Earlier this year, the European Securities and Market Authority (ESMA) decided to update the regulations for binary options and CFD trading within the European Union. Ever since then, everyone in the industry has had mixed feeling about the changes. Some have even raised concerns about the situation saying the new rules could have devastating effects on the market.
But is that really true? Not necessarily. In fact, in many ways, the new regulations will benefit both traders and brokers.
The changes that were made
Before we get into it, we need to clarify what it was that happened and what changes ESMA enforced.
First and foremost, ESMA decided to ban all forms of binary options trading. That means that no one is allowed to offer or participate in binary options trading within the European Union.
Secondly, ESMA updated the regulations regarding CFD trading in an attempt to create a fairer market. This was done by lowering and limiting the amount of available leverage for every asset class as well as forcing CFD brokers to implement protection against negative account balances.
The cryptocurrency market was hit the hardest with leverage being limited to 2:1, while major currency pairs will have the highest leverage of 20:1.
Naturally, these updated regulations have had a profound impact on a market where regulations have been quite limited, but it’s not all bad and let us tell you why.
Note that ESMA made more changes than this and that we’ve only mentioned the most drastic ones.
Benefits of ESMA’s new regulation
To understand why ESMA’s new CFD regulations could be beneficial to the market, we have to first understand why they decided to update them in the first place. You see, ESMA’s intention is not to scare traders away from the industry or try to hurt brokers. Instead, what they are trying to do is create a more fair and safe marketplace.
Leveraged trading is associated with high risk and by limiting the available leverage, ESMA makes trading safer for traders. And guess what? A safer marketplace will attract people that have been reluctant to try leveraged CFD trading before, which in turn will benefit the CFD brokers since they’ll get more customers.
Likewise, the protection against negative balances will mean that no one can lose money they haven’t invested, which will also help attract a new crowd of traders. And as if that wasn’t enough, the lack of negative account balances will protect brokers from having traders owing them funds.
Possible downsides to the regulations
As you can see, the new regulations have the potential of being a win-win situation for everyone involved, and so far the market hasn’t suffered any major setbacks.
That being said, there are a few minor issues with the regulations. For example, all the professional day traders that are used to trading with high leverage will now be very limited in their choices. And you could argue and say that 2:1 leverage for cryptocurrencies and 5:1 for stock trading might be a bit too strict.
The leverage offered is one of CFD tradings benefits, while it also introduces risk.
The point we’re trying to make is that ESMA’s new regulation probably isn’t the end of the world and that there are potential benefits to come out of this. And let’s be honest, who doesn’t want to see a more fair marketplace?
In the end, the final decision will be on ESMA. All we can really do is wait and see where it takes us but we are sure about a bright future where we get to see the industry evolving to the next level.