Over the years online trading had been evolving in a unique way and because of that, public regulators had been forced to adapt legislation to changes. You as a trader must be fully aware of some of the most important changes that took place, which is why today we will talk about the MiFID 2.0 and the new ESMA regulation for CFDs.
What’s new in MiFID 2.0?
If you don’t already know, MiFID is the Markets in Financial Instruments Directive, adopted in 2004 by the European Commission, which is applicable since November 2007. It represents one of the most important law for financial markets, contributing to the improvement of competitiveness and a higher degree of protection for investors.
On the other hand, MiFID 2.0 is a revised legislative proposal adopted by the European Commission on October 20th, 2011, and published in the EU Official Journal on June 12th, 2014. The news legislation ensures a greater degree of transparency, reduces the use of dark pools and OTC trading, sets stricter rules for high-frequency trading and introduces new requirements for investors’ protection.
Brokers like Oanda, forex.com, and others, need to fully comply with the EU law if they have clients with citizenship in one of the EU countries.
ESMA regulation for CFDs
More recent legislation, adopted by the European Securities and Markets Authority (ESMA) in June 2018, sets up new and stricter rules for CFD trading. Applying since August 1st, 2018, the new law prohibits retail binary options trading.
With regards to CFD trading for retail investors, leverage limits, a margin closeout rules, negative balance protection, and a specific risk warning, represent new measures which need to be taken into account by all brokerage companies.
In terms of leverage, it varies between 30:1 (for the major currency pairs) and goes as low as 2:1 for cryptocurrency-related CFDs. The market close out rule is set at 50% of the minimum required margin, and the negative balance protection is on an account basis.
Brokerage companies are prohibited from offering trading incentives for retail investors and they are also required to provide a standardized risk warning, including the percentage of losses on the provider’s retail investors accounts.
All the above-mentioned requirements were set in order to reduce excessive risk and potentially limit the losses which may encounter with CFD trading. If you are a retail trader, you need to be fully aware of them and make sure that your broker is compliant.