FCA Anticipates Substantial Drop in 2020-21
An impact assessment was released by the Financial Conduct Authority on Thursday, January 16, 2020. This assessment examined contracts-for-differences and how various restrictions have impacted this market space over a prolonged period. Subsequently, the results noted that blockchain firms and financial institutions operating CFDs would be a substantial decline in profit throughout the 2020-21 period. This assessment is based on a collective of information founded on two firms in the United Kingdom. Analyzing their data, the permanent measures implemented by the European Securities Market Authority have caused these two firms to see declining profits of 43%.
When it applies to the two firms analyzed for this assessment, the Financial Conduct Authority noted that an average of £17 million is lost yearly from the ESMA legislation. This is an annual 6.7% decrease in net profits, which are slated to increase to 10% by 2021. When accounting for the leveraging options with the ESMA, the highest is 20:1. However, the United Kingdom has implemented a 30:1 leverage cap. It should be noted that the leverage amount is dependant on the underlying asset and association risk warnings. Multiple other factors apply to this leverage cap as well.
The United Kingdom’s Enhanced Market
The Financial Conduct Authority in the United Kingdom takes another step beyond the ESMA, allowing for numerous financial products to be inquired with the leveraged amount of 30:1. This applies to various CDF-Bonds, Indices and Options. Another aspect noted in their analyzation was that operational costs for firms would become more expensive, with legal expenses exceeding 35% with what is currently maintained. Subsequently, the financial conduct authority noted that operators in the United Kingdom would face considerably lowered costs and enhanced profits by switching markets.
The financial conduct authorities’ official statement in the assessment reads: “Consequently, in our cost-benefit analysis, we explained that ongoing costs to firms would be nil. While some firms suggested that there would be additional costs from requiring firms to display a risk warning at the top of the webpage, we did not receive any quantification of these costs. Because the net benefits of these measures are far greater than the expected costs, we do not think it was proportionate to assess these costs.”