There’s a fair bit of chat about the new regulations that’ll come in this summer, affecting spread betters. However, there’s a lot of confusion about what this actually means for our trades, and our profits.
Here I’ll run through how it’ll affect your trading account, and take a look at the shift in focus that’ll help us keep our trading as active and profitable as we can.
The gist of these regulations is that they will protect unwitting traders from losing more money than they expect. Obviously, that’s got to be a good thing, but the problem with these kinds of restrictions is that they can have unwanted side-effects.
Here is a basic outline of what’s being brought in …
• The marketing, distribution and sale of binary options will be banned.
Personally, I’m very happy about this. I’ve always been deeply suspicious of this as a trading tool, as it only seems to make brokers rich.
• Retail traders can never lose more than the money available in their account.
If an account goes into the negative, the broker is obliged to bring it back up to zero.
• New minimum margin rates
This is where most traders will experience the biggest changes.
At the moment, a major firm like IG requires a margin of 0.5% on major FX and indices, and 1.5% on commodities (except Gold, which is 0.7%).
Under the new rules, it’ll go up drastically to 3.33% for major FX, 5% for major indices and gold, and 10% for commodities.
Here’s a snapshot of IG’s before-and-after rates (I’d expect most brokers to look pretty similar) …
For most traders, margin is a bit like the workings under the bonnet of the car. As long as it’s not giving us a problem, we really don’t want to know about it. But these new rules are going to force us to be a bit more aware of the financial machine that enables us to trade the markets.
That’s not a bad thing.
(If you need a crash course on margin requirements and how they work, check out this post HERE.)
Here are a couple of examples of margin requirements
Let’s say that we want to buy the FTSE at 7050 points, with a stake of £1.
The percentage of margin required is based on the size of the instrument, so currently, our margin requirement of 0.5% of a 7050 point instrument would be £35.25 (7050 x 0.5%).
With the new requirements, to trade the FTSE with a stake of £1, and a margin requirement of 5%, instead we’d need to have £352.50 in our accounts (7050 x 5%).
Here’s another example …
This time I want to sell Silver at 1650 with a stake of £2. Current margin requirements of 1.5% would mean that I need £49.50 of margin (1650 x 1.5% x £2). But new requirements would mean that I need £330 margin (1650 x 10% x £2).
It’s a big leap, but the reality is that we shouldn’t be trading either of these markets with less than £50 in our accounts!
So, it’s really just a requirement to be sensible.
I get tired of listening to myself banging on about sensible risk profiles and stake sizes. And again and again I speak to traders who’ve put £500 into an account, and are surprised to have lost 10% of their fund on their first trade.
Hopefully, these new regulations will adjust new traders’ mindsets, so that rather than having to listen to me prattle on about risk … their margin requirements will make them all too aware of the figures involved in the trades they take.
But this isn’t all good news
Those of us who pride ourselves on always being sensible with our risk levels, and don’t feel we need regulations to protect us, are unlikely to experience any problems with the new rules. If you do run short on margin, then it’s a good sign that you could be overstretching yourself.
Where these rules do niggle me though, is that I hate loading all my money into my spread-bet account – why should my broker have the luxury of it sitting in his bank? I’d much rather keep less in my trading account, safe in the knowledge that I can top-up if needed.
Frustratingly, margin requirements pay no attention to the fact that you’ve built a balanced portfolio, where one position is carefully hedged by another … nor do they care how you’ve positioned your stop levels. So, if you think you may run into margin issues, despite being careful with your risk, then you may need to make some adaptations to your trading. I’m going to be exploring this in depth over the months leading up to this change (due in July) … so please keep following Trader’s Bulletin for ideas and tips, so you don’t need to see any dips in profitability as a result of these new regulations.
If you’d like help calculating new margin requirements, please check out my margin calculator here.