Forex Trading — Can You Afford ESMA’s New Leverage Regulation?

Many retail traders are wondering if they can afford the new leverage provisions that the European Securities and Markets Authority (ESMA) has imposed on brokers in the EU and UK. Leverage for FX majors is 1:30, 1:20 for FX minors, and 1:2 for cryptocurrency CFDs! What does this translate into in terms of raw cash? We will crunch the numbers in this piece so you know exactly how this will affect you in monetary terms. After reading this article, you will be able to know if you should stick to your present brokerage, or simply use one of the brokerages listed on FX-List.

The Numbers

Let us assume you love trading EUR/USD, and you want to know what ESMA’s leverage cap entails in terms of margin (i.e. capital used for trading). Leverage of 1:30 for the EUR/USD equates to the use of 3.33% of your account capital as margin for executing this trade. A Standard Lot for the EUR/USD costs $100,000 to execute.

• 3.33% of 100,000 = $3,330.
• So if you want to trade a Standard Lot for the EUR/USD, it will cost you $3,330 in margin.
• To adhere to the 3% risk exposure rule, you need to have at least $111,000 in capital to trade Standard Lots on any FX majors.

What if you were to use a margin of 1:200 which can be found with some of the brokers on FX-List?

• Leverage of 1:200 equates to the use of 0.5% of capital as margin for a trade.
• A Standard Lot trade on EUR/USD costs $100,000 - Margin = 0.5% of 100,000 = $500
• So if you want to trade a Standard Lot for the EUR/USD on 1:200 leverage, it will cost you $500.
• The 3% risk exposure rule means that you only need at least $16,700 as capital to trade Standard Lots on FX majors.

Take a look at the difference in margin required to execute a Standard Lot, trading on under the new ESMA conditions, and trading without these conditions. This is an extra cost of $2,830 as margin, simply to execute a Standard Lot trade on an asset with the lowest spreads in the market. You will also need nearly 10 times the account capital to maintain risk management on an ESMA-compliant account.

Let us perform the same calculation for an FX minor, where leverage has been reduced even further to 1:20.

• Leverage of 1:20 equates to the use of 5% of capital as margin for a trade.
• A Standard Lot trade on EUR/GBP costs $100,000
• Margin = 5% of 100,000 = $5000
• So if you want to trade a Standard Lot for the EUR/GBP on 1:20 leverage, it will cost you $5000.
• You would need at least $166,670 as account capital to maintain the 3% exposure rule.

You can see that it will cost 10 times more to execute a trade on an FX minor with an EU broker, than it would on a broker outside the EU offering a leverage of 1:200. This is a lot of money, especially for many retail traders that do not have a lot of capital available to them. This explains why some notable brokers have kicked against ESMA’s new regulations, claiming that it will simply drive away a lot of their clientele from the FX market.

You can see clearly that ESMA’s new regulations have put under-capitalized traders in a bind. But there is some hope on the horizon. The forex and cryptocurrency brokers listed on FX-List have offshore locations that can allow traders to use the old leverages that they have been used to, ensuring that they are not locked out of the market.

If you can afford the new margin requirements imposed by ESMA, well and good. But if you cannot, you still have options available to you.