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.
Conclusion
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.
Well ESMA is just another reason why the European Union should not exist in the first place.
Bunch of uneducated banker puppets, damagin the business models, quite heavily,
of binary options brokers (/ forcing them to leave outside EU).
This is the problem with EU – a single agency having such control over broader EEA (all countries in EU).
And nobody says a word.
Well never mind, since to my knowledge, the majority (very few brokers), are really from the EU, but ESMA really, didn´t add anything new with this anyway.
Negative balance protection – already was in place, as an obligation, for Cyprus (Cysec) regulated brokers.
So what they only did, was lower the leverage.
What will really happen, is people will make MUCH LESS money with EU brokers, but lose it more slowly also, lol.
(also, who is going to trade crypto with leverage of 2x, and stocks with 5x?) – EU now has lower leverage then USA (30x)
Likewise, brokers will make thousandfold less money, because of commisions on lent money (500x vs 20x), fees, swaps, spreads.
Binary options will be reserved for institutional clients (banks), and people will flee to non-EU brokers, and likewise, EU brokers will abandon their EU licences, to often times, unknown islands in the Atlantic / Pacific ocean, and cause more problems for people.
In other words, competition from outside the EU welcomes this move, since they will have much more to offer, and besides, many FCA regulated brokers already offer this negative balance protection as well.
How are you going to get into negative balance with 20x leverage is also the question (practically impossible, since the broker would probably stop you far sooner, to even approach negative balance anyway).
Andy – why do they also abandon deposit bonuses? Should focus on regulation, instead of prohibition, but these people seem to know “better”.
In FCA regulated UK,- the regulators (FCA), just reacted to the complaints of elderly, who obviously didn´t know what they were doing, overtrusting the expected returns from the brokers, and hence also wished to ban binary options also, so
It just shows what ESMAs true intentions are – they are not benefiting the market in any way, just reserving it for the big banks / institutional investors, as they show in their whiteprint.
Because with 20x leverage, it is IMPOSSIBLE to make a profit equivalent to the big players (banks), scalping the market on a daily basis for example.
Banning binary options just makes it in addition even that much harder.
Will IQ Option be abandoning their EU licence and moving to a different regulatory territory, where binary options are legal?
Since the effects of ESMAs decision should take effect within some 3 months am I correct?
What if someone has a binary option that has expiry rate after the effect of this ruling?
This agency doesn´t listen to what the people it serves want, but rules it on its own.
Why did they ask for opinion, when 98%+ traders didn´t agree ? Yet they proceed with their “idea” anyway.
ESMA should be abandoned. It is not good to have such a regulatory body over such a large area as Europe is, especially with people who have no clue what forex market is, yet just want to ruin it for everyone else.
Hello, thank you so much for such a detailed review!
From our point of view ban of Binary Options is mostly connected with a huge amount of fraudulent activity of dishonest brokers.
This is why a lot of traders view Binary Options trading as gambling nowadays, though it is a totally legitimate financial instrument.
Nevertheless we will have to follow ESMA regulations and remove BO for traders from EU.
As you said, majority of traders expressed their objection regarding bank of BO, let’s hope that it will be taken into account and BO will be back in Europe one day.
ESMA published a regulation which puts prohibition on providing Binary Options trading to from the 2nd to July and a restriction on CFD trading from the 2nd to August.
If our traders have options that expire after this date, we invite them to contact us as soon as possible via support@iqoption.com
Every case will be reviewed individually, but in general all the trades opened before 2nd of July will expiry on it’s “normal expiration date”.
So if trade was opened on the 15 of May and should expiry on the 15 of July – it will expiry on the 15 of July.
You made a valid point, effective regulation should prevail over prohibition.
It is our responsibility, as a broker, to keep our activity transparent and follow regulation.
Even if regulation means ban of BO and restriction on CFD in this case. Let’s hope that there will be an update on this situation, that will benefit ESMA, brokers and traders all together.
We are working on new instruments on our platform, that we will announce very soon.
Please stay tuned!
If you have any other question left – please do not hesitate to contact us.
Thank you again for your interest in this matter, we would not be able to improve without your continuous support.
Best regards,
Alina IQ Option
What will happen with IQ Option Binary Options for EU customers? Will I still be able to trade them?
will the Binary Option prohibition affect Nigerian Binary Options traders as well?
Hello Chris and thank you for your question!
ESMA regulation regarding Binary Option and CFD only applies to traders from European Union.
Traders from Nigeria will not be affected.
If there is any update on this matter – we will immediately notify you.
Have a lovely day 🙂
What about traders from England ? As Brexit leaving the EU will they still be affected also ?
Hello, Sven!
Unfortunately, BO will be also closed for the UK.
Honestly I’m very disappointed what ESMA did.. I already practiced the demo account I have my own strategy that’s why I’m very pissed off, in 2 to 3 weeks time I’m gonna start my investment but this what happened., So please iq option make a new strument for us I really love your platform good luck and God bless..!!!
Hi, Alberto!
Thank you for the feedback! We would not be where we are without the continuous support of our traders!
Per ESMA measures, binary options are no longer sold to retail clients. They will still be available for professional clients. To learn more about the different categories and the recategorization procedure, please click here to read our client categorization policy https://eu.iqoption.com/en/terms-and-conditions/client-categorisation.
Don’t worry, please! We are already preparing something new for you 😉