Implementation of ESMA leverage: calendar and practical example

11 July 2018
Jesús Domínguez

After having given you all the details regarding the new ESMA regulations, as well as their impact for traders, investors and DARWINs, today’s post evaluates several different circumstances that you may encounter during the implementation process.

We provide concrete examples to dispel any doubts and  lay out all the requirements that you have to meet in order to be considered a professional trader by ESMA and thus maintain your current leverage.

New ESMA measures (from August 01, 2018)

As you may already know, on August 1st, the new ESMA measures come into force, that restrict the advertising, distribution and sale of CFDs to retail traders:

1-Maximum leverage depending on the financial instrument:  

  • 30:1 => main currency pairs or forex majors *

* According to the criterion established by the ESMA, forex majors are those whose base and quoted currency are made of the following: USD, EUR, JPY, GBP, CAD or CHF.

According to this definition, the GBPCAD pair for example is rated by the ESMA as a forex major, while the AUDUSD would be considered a non-major.

  • 20:1 => forex non-majors, gold and major indexes **

** All indexes currently available in Darwinex are considered majors by ESMA except the SPA35, which is rated as a non-major

  • 10:1 => commodities, except gold, and non-major indices (SPA35).

*** Darwinex only offers the possibility to trade cryptocurrencies with no leverage (100% margin)

2-Margin call and stop-out rule on a per account basis

A close-out will be triggered when the margin level reaches 50%.

3-Negative balance protection

This implies a guaranteed global protection for retail traders to limit their losses.

4- A restriction on the incentives that brokers can offer to their clients to trade with CFDs.

5-A standardised risk warning.

Implementation of ESMA leverage: calendar and practical example

In order to assist you during the transition to the new ESMA regulations, and to ensure that you have plenty of time to adjust your trading account to the impending changes, we will implement them progressively.

Write down the following dates in your trading agenda:

  • The weekend of July the 28th/29th
  • July the 29th/30th at market opening
  • Approximately 1 hour before the market close on August 3rd at 20:00 GMT

During the weekend of July 28th/29th, we will proceed to adapt leverage levels according to ESMA regulations and you won’t be able to open new trades if your account in on margin call (margin level below 100%). However, stop-outs (margin level below 50%) will be triggered taking into account the old leverage until approximately 1 hour before the market close on August the 3rd at 20:00 GMT.

Here’s an example:

Imagine that before the market close on July the 27th/28th your account reflects a balance of € 1,000, in which you have one lot opened on the EURUSD (margin level 0.5% / leverage 200:1).

  • 1 lot EURUSD
  • Balance => € 1000
  • Margin => € 500
  • Margin level => 200%

Now imagine that you open a mini lot (0.1) in the same forex pair. Your MetaTrader terminal will show the following:

  • 1.1 lot EURUSD
  • Balance => € 1000
  • Margin => € 550
  • Margin level => 179.49%

What happens if you leave this position opened during the weekend of July 28th/29th when Darwinex will proceed to update its leverage levels?

The margin level in the EURUSD will go from 0.5% to 3.33% (from 200:1 leverage to 30:1), so the same position will show the following changes in your MetaTrader account at market opening in July the 29th/30th:

  • 1.1 lot EURUSD
  • Balance => € 1000
  • Margin => € 3666.85
  • Margin level => 27.05.%

As of market opening in July 29th/30th, the MetaTrader terminal will calculate your margin taking into account the ESMA leverage, margin calls included, so that you won’t be able to open a trade if your margin level is below 100%.

However, stop-outs – the level at which a trade will be automatically closed if the margin level goes lower than 50%, will continue to be calculated taking into account the old leverage.

In this particular case, even though the margin level is 27%, well below 50%, Darwinex will not close any of your trades, since we will consider that the margin is 180.77%.

What happens if you keep the same position approximately 1 hour before the market close on August 3rd at around 20:00 GMT?

At around 20:00 GMT on August 3rd, all positions will be calculated with the new ESMA leverage so the MetaTrader terminal will proceed to close trades* as long as the margin level is below 50%.

*MetaTrader will start closing the trade that is incurring the greatest loss.

It is advisable that you check your trading account before 20:00 GMT on August 3rd and – if the margin remains close to 50% – either proceed to deposit more capital to avoid a stop-out or close some trades to free a bit of margin.

Also, be very careful if you are hedging, since the closing of one of the trades can trigger a domino effect that could *lead to* the closing of the rest.

In our example, and since the margin level is 27%, the terminal will automatically close 1 lot to bring the margin level above 50% so the new position would reflect the following:

  • 0.1 lot EURUSD
  • Balance => € 905.17
  • Margin => € 333.35
  • Margin level => 268.72.%

For your information, Darwinex will restart its server at approximatelly 20:00 GMT on August 3rd.

Is there any way to keep the level of leverage intact?

The imminent changes announced by the European ESMA Regulator imply that depending on the financial assets in which you trade, your maximum allowed leverage will range between 30:1 and 2:1 as long as you remain a Retail Trader.

However, if you meet 2 of the following 3 requirements, you are eligible to request to be categorised as a Professional Trader so you can keep your leverage level intact.

Requirements to become a professional trader:

  • You must have carried out significantly large transactions, in the relevant market, on average 10 per quarter over the previous four quarters.
  • The size of your financial instrument portfolio, including cash deposits and financial assets, must exceed 500,000 EUR. This might include, but is not limited to, saving accounts, options, shares portfolios, equities and investment in funds.
  • You currently work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.

Do you want to be categorised as a Professional Client?

To be categorised as a Professional Client, you must download these forms and send them to us duly signed at info@darwinex.com.

Our Compliance team will review your case and contact you.