ESMA – The ‘Pros’ and ‘Cons’


Following on from my previous post about the pan-European financial regulator  ESMA (Let’s Talk Leverage) proposals, its’ introduction and the reduction of leverage across the board for those categorised as ‘Retail’ traders, I thought I would highlight something of importance to you.  I have received several emails from the different brokers I use, asking if I would like to categorise myself as a Professional Trader, a title I would consider myself to be.  This would then allow me to trade with leverage up to the maximum those brokers offer (400 – 500 to 1 rather than 20 or 30:1 under the new ESMA rules).  However, to meet the new ESMA criteria of a so called ‘Professional Trader’ one has to meet 2 of the 3 of the following criteria:

  1. You need to have placed 10 trades in each quarter in the last 4 quarters, in “significant” size. (Not sure what ‘significant’ means?)
  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 may be able to meet 2 of the 3 criteria or be tempted to falsify your answers when asked these questions by your broker, but here is the Rub…………….!

Under the new ESMA Rules, as a Retail trader you will receive certain protections whereas those categorised as Professional traders will or ‘may’ not be protected.

As someone who experienced the Swiss National Bank debacle several years ago when one of the brokers I used went into Administration.  Though it took months, I did get my Trading Account money back through the Financial Services Compensation Scheme.

So here is the question:  Why would I want to be categorised as a ‘Professional Trader’ if there are no guarantees of protection on my Trading Capital, held by whichever broker, despite them being FCA Regulated.

If you want to know more about all this then I suggest you read Tom Hougaard’s (Trader Tom) Blog article on this topic, as it is well worth a read, and will no doubt be enlightening for you.  Once on his blog I suggest you also read his previous article on the new ESMA rules.  I hope this helps in some way to keep you and your hard earned money safe.

Top Trading Tip:  Before you place real money with a Broker and trade in the live markets make sure you know what your protections and guarantees are and that you are covered by the Financial Services Compensation Scheme in the UK or similar if you live and trade outside the UK.  OR at least you are aware of the Risks to your money if you decide to do otherwise.