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Ireland proposes restrictive measures for forex and CFD trading

Mar 06 2017
Jonathan Smith

After the Financial Conduct Authority capped leverage to 1;50 and banned trading bonuses in the UK, it is hardly a surprise that the Irish financial watchdog follows suit. In order to protect the interests of retail clients, the Central Bank of Ireland (CBI) is considering two options in relation to the distribution of CFDs: To ban the sale of CFDs to retail clients altogether, or to introduce enhanced investor protection measures.


In the consultation paper issued by CBI on Monday, interested parties are invited to make a stand until 29 May 2017 and if the Irish watchdog decides to implement the second option, the proposed investor protection measures are, as follows:


-          - Introducing a maximum leverage limit of 25:1;

-          - brokerages are required to provide negative balance protection to all retail customers and to prominently display a detailed standardised risk warning;

-          - prohibiting bonuses and other promotions.


In recent years, the CBI has undertaken a number of supervisory inspections of local brokerage firms offering CFDs, which have provided strong evidence of the elevated risks in relation to this product. A recent inspection of a sample of the largest CFD providers in Ireland found that in the two-year period (up to 31 December 2016), 74% of retail clients lost money (with an average loss of €2,700). 


One of the popular forex brokers to be afected by the restrictive measures planned by Irish regulator is AvaTrade (regulated by CBI in Ireland, among others).


Studies of client data conducted in other European countries have also found high levels of client losses.By comparison, in a review from 2014 the Autorité des Marchés Financiers (AMF) in France found that 89% of retail investors lost money trading CFDs. A 2016 review conducted by the Financial Conduct Authority (FCA) in the UK found that 80% of all clients lost money during one year when trading CFDs.


That is why UK’s FCA introduced a cap leverage to 1:25 for inexperienced traders (1:50 for those with experience) and prohibited any forms of trading bonuses or benefits aiming to promote risky CFD products. Recently, the Cypriot financial watchdog also tightened the control on forex and binary options brokers in line with ESMA’s guidelines.


TAGS: CBI  Ireland  regulation  ban of CFDs  leverage cap  negative balance protection 

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