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How to Deal with ESMA Forex Regulation? 5 Options

November 5, 2018 (Last updated on May 14, 2021) by

Keep calm and don't risk too much!

As there is no doubt that the ESMA rules on retail Forex trading are here to stay for long, it is time to look at them from a practical perspective — how actual traders are dealing with this regulatory disruption? When we look closer at the change in the conditions for European traders and at the global regulatory trends that affect traders and brokers from other countries, we are left with an ample but noticeably narrowing range of choices. Let’s review them one by one.

The most obvious and straightforward way of dealing with the rules set up by the European Securities and Markets Authority is to adapt your trading strategy and style to the new conditions changing neither your brokerage or nor residency. Unfortunately, going this way has its price — you might not miss bonus offers much, but your performance might actually suffer from diminished capability to open multiple trades due to the lower leverage. If you are conservative trader with a rather big account, you will probably decide to stay under the ESMA standards. But if your strategy depends on opening as many orders as possible and is prone to stop-outs when market goes against you, you would probably want to abandon your EU broker… or, switch to the next choice.

The next choice is not obvious at all as it is rarely mentioned by the ESMA itself and not all affected brokers support it. The choice I am talking about is opting for an elective professional client (EPC) designation. As an EPC, you are no longer a retail customer, so the ESMA rules for trading do not apply to you. This choice also comes at a cost. First, you need to have a big enough financial trading portfolio (at least €500,000). Second, you must prove that you are experienced and knowledgeable enough to be considered an EPC. Finally, you will have to waive all the perks you get as a retail client, namely: negative balance protection and regulator’s retail customer protection. This way looks to be a good option for big-time currency speculators, but it is not clear whether such traders really need leverage above 1:30 — with a €500,000 account, it is viable to trade with no leverage at all.

The above two options are possible both for the EU and non-EU traders wishing to continue operating via EU-regulated Forex brokers. The good thing is that even if you are a resident of the EU, you can still opt to trade with a broker registered outside the Union. And that is, of course, true for traders living outside the EU. So here comes the next obvious choice — switching to an offshore division of your EU broker. Depending on the actual jurisdiction, there might be some more or less serious form of regulation, but more often it would be a Wild West in terms of customer protection. It also means a nearly complete lack of any bounds on the broker’s trading conditions, which usually means low capital requirements, ultra-high leverage, volatile trading instruments (cryptocurrencies of all sorts and even binary options), and trading bonuses as a cherry on top. In reality, this choice is not as reckless as it might seem at first glance. Even though traders protection and brokers supervision are lacking under offshore regimes, the prominent European brands would not want to tarnish their reputation through subsidiaries’ actions and would rather strive to provide a high level of service through their offshore outlets. Overall, it looks to be a promising option for EU traders with small trading account size and with demand for high leverage.

Switching to a non-European broker seems like a good choice too. The ESMA rules do not prohibit the EU citizens from opening trading accounts in other jurisdictions (offshore or well-regulated). However, few of the well-regulated jurisdictions allow leverage that is significantly higher than 1:30 cap set by the ESMA. For example, the USA’s 1:50 with no ability to hedge-lock trades is hardly an appealing choice. Switzerland, Australia, and New Zealand come to rescue here, but the choice of brokers in these countries is quite limited. Still, it should be enough to satisfy nearly any sort of trader. But one might wonder — how long will these nations allow such a lax treatment of Forex trading industry? The chances are that global trend in regulation would move on to all developed economies, with more and more of them adopting stricter rules for retail trading.

Of course, if trading under the ESMA is no longer profitable for you and, for some reason, you cannot switch to any of the above-mentioned options, it would probably be reasonable for you to stop trading Forex and dedicate your attention to something completely different. After all, what FX trading was loved for by many people was its accessibility, which had its foundation in high leverage. It does not seem reasonable to continue doing something under unfavorable conditions just for the sake of being called a Forex trader.

For better or worse, nearly all my trading accounts were opened with offshore divisions of regulated brokers, except for the one at a US broker. So, I did not have to change anything once the ESMA rules activated on August 1 this year. However, I would hardly suffer at all had I been with a fully compliant EU broker as most of my trading strategies work well with rather low leverage. And what is your story of dealing with the ESMA trading rules?

How do you deal with ESMA restrictions on retail FX trading?

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If you want to share your experience of trading under the current ESMA Forex/CFD restraining regime, feel free to share with others via the commentary form below.

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