Copy Trading ESMA - The Effects of ESMA on Copy Trading Revealed

Filippo Last Updated: September 2018 4 min read

Are you a copy trading user?

Are you wondering what might happen to the various copy trading service in the face of the new ESMA regulation affecting Europe?

In this article we will see what are the effects of the new ESMA regulation on brokers offering copy trading services, to better understand how to best manage trading operations.

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    79.67% of retail CFD accounts lose money

    What is ESMA?

    ESMA is an independent EU authority that contributes to safeguarding the stability of the EU financial system, strengthening investor protection and promoting stable and orderly financial markets.

    What did ESMA declare?

    On December 18, 2017 ESMA published a statement which “… considers measures concerning:”

    – “Forbidding binary options trading”

    Binary options will be outlawed;

    – “Restrict the marketing of CFD trading”

    Limits will be placed on ads related to CFDs;

    – “Set limitations on financial leverages (between 30:1 and 5:1)”

    It will no longer be possible to have too many open trades at one time if there isn’t enough money (equity) on the account;

    – “Introducing a margin closing rule”

    Transactions will be closed earlier if the available margin becomes too low;

    – “Protection of negative balance to guarantee a limit to customer losses”

    Greater limits will be placed to avoid losing more than has been deposited;

    – “Restriction on benefits that incentivize trading”

    Offers with commercial bonuses will no longer be allowed;

    – “Standardized risk information”

    To ensure communication homogeneity.

    Does this apply to all traders?

    No. The new ESMA regulations apply to private traders (Retail) only. Professional traders will be exempted.

    To clarify, traders are categorized in three types: Retail, Professional and Institutional (qualified counter parties).

    It is worth noting that to qualify as a professional trader certain criteria must be met, including:

    • financial qualifications,
    • experience
    • activity size.

    If the status of professional trader is accepted, a certain number of standard protections reserved for the private customers will no longer be applied.

    New ESMA Regulations: Are the Non-Compliant Brokers at Risk?

    The period of experimental application of the new ESMA regulations has started on June 1st, 2018.

    From August 1st, 2018 the regulations have become effective.

    All brokers now have to comply with the new regulations.

    The new regulations were initially accepted with a little skepticism. Today, however, things seem to have taken a different path. In fact, the authority has revealed its objective, which is to improve the quality of the market and to safeguard the interests of investors.

    Basically, ESMA has defined a series of sensitive measures. These are aimed at protecting retail customers from unsustainable or unforeseen risks.

    To date, the results of researches show that ESMA has taken the right direction. Concerning the regulations, the following has been stated:

    “It is extremely encouraging to see that traders have responded well to the lower leverage limits set by ESMA, reducing risk and allowing to trade more successfully. There is a balance point to identify, to allow traders to benefit from an appropriate leverage, without eliminating their passion for CFD trading.”

    This is the comment following the analysis of the results carried out by Capital.com, by CEO Ivan Gowan, highlighting how, based on the data emerging from the study, “the levels theorized by ESMA are substantially correct.”

    In 2 months of experimental application traders had the possibility to choose how and where to set the limitations of the leverage.

    According to one study, the vast majority of traders chose those set by ESMA. Only the most prepared traders chose higher leverages.

    Most brokers have welcomed the challenge posed by ESMA. At the same time, some traders have been more reluctant.

    What Are the Changes Affecting Copy Trading Brokers?

    Brokers that offer Copy Trading services must comply with the new regulations as well.

    Basically the new leverage limits will be applied to both the trading operations carried out by the signal providers, and to those replicated on our accounts (automatically or manually).

    Exaggerating with the exposure could therefore lead to a preventive blocking of the account with which we are managing the traders portfolio.

    The changes described will not apply to positions already open. However, if you decide to change your open positions, the new margin requirements will apply to those transactions.

    Which Brokers Have Implemented the New Regulation?

    The best brokers who have implemented the ESMA regulations are almost all regulated and authorized.

    All European brokers have complied with the new rules, to offer their clients a transparent and safe trading environment, to gain their trust and try to increase the number of registrations.

    Starting from August 1st 2018, all the holders of a social trading account, or even a traditional trading account, are invited to visit their broker’s website to learn about the contractual changes introduced following the new European ESMA regulations. Also, you can see in our eToro Europe review how this broker comply with all this regulations.

    If you are approaching this world for the first time, we advise you to read some trading guides to be informed about the risks and profit opportunities.

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    62% of retail CFD accounts lose money


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