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ARGUS Global Trader
 
CSE & ASE
 


New ESMA Regulation

In March, the European Securities and Markets Authority (ESMA) announced having agreed on a range of measures intended to harmonise EU-wide regulation and to provide better protection to retail clients trading leveraged products, like CFDs. The new measures will take effect from 30 July 2018. Read the full ESMA statement here The measures apply to all retail clients contracted through EU firms, regardless of where the client is domiciled.

Overview of measures

  • Leverage limits on new positions
  • Introduction of maintenance margin: stop out as soon as the client does not meet maintenance margin requirement
  • Prohibition on benefits used to incentivise trading
  • Standardised warning statement of the risks involved across promotional material

Measures in detail

Leverage caps

Leverage limits apply on opening a new position and vary according to the volatility of the underlying asset. Initial margin requirements will increase on CFD and FX products, meaning the amount of margin collateral required to open a new position will be higher.

Maintenance margin will be introduced and represents the minimum amount of margin collateral that must be held on account to maintain an open position. Maintenance margin will be used to calculate the margin utilisation.

Please note that from 30 July, the new ESMA initial margin rates will apply on the entire margin portfolio when opening a new position, and the new maintenance margin rates will also apply on the entire margin portfolio, including all existing open positions.

As an example, the initial margin requirement on non-major FX pairs will go from our current 2% margin rate (50:1 leverage) to 5% (20:1).

Current initial marginInitial margin
from 
30 July
Maintenance margin
from 
30 July
FX (Majors)1.5%3.33%1.66%
FX (Minors2.0%5.0%2.5%
Index (Majors)2.5%5.0%2.5%
Index (Minors)3.0%10.0%5.0%
Gold3.0%5.0%2.5%
Commodity2.0%10.0%5.0%
Equity10.0%20.0%10.0%

Margin close out

The margin rate required to maintain an open position is referred to as maintenance margin. Maintenance margin is used to calculate the margin utilisation.

If your account breaches 100% utilisation, then automatic margin close–out will occur, meaning that orders to close positions will be placed and existing orders will be cancelled.

Negative balance protection

Negative balance protection will be applied to accounts that hold an open FX Spot or CFD position and will apply to any loss after any/all collateral on an account has been used, including cash deposits.

We will reimburse the negative cash amount once all positions held on account settle. The reimbursement will reset the account value to zero.

Restriction on incentives

Restrictions will be placed on promotions offering excessive bonuses or other incentives to attract and encourage retail investors to invest in FX/CFDs.

Harmonised Risk Warning with firm-specific performance

A standardised format for risk warnings will be introduced, where firms will have to include information on the amount of leveraged trades which resulted in positive outcomes for their clients.

Re-categorising as professional

These measures only apply to retail clients. Professional clients, or those who successfully apply to re-categorise as such, will not be impacted. Read more here

Frequently asked Questions

We will continue to offer retail clients with one multi-asset cross-collateralised account.

To create a buffer between a client's trading capacity and margin close-out level, which ESMA has standardised, we will introduce an initial margin requirement in addition to the maintenance margin requirement. This means that we will move from having one margin requirement to two margin requirements - initial margin and maintenance margin.

  1. Initial margin: a pre-trade margin check on order placement, i.e. on opening a new position there must be sufficient cash or approved margin collateral available on account to meet the initial margin requirement for the entire margin portfolio. The same check also applies to cash withdrawals to ensure that a client request to withdraw cash from their account will not lead them to being in breach of the initial margin requirement.
  2. Maintenance margin: a continuous margin check, i.e. the minimum amount of cash or approved margin collateral that must be maintained on account to hold an open position(s). Maintenance margin is used to calculate the margin utilisation, and a close out will occur as soon as the client does not meet the maintenance margin requirement.
ProductCurrent minimum margin requirement
(equivalent to maintenance margin)
Major FX1.50% (e.g. EUR)
Non-Major FX2.00% (e.g. AUD)
Major Index2.50% (e.g. US500)
Non-Major Index3.00% (e.g. NETH25)
Gold3.00% (e.g. XAU)
CommodityVaries:
6.00% (e.g. XAG)
8.00% (e.g., HEATINGOIL)
4.00% (e.g., COPPERUS)
Individual Equities
(Rated 1 that are part of a major Index)
10.00% (e.g. AAPL)

