers are worried about the drop in their profitability, these rules are a step in the right direction for the Forex industry.
Most, if not all the rules, seem to be favoring the traders.
The balances below zero that traders were supposed to cover are no longer required. In fact, brokers by law are enforced to shield their clients from negative balances.
The transparent aspect of the new ESMA rules also stands out to us as this will help our fellow traders in knowing the standing of a broker. This rule compels the broker to publicize the number of clients that lost money. This percentage reflects the broker’s competency and education, making it easier for traders to decide on a broker.
Now that the binary options are prohibited, traders who used them for speculations will have to change their path. According to ESMA, binary options are labelled as items that tend to have a negative return. This industry was already facing an uphill battle and after the ESMA ruling it is completely out of the picture.
Brokers who stay on the safer side and don’t advertise themselves repetitively are likely to benefit from these rules as well, as these new regulations will safeguard them from the imprudent ones. Which raises a big concern for the traders who try to bag bonuses and opt for shady brokers.
This means that traders will have to mend their ways and look for brokers who are safe players in the market.
What is our opinion of the new rules?
Regulation is the foundation of every industry. Sometimes it breaks the industry or sometimes it helps the industry grow. However, we are of the view that in this case, since the rules positively affect the trader, they are being fairly used.
The new ESMA rules will favor the traders as the new regulations provide them with a lot more transparency about the losses that a broker’s customers are exposed to. This will lead the traders to make informed and smart decisions.
The number of individuals who dive into the Forex market without being aware of its basics is alarmingly high. These rules will not only ensure the stability of their trading account but will also restrict their losses. Since the regulations will require the traders to be aware of what they are diving into, this will result into well informed traders. This new set of regulations is a step in the right direction to diminish the bad reputation this market already has.
While rules can have unexpected outcomes, the new ESMA rules are sure to have a notable impact on the Forex market. Both the traders and the brokers will have to get used to these reforms, but after the implementation of these rules, the industry is bound to expand and earn its long overdue reputation.
However, as a trader, if you still can’t wrap your head around the new regulations, there’s still a way out for you. If you prior experience in the trading industry exceeds 5 years then by becoming an elective professional you can avoid the new ESMA regulations all together. By doing this, you will be able to receive the previous leverage amounts. However, there are a few tests that you’d have to take in order to reach that level of ease. You can get in touch with your broker to know more.
All in all, the new ESMA rules are what the foreign exchange industry needs right now. They are bound to improve the position of this market and help it reach new heights.
Waqas Javed is a digital marketing strategist that helps companies to maximize online reach with his unparalleled outreach skills. Currently, he is serving at Fuad Ahmed Currency trading expert blog.
Also published on Medium.