New ESMA Rules & Brokers Outside EU

By Tom Hougaard

24th July 2018

A guide to the new ESMA rules and what your options are.

On the 1st August 2018, trading for the retail trader will change dramatically. On this date the new ESMA rules will come into force.

There are 4 significant issues you should know:

  1. Leverage for MAJOR stock indices will be reduced to 20:1.
  2. Leverage for MAJOR currency pairs will be reduced to 30:1.
  3. New margin close-out rules will come into effect.
  4. All accounts will be protected against negative balances.

How bad will it be?

How bad will the leverage restriction be? It will be something that everyone will notice. Take for example a typical bet in the German Dax index at say £10 a point.

OLD RULES: Margin for £10 DAX trade = £650

NEW RULES: Margin for £10 DAX trade = £6,500

From £650 to £6,500 will be felt by everyone. Most traders will have to severely reduce their trading size, maybe to the point where trading becomes meaningless. A typical account deposit for a client is about £1,500. That would entitle you to trade about £2 a point.

Are there alternatives?

Are there alternatives available? Yes. There are 3 alternatives.

  1. Apply to change your “trader status” to professional trader.
  2. Deposit more money on your trading account.
  3. Find a reliable broker outside of the EU so you can continue to enjoy 200:1 margin on forex and stock indices and commodities.

Apply for professional status

You can apply to your broker to change your status from “retail trader” to “professional trader”. If the broker can help you, they will. It will be in their interest too. If your status is changed to professional, then you don’t have to worry about the margin restrictions anymore.

However, it might not be so easy to get approved to “professional” status by your broker. You will need to satisfy at least 2 out of the following 3 criteria:

  1. You need to have placed 10 trades in each quarter in the last 4 quarters, in “significant” size. I have spoken to 2 CEO’s of prominent spread betting companies, and they are still wondering what is meant by “significant”.Please do not worry about it. If you are a regular trader, you will be fine.
  2. You need to have €500,000 in liquid assets.
  3. You need to have worked in the trading industry for at least 12 months and be familiar with trading of CFDs.

You can probably easily fulfil point number 1. You probably already have traded more than 10 times in the last 3 months.

However, do you have €500,000 lying around – which is about £440,000? The average savings in England is £26,000 per person. Not many have €500k lying around.

Have you worked in the industry for at least 12 months? Not many can fulfil point number 2 and 3.

So, what do you do if you don’t satisfy the criteria for changing your status to professional? Well, either you accept your lot and get on with it, or you deposit more money on your trading account.

There is a third solution. You can consider opening a trading account with a broker outside the European Union. It is legal to do so, but you need to consider your choice of broker carefully.

Brokers outside EU

If you decide to look for a broker outside the EU, you need to be aware of a few things.

  1. You may not receive the same kind of protection that you enjoy inside the EU.
  2. There are many countries around the world where they don’t even have something as basic as an “Ombudsman” in case you have a dispute with your broker.

I have had trading accounts with other brokers outside of the EU for many years. It is not as dangerous as you may think. The world is rapidly becoming a small place. I have a futures trading account with a broker in Chicago. That has never caused me any headaches.

Having said that, as I am writing this to guide you to a solution that suits you, I will be quick to add that my research has uncovered many areas where I would certainly not be opening a trading account.

For example, a colleague of mine in the industry has recommended Trade View Markets. I consider this an ill-conceived choice. The broker is based on the Cayman Islands, and is regulated by the Cayman Island Monetary Authority.

The Cayman Island banks are not protected and insured by the CIMA, and thus does not offer a guarantee on their bank deposits. Additionally, there is no Ombudsman on the Cayman Islands, so if you have a dispute with your broker, you don’t have much legal support to fight your claim. I probably would be ok with an established broker setting up an off-shore entity. Say ETX Capital set up somewhere outside the UK, I would not have doubts about trading through such an entity, considering their name and reputation in UK and Europe.

