New ESMA Regulation

In March, the European Securities and Markets Authority (ESMA) announced having agreed on a range of measures intended to harmonise EU-wide regulation and to provide better protection to retail clients trading leveraged products, like CFDs.
The new measures will take effect from 30 July 2018

Read the full ESMA statement here

Overview of measures

  • Leverage limits on new positions
  • Introduction of maintenance margin: stop out as soon as the client does not meet maintenance margin requirement.
  • Negative balance protection limiting client losses
  • Use of collateral for margin trading
  • Prohibition on benefits used to incentivise trading
  • Standardised warning statement of the risks involved across promotional material

Measures in detail 

Leverage caps

Leverage limits apply on opening a new position and vary according to the volatility of the underlying asset. Initial margin requirements will increase on CFD and FX products, meaning the amount of margin collateral required to open a new position will be higher.

Maintenance margin will be introduced and represents the minimum amount of margin collateral that must be held on account to maintain an open position. Maintenance margin will be used to calculate the margin utilisation.

Please note that from 30 July, the new ESMA initial margin rates will apply on the entire margin portfolio when opening a new position, and the new maintenance margin rates will also apply on the entire margin portfolio, including all existing open positions.

As an example, the initial margin requirement on non-major FX pairs will go from our current 2% margin rate (50:1 leverage) to 5% (20:1).

Current initial marginInitial margin
from 
30 July
Maintenance margin
from 
30 JULY
FX (Majors)1.5%3.33%1.66%
FX (Minors2.0%5.0%2.5%
Index (Majors)2.5%5.0%2.5%
Index (Minors)3.0%10.0%5.0%
Gold3.0%5.0%2.5%
Commodity2.0%10.0%5.0%
Equity10.0%20.0%10.0%

Margin close out

The margin rate required to maintain an open position is referred to as maintenance margin. Maintenance margin is used to calculate the margin utilisation.

If your account breaches 100% utilisation, then automatic margin close–out will occur, meaning that orders to close positions will be placed and existing orders will be cancelled.

Change in margin methodology

If you are holding both a long and short position in the same instrument that will not net at end–of–day, the margin will now be calculated on the largest leg.

In addition, intraday margin on CFDs will no longer be available

Negative balance protection

Providers must introduce negative balance protection on a per-account basis. This is designed to provide an overall guaranteed limit on potential losses incurred by retail clients. 

Use of collateral for margin trading

Retail clients will no longer be able to use a percentage of securities (such as stock holdings) as collateral for margin trading activities. 

Restriction on incentives

Restrictions will be placed on promotions offering excessive bonuses or other incentives to attract and encourage retail investors to invest in FX/CFDs.

Harmonised Risk Warning with firm-specific performance

A standardised format for risk warnings will be introduced, where firms will have to include information on the amount of leveraged trades which resulted in positive outcomes for their clients. 

Re-categorising as professional

These measures only apply to retail clients. Professional clients, or those who successfully apply to re-categorise as such, will not be impacted.

Saxo’s Position

Saxo has always been an advocate of responsible trading and we support the measure set forth by ESMA.

KF

At Saxo, we have been expecting these developments for some time. We made a clear strategic decision not to compete on high leverage. Saxo believes that consistent, harmonised regulation at a European level will be positive for clients and the industry as a whole.

Kim Fournais – Co-Founder & CEO, Saxo Bank


Frequently asked Questions

Saxo will continue to offer retail clients with one multi-asset account.

To create a buffer between a client's trading capacity and margin close-out level, which ESMA has standardised, we will introduce an initial margin requirement in addition to the maintenance margin requirement. This means that we will move from having one margin requirement to two margin requirements - initial margin and maintenance margin.

  1. Initial margin: a pre-trade margin check on order placement, i.e. on opening a new position there must be sufficient cash or approved margin collateral available on account to meet the initial margin requirement for the entire margin portfolio. The same check also applies to cash withdrawals to ensure that a client request to withdraw cash from their account will not lead them to being in breach of the initial margin requirement.
  2. Maintenance margin: a continuous margin check, i.e. the minimum amount of cash or approved margin collateral that must be maintained on account to hold an open position(s). Maintenance margin is used to calculate the margin utilisation, and a close out will occur as soon as the client does not meet the maintenance margin requirement.
ProductCurrent Saxo minimum margin requirement
(equivalent to maintenance margin)
Major FX1.50% (e.g. EUR)
Non-Major FX2.00% (e.g. AUD)
Major Index2.50% (e.g. US500)
Non-Major Index3.00% (e.g. NETH25)
Gold3.00% (e.g. XAU)
CommodityVaries:
6.00% (e.g. XAG)
8.00% (e.g., HEATINGOIL)
4.00% (e.g., COPPERUS)
Individual Equities
(Rated 1 that are part of a major Index)
10.00% (e.g. AAPL)

 

New ESMA minimum margin requirement

InitialMaintenance
3.33% (30:1)1.66%
5.00% (20:1)2.50%
5.00% (20:1)2.50%
10.00% (10:1)5.00%
5.00% (20:1)2.50%
One rate:10.00% (10:1)5.00%
20.00% (5:1)10.00%

Trading example:

You deposit EUR 10,000 in your account. You believe that the Euro (EUR) is going to strengthen against the U.S. Dollar (USD) and want to take advantage of this move higher. You therefore decide to buy 100,000 EURUSD. You hold no other open position(s).

Initial margin requirement = 100,000 x 3.33% = EUR 3,330

Maintenance margin requirement = 100,000 x 1.66% = EUR 1,660

Margin utilisation (at the time of the trade) = 16.6% (EUR 1,660/EUR 10,000)

Retail clients will be required to meet the maintenance margin requirements for an FX/CFD position(s) opened prior to 30 July 2018.

Since we will provide one multi-asset account where margin requirements differ between instruments and products that are in-scope and out-of-scope of the ESMA measures and may also be higher in some cases than the initial minimum margin requirements specified by ESMA, automatic margin close-out will occur at 100% (maintenance) margin utilisation.

For example, to continue the above trading example:

You deposit EUR 10,000 in your account. You believe that the Euro (EUR) is going to strengthen against the U.S. Dollar (USD) and want to take advantage of this move higher. You therefore decide to buy 100,000 EURUSD. You hold no other open position(s).

Initial margin requirement = 100,000 x 3.33% = EUR 3,330

Maintenance margin requirement = 100,000 x 1.66% = EUR 1,660

Margin utilisation (at the time of the trade) = 16.6% (EUR 1,660/EUR 10,000)

Later due to market movements there is an unrealised loss on your account of EUR 8,340.

Margin utilisation = 100.0% (EUR 1,660/ (EUR 10,000 – EUR 8,340))

As a result, your margin is fully utilised and therefore you have no capacity to enter into further transactions (except to close out your open position(s)). You will be in breach of margin requirements and, to comply with the margin close-out rule, we shall seek to immediately terminate, cancel and close-out all or part of any outstanding position(s), as well as cancel any open orders.