 

New ESMA minimum margin requirement

InitialMaintenance
3.33% (30:1)1.66%
5.00% (20:1)2.50%
5.00% (20:1)2.50%
10.00% (10:1)5.00%
5.00% (20:1)2.50%
One rate:10.00% (10:1)5.00%
20.00% (5:1)10.00%

Trading example:

You deposit EUR 10,000 in your account. You believe that the Euro (EUR) is going to strengthen against the U.S. Dollar (USD) and want to take advantage of this move higher. You therefore decide to buy 100,000 EURUSD. You hold no other open position(s).

Initial margin requirement = 100,000 x 3.33% = EUR 3,330

Maintenance margin requirement = 100,000 x 1.66% = EUR 1,660

Margin utilisation (at the time of the trade) = 16.6% (EUR 1,660/EUR 10,000)

Retail clients will be required to meet the maintenance margin requirements for an FX/CFD position(s) opened prior to 1 August 2018. Retail clients are only required to meet the new initial margin requirements on an FX/CFD position(s) opened from 1 August 2018.

Since we will provide one multi-asset cross-collateralised account where margin requirements differ between instruments and products that are in-scope and out-of-scope of the ESMA measures and may also be higher in some cases than the initial minimum margin requirements specified by ESMA, automatic margin close-out will occur at 100% (maintenance) margin utilisation.

For example, to continue the above trading example:

You deposit EUR 10,000 in your account. You believe that the Euro (EUR) is going to strengthen against the U.S. Dollar (USD) and want to take advantage of this move higher. You therefore decide to buy 100,000 EURUSD. You hold no other open position(s).

Initial margin requirement = 100,000 x 3.33% = EUR 3,330

Maintenance margin requirement = 100,000 x 1.66% = EUR 1,660

Margin utilisation (at the time of the trade) = 16.6% (EUR 1,660/EUR 10,000)

Later due to market movements there is an unrealised loss on your account of EUR 8,340.

Margin utilisation = 100.0% (EUR 1,660/ (EUR 10,000 – EUR 8,340))

As a result, your margin is fully utilised and therefore you have no capacity to enter into further transactions (except to close out your open position(s)). You will be in breach of margin requirements and, to comply with the margin close-out rule, we shall seek to immediately terminate, cancel and close-out all or part of any outstanding position(s), as well as cancel any open orders.

Within the platform, clients will be able to choose if they want to pledge securities such as Stocks, Bonds, ETFs, etc. as margin collateral towards trading FX/CFDs. If a client requests not to pledge securities as margin collateral, a margin check will take place to ensure that they then still have sufficient margin collateral on account to continue to hold an open position(s). If there is insufficient margin collateral on the account, and prior to the request not to pledge securities as margin collateral is enabled, the client will be asked to deposit more cash or to reduce exposure.

Bonds: the collateral value available for margin trading will remain unchanged.

Stocks: the collateral value available for margin trading will only be offered on stocks that are part of a major index.

Negative Balance Protection means that maximum losses, including all related costs, are limited to the cash or approved collateral (e.g. securities or other assets) pledged towards trading FX/CFDs i.e. losses cannot exceed deposits. Negative Balance Protection only applies to accounts that hold open FX Spot or CFD position(s).

Due to the margin close-out rule (together with leverage limits) ensuring a buffer of margin in normal market conditions, Negative Balance Protection is expected to be needed only in rare situations, i.e. under extreme market conditions. In the event where the aggregate profit/loss on FX/CFDs exceeds the cash and/or approved collateral, we will reimburse the negative cash amount once all position(s) held on the account settle.

The reimbursement will reset the account value to zero. For example:

  1. Unrealised loss = EUR 4,000
  2. Cash and/or approved collateral = EUR 1,000
  3. Reimbursement = EUR 3,000
  4. Account value = EUR 0

Note. Depending on local tax rules the reimbursements amount may be subject to tax.