What are the ESMA regulation leverage requirements?

On the 1st of August 2018, the European Securities and Markets Authority (ESMA) officially adopted new measures for marketing Contracts for Difference (CFDs) to retail clients. These ESMA regulation leverage measures included:

1. Limits on leverage for opening positions;
2. Margin close out rule on a per-account basis;
3. Negative balance protection on a per-account basis;
4. Halting the use of bonuses or similar incentives;
5. A standardized format for risk warnings;

The first two of these new regulations were the brokers’ primary concern.

Leverage and Margin are critical features of any retail trading account. Therefore, any new limits to these are always a cause for concern.

For example, there are risks associated with excessive leverage limits, but higher leverage is a key selling point for any brokerage.

Apart from the potential loss of traders, maintaining leverage and margin levels call for considerable investment in resources and time.

This leverage and margin maintenance is complicated enough for a brokerage under a single jurisdiction and regulation.

For brokerages operating in multiple jurisdictions, the process becomes more complicated. This could potentially lead to issues with the competent authorities for any mistakes.

Mistakes can happen, and the process soon snowballs in complexity when you factor in the different leverage limits for different assets.

Under the new ESMA regulation leverage regulations, leverage limits follow the limits 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;

Any traders wanting higher leverage limits must apply for a Professional Account. That application includes providing information about trading knowledge, experience, and the source of any trading funds.

While the new ESMA regulation leverage limits did aim to minimize potential trading losses, the restrictions on leverage saw many brokers experience a higher than usual fall in the number of traders.

A natural consequence was the reduction of trade volumes. This reduction is because trade volume links directly to leverage, and lower leverage means lower trade volumes.

Since the new ESMA regulations came into effect, the industry has seen considerable changes. As a result, many large-scale brokers have since left the European markets and are concentrating their client onboarding to other geos, namely Latin America and Africa.

The European market, however, remains hugely lucrative, so compliance with ESMA leverage regulations is unavoidable for brokers targeting these markets.

Managing the margin and leverage levels for various multiple regulators and brands can be highly time-consuming and, at times, frustrating.

So how do you as a broker manage your day-to-day operations and stay compliant with your regulator?

The answer is quite simple for brokers working with the Plugit modules and plugins. Dynamic Margin!

Multiple margin profiles

Our Dynamic Margin module lets you create multiple margin profiles for the same instrument or trading account and apply these to various market scenarios according to your priorities.

Multiple leverage profiles

Creating multiple leverage profiles is a simple process with the features in our Dynamic Margin module.

Set your margin and leverage tiers, and the intelligent automation in our Dynamic Margin module adjusts to this automatically. In addition, you can set levels for future events, such as economic calendar releases, a compelling feature that takes broker risk management to new levels.

Dynamic Margin module integrates seamlessly with MT4 and MT5 and supports all asset classes, Forex, Metals, Energy, Indices, CFDs, and Cryptocurrencies. Your pre-defined tiers work at all levels and all combinations. Set your tiers for individual instruments, asset classes, account levels, account groups, or any combination of these.

We’ve even included the ability to recognize the order type, such as pending or open orders, giving you the flexibility to apply different rules to these.

Our Dynamic Margin module is one of those tools you need to add to your brokerage. It gives you the features you need to stay ahead of your regulators and adds a range of functions designed to help with your risk management and the smooth running of your operation.

Dynamic Margin is part of our flagship Yoonit suite of modules. Yoonit powers over one hundred global brokers and is a tried and tested solution for operations of all sizes.

Completely modular, Yoonit builds on the ten-plus years of experience Plugit has in the fintech industry.

We’ve built our reputation on delivering robust solutions combined with our renowned support levels. We don’t have clients, we have partners, and our partners always deserve the best.

Suppose you need a tried and tested way to stay ahead of ESMA or other jurisdiction regulations. Why not schedule a no-obligation demo with one of our account managers? We’ll be happy to show you what we can do for you!