The advantage we enjoy by having an account with an EU broker is that our deposits are protected. This level of private investor protection is not replicated elsewhere. If you open a brokerage account in the British Virgin Islands or Cayman Islands or Russia or Belize, you have no protection whatsoever. If that broker goes bust, you have lost your money. If their bank goes bust, you have lost your money.

There is no Ombudsman or any kind of retail protection mechanism in these off-shore areas, so if you decide to open an account with say MadForex.com, who is “based” in Belize, just be aware of these things.

Australia

Australia has everything that I need to feel comfortable sending my money abroad. Australia doesn’t feel like a third world country nor does it have the stigma of an off-shore tax haven.

The banking system in Australia is solid, and the 4 major banks in Australia are all in the top 50 of global banks, measured by assets. As you can see from my Google search, the Australian government has a $250,000 (Australian dollars) guarantee on bank deposits. That is about £147,000 or about €167,000.

Australia also has an Ombudsman, so if you have an issue with your broker and you need to launch an official complaint, you will have someone to look at your case. As I said earlier, this is not the case with any of the off-shore islands I looked at.

Conundrum: ASIC & FCA/CYSEC

I identified a handful of brokers in Australia, which I thought were suitable for this article. One of the criteria I had for opening an account was that I did not want an MT4 account. MT4 brokers are a dime a dozen, and I am not a fan. I narrowed my search down to 5 brokers: IG Markets, CMC Markets, Plus 500, Pepperstone and TD365.

I started off with TD365 on an recommendation from a friend. He liked the fact they had tight fixed spreads. Very few brokers have fixed spreads. Most have variable spreads. I had no problem opening an account. It took a few minutes.

Then I went to open an account with IG Markets. IG Markets did something very peculiar. I contacted them in Australia, only to receive a message from IG in a different jurisdiction. I thought that was odd. They offered me to open an account in another jurisdiction, but it was not where I wanted it.

When I tried to open an account with CMC Markets, I was flat out refused. They argued I had to open an account with CMC in Europe. The same happened with Plus 500 and Pepperstone. My quest to open a handful accounts had dwindled down to being able to open just 1 account. Then I realised there is a conundrum with Australia.

If your broker is in Australia but also in Europe, then there is a problem. I did not know that. TD365 is only in Australia, but other brokers like IG Markets, CMC Markets, Plus500 and Pepperstone are also in London. I contacted these 4 other brokers, and I explained to them that I wanted to trade with them under Australian laws, and I was happy to accept that I was no longer protected under EU law.

CMC was very helpful. They wrote a very nice email to me saying that they were unable to let me trade under their Australian flag because I was resident in the EU. Because they too had an office in the EU, I had to come under the branch within the EU, and as such they could not offer me the leverage I was looking for.

I like the Pebberstone platform, and I thought Pepperstone was a “pure” Australian broker, but then I had the following conversation with them:

In other words, you can open an account with a broker in Australia, but if that broker also has an office within the Euro Zone, then they must treat you according to your residency, which means you come under ESMA rules, which means no attractive margin for you. At least that is what I have uncovered.

Pepperstone might be based in Australia, but they are ALSO based in the UK. Therefore, they have to place you under their European office.

Pure Australian brokers

By “pure” I mean they are only governed by ASIC, and therefore they can accept European clients if these clients find their own way to the brokerage. It is an interesting distinction. Australian companies can’t advertise in Europe, at least gauging from the information I found on the ASIC website. I started looking at other brokers in Australia. When you want a broker which is not an MT4 platform, you don’t have much choice.

I found other Australian brokers that are also “pure”. The problem I have with some of them is that they are predominately MT4 brokers. I am not a fan of MT4. Sure, TD365 have MT4 too, but their focus is on their Cloud platform.

IC Markets had a good selection of products as has Berndale Capital. Companies like IC Markets have MT4 and MT5 and also an ECN platform where you trade directly into the market. Their spread in indices are variable, which is an issue for me and their spread in the Dow is 2.8, which is too high. The problem I have with an ECN is that liquidity can be an issue in fast markets and my stop-loss can be subject to slippage.

