Financial regulators want to protect investors, and the new rules they’re looking to bring in are – in many ways – very welcome. Too many companies view their clients as a disposable commodity, that they’ll drain of their cash, before moving onto the next person.
There’s rarely a day goes by when I’m not shouting at my computer because of the dodgy offers being pushed out to unwitting investors. It makes me furious. One of my missions with Traders Bulletin was to empower us small traders, so we could be wise to companies like that.
However, I’d like you to be aware of how these new ESMA spread betting rules could affect you, and how some of these steps could (in my opinion) have the opposite effect.
From the correspondence in my inbox, I know that most Trader’s Bulletin members are pretty clued up about what they’re doing with their trades.
But in the world of financial markets, the sands are always shifting under our feet, so we have to keep up with changes, and be aware of how they’ll affect us.
Most of the changes being proposed are about improving industry standards and protecting clients, including a ban on the sale of binary options – a trading tool that I won’t be sad to see the back of.
But the area of concern is around leverage and margin.
I’m very aware that the words ‘leverage’ and ‘margin’ cause many traders eyes to glaze over. I promise to keep this simple – but it’s important that you understand the effect this could have on your trading.
The leverage proposals are:
- 30:1 on major currency pairs
- 20:1 on major indices
- 10:1 on commodities
- 5:1 on equities
The margin proposal is a 50% margin close-out rule on each position you hold.
So, what does that actually mean?
For a crash course on how leverage and margin work, I recommend you take a look here.
But, to give you an example of the effect these leverage proposals could have on our accounts …
If you currently use £660 margin to open a £10/point trade on the DAX, under the new regulations, you’d need £6,600 margin to open the same trade.
If they did bring in rules like this, it could mean having a lot more money sitting in your spread-bet account, or trading with much smaller stakes. Either way, the return on your tied-up investment coud be significantly lower.
This is going to impact those of us who are managing hedged positions, or long-term positions, as we’ll quickly find ourselves running out of money to open new trades.
The result, perversely, could push traders into riskier set-ups
If you’re no longer able to hold long-term or medium-term, trend-following positions, on major indices or currency pairs … what are your options?
The concern is that spread betters will move towards short term trades that they can open and close within the space of a few minutes, or a few hours, freeing up cash for their next trade. This is exactly the kind of trading that I’ve spent a lot of time warning people to guard against – it’s incredibly difficult to make a profit this way, and you’ll end up paying out a lot to your broker.
Another concern is that investors will be driven to off-shore services, without the security of regulation.
These proposals haven’t yet been decided on, and the industry is still in a short period of consultation. If you’d like to have your say, there’s still time (just! The consultation runs until Monday). You can submit your views, along with thousands of other traders, via your broker, or you can use this portal that’s been set up by IG: here.