ESMA Regulations: A Brief History of Regulation


The departure of a very prominent broker from the US market made waves back in 2017. The blowback though was felt by the entire industry…globally. This tarnished the industry’s (admittedly) not so pristine image which it is still trying to recover from.

Then earlier this year Chinese authorities enacted their own CFD crackdown, by contacting the heads of foreign CFD companies and inviting them to a quiet little sit-down. In the company of a few dozen police officers.

This isn’t the first time the CFD industry has experienced a crackdown – just a few years ago brokers were forced by the FCA to fully screen and assess the competence of their clients. Gloom and doomers across the industry said the sky was falling, that this would cripple the industry, lessen their pool of clients. Not really – it just made the industry better, as a result, many brokers started offering education to their traders in the form of webinars, ebooks, and video tutorials.

We have also seen in the past few months a global clampdown on unregulated brokers – but of course, those were illegal anyway. The regulations are targeting legal and fully regulated brokers.

Why ESMA Why?!

ESMA isn’t happy that many FX or retail CFD brokers target novice and inexperienced traders. This is why it is restricting high leverage which is often used by new traders but avoided by experienced traders.

Forums were ablaze with complaints of a nanny state and unnecessary restriction under the guise of protecting new traders.

But hear me out, maybe the problem goes deeper – maybe the reason new traders are losing is that although they trade with high leverage – they probably are unlikely to do so with a trading strategy and risk management measures in place. This is why there is a high rate of failure amongst inexperienced traders – a lack of risk management and trading without a strategy. How can I claim so vehemently that these are the mistakes new traders make? Well because they use high leverage – that’s all the proof needed.

The most rudimentary type of risk management is the so-called risk-reward ratio. It basically calculates the amount of risk that needs to be taken for a target return. The lower the ratio the more conservative your ration is. Leverage increases risk – which sure increases the potential reward…but again the possibility of getting that reward is greatly diminished.

Risk Reveal Yourself! Leverage you’re Cool.

Obviously, the biggest unknown when forex trading is the risk. A trade moving against you can decimate both your account and if you are trading with a broker that doesn’t offer negative balance protection, it could put you in debt.

If you haven’t been keeping track, leverage increases risk, which is why ESMA is targeting it in its new regulations. The higher the leverage – the higher the risk.

What if you could know what your risk was though and still use significant leverage? Impossible right? Wrong.

Some brokers are offering ways to trade CFDs with known and even predefined risk with access to significant leverage.

One of these tools, easyTrade, not only allows traders to set their maximum risk, it uses an ingenious way to offer trading that doesn’t require margin, which means trades won’t be closed out by margin stop-out by basing the new product on vanilla options.

Another great benefit is that easyTrade does not cap your trade’s potential. Some financial instruments, like binary options for example, feature fixed payout no matter how well the trade goes.

Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.