Other brokers like Berndale Capital, Vantage FX are great looking brokers and websites, but they are all MT4 brokers, and it means variable spreads and it means you have to learn to love MT4, something I don’t.

One concern I had was sending money to Australia. I looked into the banking system there. Take TD365, for example, they bank with Westpac, which is ranked 47 on the global bank list – by assets – and 87 of the largest public companies in the world. So, I feel sending my funds there is a safe choice. I don’t know who IC or Berndale banks with, because I have not sent money there, but I doubt they would be using anything but a top-tier bank.

If you find a good Aussie broker, then please email me, and I will do a review of them. I suggest you do your own research, and consider the pro’s and con’s of sending money to Australia.

From spread trading to CFD trading

Another matter to consider is that you will perhaps go from trading “spread betting” to trading CFDs. It is not an enormous difference, but the difference is there, albeit subtle.

I have an account with a “base” currency. Your “base” is what you decide it to be, although the choices are dictated by the broker. I have my base in Danish Kroners, and TD365 was the only one that had that currency.

For people in the UK it would be natural to have a “base” in Sterling, but in principle a trader from say Germany could select to have his “base” in Euros, and a trader from Norway could select to have his “base” in Norwegian Kroners, and so forth.

The advantage of this is that you don’t have money sitting in a different currency to what you are paying for goods in your own country. Otherwise you will have a currency risk on your base currency.

Let’s take an example of a trader from England placing a trade in the Dow. He or she will execute the trade in “dollars per point” rather than what he is used to, which is in “pounds per point”. Once the trade is CLOSED, the broker will immediately “sweep” your US $ profit or loss into your “base” currency using the spot rate of that moment between your “base” and the currency you traded in.

TD365 Trading Ticket

Not all brokers treat customers fairly

Here it is worthwhile mentioning that not all brokers are alike. I have traded with CFD brokers that used some truly outrageous “sweep” rates. It meant that my losses swept back to my “base” were bigger than they should have been, and my profits were smaller than they should have been.

Be aware of that.

Conclusion

ESMA has implemented rules which they consider are for your benefit. If you strongly oppose these implementations, then there are ways you can maintain your old margin. There are advantages to the ESMA rulings, which you should consider, before you decide what to do. For example, you don’t have a Negative Balance Protection elsewhere in the world. I have written about the advantages of looking outside the EU, knowing full well that you and I are going to have to accept more risk by doing so. There are many advantages of an Australian broker:

Margins

Protection

Top Tier Bank

Spreads

1-point spread

FX Spreads

Application Process

No fuzz

There are disadvantages too:

CFD's

Negative Balance

I have been critical of ESMA, but I must concede that not all their initiatives are without merit. For example, they have banned binary betting outright. A big hurrah for that decision. Their Negative Balance Protection rule is another very good initiative.

The Negative Balance Protection rule means that a client cannot end up owing money to the broker. It does open up questions about moral hazard trading by clients ahead of ground-breaking news, but I suspect that is up to the broker to manage.

The conclusion is that there are options available to traders who want to trade with more leverage than the ESMA directive offers, but they would be wise to shop around and weigh the pros and cons of an account inside vs outside the EU.

If you have any questions, please do not hesitate to get in touch with me on tom@tradertom.com

Tom Hougaard

29 thoughts on “New ESMA Rules & Brokers Outside EU

    1. Hi Rosemary,

      if you email me on tom@tomhougaard.dk I will send you the instructions how to get on the private group.

      Yesterday was such a brilliant example of the strength of the App and my trading: I made a call to short Dow. I use a 100 point stop, which is way too much anyway. I know that, but I thought it was never going to get hit and I would have moved the stop down anyway at some point.

      I was plus 40, when the market turned. I got stopped out for minus 100, which really hurt. I realised that I must be one of many who were caught wrong-footed and I reversed long with a modest stop. I closed right at the closing bell for plus 175. The thing about Telegram is that I get no feedback. No one can reply to me, except if they write privately. But I imagine there were many happy faces that evening, or relieved faces.

