The forex market is continually changing. Every year, new regulations pop up to control a market that is experiencing robust growth, which could get out of control, if not regulated. Both 2017 and 2018 saw many financial regulatory bodies releasing new rules to regulate the operations of the forex market. Some of these rules placed many forex brokers in tricky positions, forcing them to adjust quickly in order to remain profitable.
Many of the regulations that came out in 2017 and early 2018 focused on bonuses and leverage offered by forex brokers.
Regulation on Bonuses
In late last year, the Cyprus Securities and Exchange Commission (CYSEC) hit the financial headlines after releasing a ban on bonuses. This came shortly after the same body had, in November, imposed a ban on cash rewards that are connected to trading. As an alternative to bonuses, CYSEC recommended that brokers should lower their spreads if they really had the interest of the clients at heart. According to the regulations, bonuses that are not directly tied to trading are a representation of the brokers’ attempt to solicit buyers.
Regulation on leverage
ESMA introduced new regulations in 2018 to:
- institute limits on leverage for different assets
- Do away with bonuses and binary options
- Ensure transparency from brokers
These regulations brought with them mixed reactions with some brokers arguing that they would affect profitability, especially in European accounts. However, some brokers felt that the rules could be an improvement towards turning Forex into an asset class. Forex experts argue that the new ESMA rules will be instrumental in helping brokers turn their attention to their clients.
Leverage limits for retail clients were presented in a number of tiers. The Contract for Differences on chief FX pairs was traded with 30:1. Minor currency pairs, on the other hand, were traded at 20:1. Brokers were allowed to give personal equities at 5:1 while cryptocurrencies were traded at 2:1.
As a result of these new regulations, brokers were required to present negative balance protection and close out margin positions every time the account hits 50% of the least required margins. The chairman of ESMA argued that these regulations were reached to ensure the protection of the retail investor. The EU views the employment of unrestricted leverage and binary options as products that usually result in negative returns.
General Forex Regulation Changes in 2018
Similar to 2017, the year 2018 also saw some significant regulation changes in the forex market. For instance, MiFIDII (Markets in Financial Instruments Directive) joined forces with other industrial dynamics to refurbish the way the forex market operates in 2018. This move saw the introduction of new regulated trading platforms and an attempt to encourage automation of services.
FX trading venues regulation changes
Members all over the buy and sell-side were forced to decide where they would obtain and provide forex liquidity. This was a welcome idea to some since it gave them an opportunity to enjoy increased transparency by trading on a regulated venue. However, other people complained that the regulations were responsible for higher costs. Experts predicted that the majority of the buy-side institutions would keep on trading in the same jurisdiction while some may consider moving their operations in order to avoid the new regulations.
Choice of derivatives
It is undeniable that the introduction of new trading venues will affect where forex operations in 2018 take place. However, trends in the kind of derivatives users settle for may remain unchanged. The features that have positioned traditional OTC FX instruments and exchange-traded FX will remain favorites of most forex enthusiasts despite the new regulation.
Transaction cost analysis
Additionally, in 2018, there was the acquisition of the advanced voluntary FX Global Code and new execution requirements that greatly affected trading workflows. Numerous firms are now under an obligation to come up with best execution policies with the buy-side being held responsible for rationalizing liquidity decisions. Forex institutions will be forced to rely on transaction cost-analysis tools and data to keep up with the new obligations.
Forex technology solutions
The new regulations are also in support of a push to shift to automation affecting all trading workflows. This move is made in the hopes that it will increase transparency in an industry that is shrouded in fraudulence. With extreme pressure in the market, many institutions have been elbowed into depending on technology solutions to ensure that they remain efficient when it comes to analyzing and distributing forex liquidity. These regulations necessitate the need for data and analytic tools to make and evaluate the effectiveness of trade decisions.
Other Major Regulation Changes
Other notable forex regulation changes in different countries in 2017 and 2018 are as follows:
Ireland
The country experienced some pretty interesting regulation changes in the forex market. The Central Bank of Ireland announced that it would be:
- Entirely banning the sale of CFDs to retail clients within Ireland
- Implementing improved measures to ensure the protection of the investor. This too included a restriction on leverage.
Spain
In its activity plan for 2017, the National Regulator in Spain indicated that they were to scrutinize high-risk products, for example, leveraged ones that are traded by retail clients.
United Kingdom
The FCA proposed:
- A ban on bonus payments made to retail clients
- Restriction of forex and CFD leverage to 50x
Germany
The BaFin called for negative balance protection.
Belgium
Belgium effected a total ban on leveraged trading.
France and Holland
The national forex regulations in both France and Holland issued a statement effecting the ban on leveraged trading.
Cyprus
In Cyprus, the Cyprus Securities and Exchange Commission issued a ban on bonus payments and restricted welcome leverage to 50x. More experienced traders were, however, allowed higher leverage.
Conclusion
Regulations can have unforeseen repercussions and may sometimes be controversial. However, most traders and brokers have learned to quickly adapt every time new rules come up to stay relevant and profitable in the forex market. On the other hand, regulations may help do away with some of the pains that have stuck with the forex market and give the industry an opportunity to grow and become more profitable for all participants.
