The European Securities and Markets Authority (ESMA) is an EU body aimed at protecting investors and ensuring the integrity, stability and smooth functioning of financial markets. Since the foreign exchange market in which XTB operates is an important part of the financial market universe, it is of course of interest to the European regulator. ESMA rules apply to every EU market and are therefore of the utmost importance to the XTB group. XTB has a considerable market presence in countries such as Germany, France, Spain, Poland, Portugal, Slovakia or the Czech Republic.
The main reason for a applying as professional trader is the higher leverage and lower margin requirements.
Become a professional client to retain or achieve low margin requirements.
Brokers will not be required to provide you with the current risk warnings, which they must provide to retail clients or any standardized risk warning that is introduced in future in relation to transactions in complex financial products.
Communications and financial promotions
Certain rules relating to the form and content of information provided by the broker do not apply, including those relating to communications and financial promotions.
Negative balance protection
Retail clients will benefit from negative balance protection being introduced in the near future, from the ESMA.
Starting at the 01. August 2018 - Brokers will be required to restrict leverage to between 30:1 and 5:1 on the products they offer to retail clients. Higher leverage can work against investors and amplify losses.
It is worth mentioning that the limits introduced by ESMA rules apply to retail and retail clients. Brokerage clients, including XTB, could consider being classified as a Professional Client. ESMA itself highlighted this possibility in its opinion:
"If you want to continue trading CFDs without limiting the leverage of product intervention or even binary options, you can discuss this with your broker and carefully consider becoming a professional client," ESMA said in response to questions arising in connection with the product interventions.
How to become a professional trader
To qualify as a Professional Client, certain conditions must be met. This includes that the customer must meet 2 of the following 3 conditions:
1. the customer has concluded an average of at least 10 transactions with a nominal value of at least 50,000 euros in the last 4 quarters;
2. the customer has financial assets of at least 500,000 euros;
3. the client has at least one year of professional experience in the financial sector and in a position that requires knowledge of the financial markets.
ESMA points out that while professional clients are not subject to leverage restrictions, in return they give up a level of protection offered to private clients.
What are the new rules about?
A BrokerCheck Interview with the broker XTB about the upcoming changes.
ESMA decided to use what is known as “product intervention”, which is aimed at protecting small investors. The rules usually relate to leverage, but many other points are raised:
- The intervention introduces a complete ban on binary options that were considered too complex for private investors. The management of XTB regards this change as secondary for the company. BrokerCheck Comment: did never list any Binary Option Broker anyway, since we believe in transparancy and Binary Options are often offered by unregulated companies.
- Other changes relate to Contracts for Difference (CFDs), the core of the XTB product offering. The maximum leverage is limited to 30:1, but many instruments are more limited to up to 2:1. 30:1 leverage applies to the largest and most important currency pairs, 20:1 leverage applies to other currency pairs as well as to gold and major stock indices. A 10:1 leverage applies to other stock indices and other commodities, a 5:1 leverage applies to other, unspecified instruments and, most recently, a 2:1 leverage applies to CFDs in crypto currencies. The portal “Comparic”, which is mainly represented on the Polish market, has carried out studies showing that more than 90% of traders are against such serious restrictions. ESMA acknowledged that it had received a total of around 18,500 feedbacks and that the bulk of this enormous sum came from individual investors and dealers. This indicates that the changes are not welcomed by the trade communities and are not in their interest. These changes will require higher deposit ratios to maintain a certain market exposure. This is costly because these funds could be used elsewhere. XTB sees these changes as too radical and potentially counterproductive. When traders decide to leave EU legislation in search of improved trading conditions, these traders remain without the usual protection. BrokerCheck Comment: In our Opinion the risk that many people will look for more unregulated brokers in search for a higher leverage is pretty big. That is why we think these restrictions are too far.
- Product intervention also introduces a position closing rule where positions are closed when the amount of available funds falls below 50% of the original value (at account level). XTB sees this level as feasible, but considers it too ambiguous. BrokerCheck Comment: We welcome this change, since successful traders often stay way above the 100% margin level anyway.
- Product intervention also introduces mandatory negative balance protection. This means that a loss of the private investor cannot exceed his deposit (no obligation to make additional contributions). XTB fully supports this proposal – in fact, XTB had already introduced it in practice before it was specified by ESMA. BrokerCheck Comment: This is a very good step forward for retail clients. Retail Clients however lose this protection if they choose to become a professional trader. This condition is then similar to trading futures, which also have no negative balance protection.
- The Guidelines also limit a number of additional services that could be offered in connection with CFD transactions. While XTB generally agrees with this principle, management still sees additional services as important for a successful and long-term business relationship between broker and customer. BrokerCheck Comment:
- Finally, the intervention standardises risk information. XTB and BrokerCheck fully supports this idea as it increases transparency.