Forex Brokers and Regulatory Info for Euro Residents

From Volatility.RED
Revision as of 06:19, 11 August 2021 by Jack (talk | contribs)
Jump to navigationJump to search

Brokers for European Residents

IMPORTANT: European residents are encouraged to understand their home country's specific broker and regulatory landscape as there are many factors that will affect trading conditions and funds safety.

Europe has multiple layers of regulatory bodies working together; At the top, Europe-wide, there's strong consumer protections and strict product rules set by the ESMA and industry laws passed such as MiFID. Then locally, countries have local authority on regulating the operations and capital requirements of brokers in their region. This leads the following hierarchy of regulatory authority from the top down:

Pan Europe Regulations

ESMA - European Securities and Market Authority. The ESMA sets European-wide rules on trading that affect any regulated broker operation within Europe who deal to European residents. The main impact on Forex traders are the following ESMA set rules for European accounts:

Retail account leverage set as follows:

  • 30:1 for major currency pairs
  • 20:1 for non-major currency pairs, gold and major equity indices
  • 10:1 for commodities other than gold (platinum, silver, etc) and non-major equity indices
  • 5:1 for individual equities (stock CFDs)
  • 2:1 for Cryptocurrencies (crypto CFDs)

Note: Margin closeout is set at a 50% initial margin rate. That means if you are required to post $100 of initial margin to control a position, once your account equity drops below $50, the position will be liquidated.

  • Retail negative balance protection. This means you can only lose what you deposit/invest with the broker and not be held responsible for losses caused by your account beyond this amount. In the event of a shock market move (think black swan type events, unexpected events that cause the market to gap well beyond what anyone has seen before or would reasonably expect,) you would not be liable for losses caused by your positions that are greater than the capital you've invested. Any trader with 10+ years experience following the markets will tell you these events do happen and some are large enough to bankrupt brokers who had too much client exposure at the time.
  • Requirement for retail funds to be held in segregated bank accounts. A segregated bank account means the funds stay separate from the broker's operational accounts and comingling of funds cannot take place. This helps prevent misappropriation of funds by the broker (say, to cover operational expenses, or just outright fraud,) or the loss of funds if pooled with other accounts that suffer losses greater than their deposits. This might seem like a desired custodial and banking setup for client assets at any broker, but we still see unregulated brokers do this by mixing all funds together and dipping into client funds for short term operational expenses (which as you can imagine is quite risky for the broker to do as they would not have enough funds to cover client withdrawals if too many clients pulled out at once.)
  • Requirement for brokers to post high level stats on client account profitability at their brokerage. Usually done in the footer or risk disclaimer and presented as a percentage of accounts that are net profitable in a given time period.

The above protections mirror changes the FCA made for United Kingdom residents, and many major regulatory bodies around the world are shifting to similar rules. It's been generally accepted that such changes have helped curb client losses.

IMPORTANT: A non-retail, "professional", account option is available with some European brokers that open up far more leverage but do away with the client account protection features listed above. More info in a later section will be provided.


Country Specific Regulations

Drilling further down from ESMA and Euro-wide rules, local regulatory bodies (on the country level) have their own rules for how forex brokers can operate. In some cases, a country's regulatory body can also offer additional consumer protections, or dispute resolution services to their residents. The main concern of a local regulator is to make sure the broker's operations and company management is in compliance with their standards, so a lot of the differences are behind the scenes and might not be noticeable to a retail client.

Where a broker chooses to operate and where they get a regulatory license is also telling of the broker's strength and size. For example, it's a lot cheaper and easier for a broker to setup operations in Cyprus under CySEC, than say Germany under BaFin, so many new or smaller brokers will attract business in Europe through their Cyprus entity and thus will have much less capital requirements or operational / regulatory overhead to deal with vs other European jurisdictions. The balance between providing a stable trading and financial industry, and attracting businesses through competitive operational rules, is the challenge for local regulators in Europe.

IMPORTANT: Given the above paragraph, this indirectly highlights brokers who strive to be regulated in multiple countries within Europe to better serve European residents as a whole. This not only shows the broker's commitment to doing right by regulators, but by their clients, and speaks highly of the broker's stability and where their interests are in line with their clients. We will highlight one excellent example of such a broker in a later section of this page.

High Leverage Options for European Residents

Local European Brokers (Locally Regulated)

Offshore Brokers / Regulated or Registered Outside of Europe and Take European Residents