New regulations and measures are constantly being put in place to protect retail CFD traders. European regulators want to clamp down on how CFD brokers conduct their business and how products are offered to clients. Research from European Securities and Markets Authority (ESMA) shows that around 80 to 95% of investors are losing their investment which is not always through fault of their own.
Specifically, when a broker uses a dealing desk there can be a conflict of interest. Instead of executing a trade directly to the liquidity providers, it goes through a dealing desk which can lead to delays (slippage) and spread mark-ups. This makes it even more difficult for retail traders which is another reason why it is so important to choose a reliable broker.
Amongst the new rules introduced in 2018 by ESMA for European traders are:
The maximum amount of leverage offered to European CFD traders has been capped. Some brokers will lift this limit if you meet certain requirements and qualify as a professional trader. To qualify you would usually have needed to have conducted a large amount of transactions, have a significant portfolio and experience in the financial industry.
- 30:1 for major currency pairs
- 20:1 for non-major currency pairs, gold and major stock indices
- 10:1 for commodities other than gold and non-major stock indices;
- 5:1 for single stocks and any underlying not otherwise mentioned
- 2:1 for cryptocurrencies
A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs.
Negative balance protection
Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses.
Restriction on marketing and incentives
Brokers must clearly state the percentage of clients who are losing money and not offer any incentives to attract new clients to trade CFDs.