30:1 Leverage on Government Bonds permitted by FCA
The Financial Conduct Authority has made multiple announcements in the first week of July. On the 1st of the month, they revealed that they’d be implementing the same regulations and guidelines enacted by the European Securities and Markets Authority. The rules apply to retail investors and traders maintaining contracts-for-difference and will be introduced in August 2019. The new regulations will include market restrictions, leverage caps and mandatory risk warnings.
The leverage caps on retail trading products and contracts-for-difference will now be limited to 5:1. However, in a surprising turn of events, the Financial Conduct Authority announced on July 2nd that brokerages would be able to offer clients a 30:1 Leverage. This comes as a significant relief for retail brokerages that maintain hundreds or thousands of clients in the United Kingdom. Markets in the UK won’t fluctuate dramatically as a result of the 30:1 Leverage Cap for Retail Brokerages.
The ESMA Responds
The European Securities and Market Authority responded in hours in the announcement made on July 1st and 2nd. The ESMA believes that these new guidelines and regulations aren’t justified, that the proposed leverage limits for retail brokerages and retail investors will create a divergence in the market.
The Official statement from the ESMA reads: “Since the cross-border distribution of CFDs is common in this market and ESMA‘s opinion is that regulators should adopt measures that are at least as stringent as ESMA’s measures, allowing higher leverage limits for a new indicated asset class would result in divergence within the Union and potential regulatory arbitrage.”
The FCA hit back with an immediate response that said: “As noted by ESMA, 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures. We agree that this mitigates competition amongst providers that are subject to a stricter leverage limit. As retail consumers are afforded protections by the rules of other National Competent Authorities, we concluded that our rules would not impact the markets of other Member States or result in harm to their consumers.”
This statement from the ESMA is surprising, considering that the Financial Conduct Authority followed the same format of investigation as the European Regulator. This investigation was to determine if higher leverage caps with government bonds would be a risk for the market and investors. It was established by the FCA that the 30:1 Leverage Cap on Government CFD Bonds for Retail Brokerages wouldn’t pose any risk.
There is one final area of regulation that the ESMA & the FCA has continually disagreed about, this being the regulation of CFD-Like Options. The Financial Conduct Authority believes that CFD-Like options, including turbo contracts, should be placed under the same restrictions and leverage caps as normal contracts-for-difference. This is because the FCA understands that brokers would alter which products they offer, instead of it just being contacts-for-difference. By placing the same leverage caps on all CFD-Like Options, brokers can’t adjust the market by fluctuating to another product quickly.
The ESMA Isn’t Happy
The European Securities and Markets Authority isn’t happy about the Financial Conduct Authority’s decision. The company released a full statement that represents their legal opinion, indicating that they believe these new regulations and guidelines won’t fully protect retail traders in the United Kingdom.
The Legal Statement reads: “The FCA has not adequately demonstrated that the fact that providers established in other EEA states would not be able to market CFD-like options into the UK. This would be sufficient to adequately protect UK retail clients from the risk of the detriment that the FCA has observed in respect of the trading of those products by UK retail clients,” said the pan-European regulator. Therefore, ESMA considers that the restrictions on CFD-like option providers should be applied equally to providers authorised in the UK as well as to providers approved in other EEA countries.”
The Statement from the ESMA finished with: “We did not think it would be proportionate, practical or effective to seek to apply our rules to overseas firms not supervised by the FCA and subject to different rules in their jurisdiction.”