      See you soon

      Tom

  1. Hi Tom,
    Good to hear from you again. I have always respected your seminars and professional views on life and trading.
    Due to the new rules, I have decided to move from day trading on Forex and Indices etc, and move towards investing in the world’s most profitable companies, via their shares…in the USA and UK so far, via The Share Centre in England.
    I think that many day traders will just cash in their live spread betting accounts and just use their practice accounts for fun.
    My choice gives me the thrill of trading/investing, and I can still use my chart knowledge and announcements to help me when to buy and sell.
    I am sure that if you moved into this area of trading/investing you would have many existing and new followers throughout the world.
    Best wishes,
    Geoffrey Salvage (London)

    1. Hi Geoffrey, thank you for your post. It is great to hear from you again.

      I have spent much time honing my craft and my abilities. I have no doubt that in time I will want to spend less time in front of the screen and more time on the beach. By then the option of longer term investing seems ideal. Have you made contact with my friend David Paul and his investing prowess? He does that with such flair and finesse.

      All the best

      Tom

    1. Hi Pat,
      I have an account with them. What I don’t like is that they are an MT4 company. I hate MT4. They also have an ECN, but with the size I trade, I am prone to get slippage, which is why I prefer that a broker provides liquidity to my size. I hope that helps and answers your question.

  2. if i did sign up to trade direct365 is best to bet with australian dollers also what would you say was the best trading company thanks pat

    1. I would set up a base currency that suits you, in your case its Sterling. Your trades will always be in the currency of the product, but profit or loss gets swept back immediately to your base currency.

  3. Hi Tom,thanks for your helpful article about ESMA.

    I’ve been looking at an Oz company called FP Markets – do you know anything about them?

    Best wishes

    1. ITS an ECN, meaning you are trading into the real market. I prefer say TD365 where I can get broker liquidity. They also have bonus structure, which others dont. It means they reward your loyalty. It makes sense economically.

  4. Good article Tom.

    I contacted my broker and applied for professional status on the grounds that:

    a) I spent several years working in the City, on equity funding systems, risk calculation & options.

    b) I have made over 600 CFD trades in the previous 4 quarters.

    Nevertheless, I have just been refused professional status.

  5. Tom, been a long time since we met up. For indices and commodities I have been trading with US futures brokers for over 15 years. Day trading margins are low ($500 / contract), slippage is low, spread is 1tick, liquidity is high, money transfer is fast (UK/ US only takes minutes nowadays) and the markets are tightly regulated.
    Was with PFG when it went bust due to fraud by CEO, he was soon tried and sentenced to 70 yeas in jail. As a foreign resident I received preferential treatment and eventually received all my funds back.
    Currently with TransAct and find customer service to be excellent.
    They or subsidiary Infinity will probably open an account with $3000.
    Best wishes

    1. Hi Mike,

      there are many who dont want to pay exchange fees or trade in exchange designated lot sizes. For FTSE it £10 a point, so trading with a CFD provider makes you the master of your own trading size.

      Good to hear from you Mike.

      Best wishes

      Tom

    1. Not sure about this. I applied for a UK IG CFD account, but was told I’d have to apply to IG in France as I’m in France.

      1. I understand, but I believe there are circumstances surrounding French nationals. Maybe I am misinformed, but I thought there was a ban on marketing. Anyway, why would you want to apply for an account with IG in the UK. They are all governed by ESMA.

        1. Tom this was while before ESMA… just wanted a UK, GBP based account. Anyway I have one with another UK broker.

          ESMA changes are not really a game changer for me as I mainly trade stocks & have sufficient funds in the account, but curious to know how others got on getting pro status…

  6. Hi Tom,

    Could you send me instructions re private group?

    Talking about using an Aus broker, presumably one can opt to have Australian dollar as your “base” currency. It would depend how you felt about the long-term prospects of the Aussie versus any other base currency, would it not?

    1. No you dont have to use AUD as your base. If you read the article, it says “you select the base that suits you”. For me that would be Danish Kroners or Sterling perhaps. Perhaps for you it is USD or Euros. The point is you have free choice on what your base will be.

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