Andrew Edwards, the CEO of Saxo Capital Markets recently made the following announcement regarding the new regulations and limits on the promotional and sale of Contracts For Differences (CFDs) which was introduced by the European Securities and Markets Authority (ESMA) on 30th July last year.
He explained Saxo Capital Market’s support for the ESMA rulings and he believes they are good both for brokers and retail clients in general. The new regulations came when there were high leverage levels being offered to retail customers by online brokers registered in geos with less stringent regulations. These companies were offering high leverage levels to inexperience customers as their core marketing acquisition strategy which resulted in potential massive losses for the retail traders.
CFDs are financial instruments used by traders to speculate whether the asset will rise or fall. The do not own the asset. The new regulations have capped the leverage and the losses that the retail client could incur on the CFD trades. These regulations have now been extended fora further 3 months in February 2019.
Saxo Capital New ESMA regulations
The ESMA ruling resulted in a significant drop in the profits of most retail CFD providers. He believes it “is good for the industry as the lower profits will be a barrier to new entrants and the existing firms will have to consolidate and focus on competing based on quality services and products, instead of focusing on high leverage”.
Edwards continued to comment that “CFDs are products that democratised access to leverage and hedging in the financial markets, which was previously reserved for HNWI and institutional clients. CFDs allow retail traders to hedge many of their open market positions without using options due to the stringent account requirements and large sums needed to trade options. High leverage levels limit the effectiveness of CFD products due to the high potential losses”. Source: Pete Townsend: Whichbroker.com