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ESMA New Forex Leverage Limits Are No Reason For Traders To Panic

Forex traders were stunned recently when the Europe Securities Markets Authority (ESMA) rolled out its new forex trading regulations. ESMA’s main role is to help regulate markets in the European Union.

This means that all its regulations will apply to anyone trading in the EU – which includes the UK until it formally leaves the EU. The changes are sweeping and address a number of areas with the most important one being the change in leverage limits.

Leverage limits put a cap on how much leverage that forex traders can sign up for and benefit from.

This new rule change can be a bit of a hit on forex traders since the forex market usually has the best leverage that any trader can have access to across the different asset types. The average leverage amounts usually range from 50 to 1, 100 to 1, and 200 to 1. This allows for a lot of buying power since for every dollar you invest, you could end up getting 50 to 200 dollars to trade.

European Securities and Markets Authority (ESMA)

The ESMA has now put a stop to this. According to the new regulations, a leverage limit of 30:1 for major currencies is allowed. Much lower is 20:1 for gold, non-major forex pairs, and major stock indices. There will be a 10: 1 standard for non-gold commodities, while 5:1 is just for stock. Cryptocurrencies suffer the due to their volatility. They are currently at 2:1 and are the lowest.

The lowered limits have surprised forex traders and caused a few to panic. However, there is no reason for European traders to panic as these changes are pretty much in line with some of the other global markets. Japanese traders have had to work with a 25:1 leverage limit for several years now. Traders and brokers in Japan continue to do well and consider their leverage limits as just another part of the cost structure.

ESMA Could Make More Changes In Three Months

The important factor that traders will bear in mind is that these current regulations are only temporary. ESMA needs to renew them every three months. The new regulations may stay in place for the foreseeable future, but could also end up being changed.

In a statement, Francesc Riverola, the Founder and President of FXStreet said

The new regulations will help distinguish between three types of brokers: the big brands offering multi-market financial instruments, the forex brokers that are experts in marketing and conversion, and the offshore ones. The ESMA rules will help brokers focus on their audiences and traders pick the right broker for them. So far, it was sometimes not too easy to see a clear distinction between the three types

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