The European Union (EU) isn’t known for its intelligence, fairness, or competence to govern and it more than proved this when it changed financial regulations limiting the amount of leverage contract for differences (CFD) brokers could offer their clients.
A few years ago, there were no limits on forex trading leverage with some brokers offering up to 1,000 times leverage to clients who eagerly accepted these terms as the returns were often highly favorable. In August 2018, however, the EU imposed a 30X restriction on leverage to retail investors, damaging their ability to make great returns from forex trading and investing.
The regulations were implemented by the European Securities and Market Authority (ESMA). Any country that was within the EU at that time had to enforce them regardless of whether they thought they would make a positive or negative impact within their borders. It is how the EU works.
ESMA stated that the leverage restriction was to protect retail investors from overexposure to the market. It could be argued that there is some validity in this position, but a good counterargument is that leverage should be left in the hands of the individual to take responsibility for their decisions.
It also has to be said that as EU politics is dictated by lobbyists, you would have to be very naive not to rule out lobbying from big financial institutions to prompt the change in leverage limits. Larger brokers played the PR game and said they welcomed the decision but the market reaction was mixed.
So what do you do now if you are a retail investor and want to utilize forex trading leverage for higher returns and advantage when investing?
Become a Professional Trader
The solution is to become a professional trader as they have no limits on leverage. To become a professional trader is not an easy thing to do as you have to meet strict criteria. See below:
- Experience – You have to have worked in the financial sector in a professional capacity for at least a year and can demonstrate expertise and knowledge of the forex markets including services and risks.
- Portfolio – Your financial instrument portfolio exceeds €500,000 (at time of publication 1 euro = 1.3 CAD $) or equivalent in your local currency. Your portfolio can consist of your stock portfolio, cash savings, trading accounts, mutual funds, stock portfolio, stocks and shares ISA, and SIPP financial instruments. Non-tradable assets such as property, luxury cars, jewelry, and company pensions are not eligible.
- Trading Experience – Over the last four quarters you can prove that you have carried out at least 10 large market transactions over each quarter. This can be related to any asset.
To achieve professional status, you need to demonstrate at least two of the above.
To become a professional trader you need to apply for a professional trading account from your broker. There are disadvantages with professional trading accounts as you may lose some forms of investor protection, but you’ll enjoy higher leverage from day 1. In some circumstances, you may even qualify for lower fees. As you are an experienced forex trader, you’ll know the fees eat into your investment returns.
Final Thoughts Forex Trading Investing
When the EU imposed regulations on forex trading and investing, many retail investors were impacted negatively. Retail investors were no longer treated like adults, and were treated as if they needed protection from themselves. Through opening a professional trading account, ESMA at least for now is treating you like an adult. So become a pro trader and trade as you want to.
.
