Thanks for your #ReplytoESMA

27 March 2018 update

In total, 14,605 replies were submitted via this website during the consultation period – with 98.1% against ESMA’s proposals.

ESMA has listened to traders on margin close-out rules and adapted its policy accordingly. A 50% close-out rule will now apply on an account basis, rather than on a position-by-position basis. We’d like to thank all traders who submitted views – your valuable input has resulted in a positive shift for the industry rather than a backwards step.

However, ESMA has chosen to disregard the weight of feeling against the proposed leverage restrictions. As a result, minimum margins on all CFD and spread betting markets will increase across the industry. It is disappointing that ESMA has chosen to ignore the views of traders in this instance, but rest assured we will continue to make the case that these leverage changes are disproportionate.

The changes are expected to come into force from early July 2018. You can still read all the replies received to this site, as well as responses from the industry and a summary of the results.

Read all replies | Summary of results | Read industry responses | Visit the ESMA website

More about this proposal

ESMA is considering a number of proposals aimed at retail traders, to try to increase conduct standards across the industry. While many of the proposals are sensible, this site focuses on the two that are likely to have a significantly negative effect on traders.

ESMA is suggesting a 50% margin close-out rule on a position-by-position basis, rather than on an account basis.

To put this into context, a CFD with a 5:1 leverage limit would have an initial margin rate of 20% of the initial total exposure. Under ESMA's proposal, if the margin allocated to that position then fell below 10% of the initial total exposure, the CFD would be closed out - regardless of how much money was available on the account.

Traders could, however, choose to allocate additional (variation) margin to a particular position, both at the point of opening the position and during the lifetime of that position.

How could this proposal affect traders?

  • Say you have £2,000 in your account and you open a DAX position that requires £1,000 margin. When that position runs a loss of £500 (so £500 is the remaining margin allocated to the position after the running loss), your broker will be forced to close your position irrespective of the cash on your account, and irrespective of profits on other positions.
  • Using the example above, imagine you decide to allocate the whole £2000 to the same DAX position. ESMA proposals will force your broker to close the position when the running loss is £1,500 (£2,000 minus £500). This is because the position must still be closed out when the remaining margin allocated to that position - after the running loss - is equal to 50% of the initial margin requirement.

    In summary: the initial margin is £1,000, and 50% of this is £500. You allocate £2,000 to the position. When only £500 of the £2,000 is left, the position must be closed out.

While considering your risk on each position is important, these rules are complex and unclear. And the risk is that traders will have to keep switching their allocation of margin from one position to another in order to minimise the chance of each position being closed out, even when their overall account is in profit.

You can read the proposals in full here, and see what industry leaders have to say about them.

Rupert This proposal is unworkable and badly thought out. It is a classic example of a regulator not actually understanding the products they regulate. As a customer you may use all or some of the funds you have deposited with a broker as margin. You cannot separate out individual positions for margin close-outs any more than you could separate out different deposits to your bank account for interest payments. As the account is margined in aggregate, you need to look at the whole picture, especially as your strategy may involve a pairs trade where one position is losing while the other is offsetting that with a larger profit. Please replace this proposal with an account-level threshold, I believe setting it at 25% of the margin requirement would be enough.

Thomas These suggested margin close-out measures are beyond disproportionate, and actually pose more of a risk to inexperienced traders due to the complexity of constantly having to calculate margin, and the risks of being automatically closed out. As per the general amendments to margin that have been proposed, these changes will essentially end retail trading for all but the very wealthy professional traders who can afford to cover the required margin. This will again tip the scales in the favour of the wealthy, and away from the lower stakes, but still profitable traders like myself and thousands of others. A far better idea is to enforce training for rookie traders and limit margin for perhaps their first year. Then implement staged increases in exposure to margin as the traders progress from rookie to more advanced clients.

Stuart Close out rules have to work on a portfolio basis. To have it any other way is ridiculous. Clearly decisions being made by people who do not trade.

Chandan I am against the margin close-out proposal. This would limit the effectiveness of my trading strategy. I also am concerned that external bodies are interfering with a subject matter that is highly personalised. If anything, the rules should be made on an account by account basis, which would be far too laborious. The best thing to do here is to do nothing and leave things as they are.

Rudy I really disapprove and don’t think it’s fair to change margin close-out rules on a position-by-position basis, rather than the current system where providers look at positions together at 'account level'. Instead of trying to protect people to limit their losses, this will bring much more losses to people because traders will be having positions closed out earlier, even if their overall strategy is in profit.

Michael This rule is not going to accomplish the results you want. Skilled traders may take losses that far exceed 50% of margin. What you should do is allow people who do not know how to trade to have a restricted margin account. Those of us who have experience trading should be entitled to the full margin currently allowed.