Posts

Implementation of ESMA leverage: calendar and practical example

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.

IMPORTANT: please, be informed that MT4 and MT5 trading accounts will not be treated equally. We´ll provide you all the details in the following blogpost.

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 (only in MT4 accounts)

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%.

Important Note: The above implementation applies to all currency pairs ONLY. Indices and commodities are treated differently on MT4. All the trades in indices and commodities (existing and new ones) will be subject to the new ESMA leverage levels since 29 July 2018, triggering margin calls and stop-outs since Sunday (29 July 2018) when market opens. 

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.

¿What happens if I am trading with MT5?

If you are an MT5 trader, all the changes will come into effect throughout August 1st. From that day on, both margin calls and stop-outs will be triggered based on the new ESMA leverage.

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.

esma leverage

ESMA Leverage: Impact On Traders, Investors And DARWINs

The following post complements the article ESMA – Product Intervention published a few months ago in our blog and aims to provide all the details of the impending regulatory change, as well as the impact of ESMA leverage on traders, investors and DARWINs.

ESMA’s new regulations are just around the corner, so we suppose that, whether a trader or an investor, you’ll be wondering how this regulatory change will impact your trading/investing.


New ESMA Maximum Leverage (As Of August 1st)

Before going forward, let me remind you of the new maximum leverage that will be effective as of August 1 to help you grasp the impact of these new measures.

esma leverage impact on traders


How does ESMA affect DARWIN investors?

As we described in our previous article, the impact of ESMA regulations on investors is almost negligible*, since the new limit imposed by ESMA is above the level of leverage employed by DARWINs (DARWINs target VaR => 10% per month).

*A DARWIN’s volatility might decreases temporarily if its trader currently trades with a leverage much higher than the one required by the ESMA. However, it will NEVER occur that a DARWIN volatility rises due to ESMA regulation.


How does ESMA affect traders and their grades in the Investable Attributes?

Here we are faced with two possible cases.

  1. A trader who trades with less leverage than the maximum required by ESMA. If you are within the group of traders that do not exceed the maximum leverage imposed by ESMA, this change does not affect you at all.
  2. A trader that trades with leverage levels above the maximum required by ESMA. Should this be your case, you need to be aware that, from August 1st onwards, you will not be able to keep on trading with the same lot size as you’ve been doing up to now and this may affect your trading, as well as your Risk stability Investable Attribute (Rs) grade.

The greater the difference between your current leverage and ESMA’s leverage limit, the higher the impact on your Rs grade

What does the Rs Investable Attribute assess?

The Rs Attribute measures how stable the DARWIN’s underlying strategy’s risk is. The higher the score, the more stable the risk, hence: 1) the more proportional the DARWIN’s behaviour vs. its underlying strategy, and 2) the more likely the DARWIN will trade with a 10% VaR target risk.

Possible worsening in your Rs grade

If due to ESMA leverage, the VaR of your strategy decreases rapidly, the Rs grade will deteriorate temporarily until it finds a new area of support at your new risk level.

Example

Imagine that you were currently trading with a 60:1 leverage in forex majors and your monthly VaR were around 40%, that is, four times higher than your DARWIN.

As of August 1st, ESMA will only allow you a maximum leverage of 30:1 – half your current leverage-, so if you decide not to take any preventive measure before this date, the VaR of your strategy will decrease until it consolidates around 20% -half leverage = half VaR-.

If your VaR falls from 40% to 20% swiftly, your Rs grade will deteriorate for a few weeks until it finds its new “comfort zone” around 20%.

What happens if your Rs grade gets worse?

The first consequence will be a worsening in your D-Score grade. As a consequence, your DARWIN might lose attractiveness for both our investors and our proprietary investment algorithms.

How can you avoid a decline in your Rs / D-score grade?

To avoid a sudden decrease in your risk level and, in case you want to maintain the current lot size, we highly recommend that you increase the equity in your trading account based on the ratio between the ESMA leverage and your current leverage level.

Increase Equity = Current Leverage / ESMA Leverage

Continuing with the previous example, if you had a 2000 € account and were currently trading in majors with a 60:1 leverage and, should you like to continue trading with the same lot size, you’d have to double the equity of that account:

Equity increase: 60/30 = 2

Important: add capital gradually

It is very important that you start adding capital gradually as soon as possible to adapt your trading strategy during the weeks before the implementation of the new ESMA leverage.

To do this, we ask you to calculate the remaining days / weeks until August 1st and gradually add, until July 31st, the capital you have to deposit to prevent your grade in the Rs Attribute from deteriorating.

  • Market days / weeks until August 1st (for the sake of the example, imagine that today is Monday, July 2nd, 2018) => 22 days / four weeks and two days
  • Capital to add=> 2000 €

Amount of capital to transfer capital from your wallet to your MetaTrader account = total capital to deposit / days (or weeks)

  • Daily deposit: 2000/22 => 90.90 €
  • Weekly deposit => 2000/4 => 500 €*

*The more you get to fraction your deposits the smoother your VaR curve will decrease and the less it’ll affect your Rs grade.


With this article, we hope we’ve been able to dispel all your doubts that could have arisen about the new ESMA regulation.