In a report by the FCA late last year on the 6th of December, they had proposed several changes to Forex market regulations. The FCA was not alone in this, as several other financial regulators had similar proposals. CySEC also had some changes in mind, which was troubling coming from the most popular Forex market regulator.
Anyway, the FCA report made it seem like the proposals would come into effect soon, but they have not yet been enacted. The first half of 2017 is gone and there have still been no changes, but the latest report shows that they may not even come into effect this year. Following the issue of the report last year, the FCA allowed three months’ discussions with the brokers to receive feedback.
How did the markets receive the news?
By the March 7th deadline, the FCA had received more than 4,000 formal responses to the proposed changes. Many of these came from major Forex brokers licensed and regulated by the FCA such as IG Markets, Plus500, CMC Markets, etc. Some of these responses were complex, sometimes 100-page long proposed amendments. A lot of traders would have been affected too by the new Forex market regulations, so you can assume there were plenty of those too.
In the December report, there was no clear date on when the proposed Forex market regulation changes would come into place, but the 3-month period of responses provided a hint. Most experts believed that some, if not all, changes would be implemented in late April. Now, with the huge number of responses, it seemed unlikely, possibly pushing the deadline to May.
Besides the responses sent to the FCA, the institution also had secret meetings with some senior representatives with London-based Forex brokers. In order to get the general feeling of the market, FCA officials would meet with individual brokers’ representatives. Around February, though, there was a meeting with several representatives in the same room.
The point of these meetings was to, of course, discuss whether the proposals were adequate. On one side, the FCA felt that there was the potential for abuse in the Forex industry where more than 80% of traders lose money. It is the FCA’s contention that a lack of strict Forex market regulations is allowing inexperienced traders to engage in the risky trading behavior. For example, through the use of high leverage. On the other hand, it is exactly these kinds of provisions that have made the Forex market so enticing to individual traders. Taking them away could turn off many potential clients.
However, there’s another school of though that isn’t mentioned enough – perhaps there are some brokers who favor the proposed Forex market regulations. When you look at the offerings by some of the biggest Forex brokers in the UK, an implementation of the rule changes would not affect them that much. If you look at the amount of leverage offered by the ‘big boys’ like IG Markets and CMC Markets, a leverage cap would not be too much of a dip. However, smaller Forex brokerages who offer leverage of up to 500:1 would certainly see a major change. It is possible and certainly plausible that the major brokerages may be in favor of the proposed Forex market regulations in order to squeeze out the competition. The provision of high leverage and bonuses had made it possible for smaller brokerage companies to stand out and attract clients.
What is going to happen now?
From the data we could gather, there still isn’t a consensus on which changes will be made to the Forex market regulations. what seems certain is that welcome and deposit bonuses are definitely out. The matter of leverage still remains in question, with some expecting a 100:1 leverage instead of the proposed 50:1. Otherwise, the FCA could adopt CySEC’s concept of a 50:1 leverage to beginners and the option to raise it upon request.
When may the Forex market regulations change?
The European Securities and Markets Authority (ESMA) has recently published a statement on their website regarding the same concerns as the FCA. They are also going to consider applying limits on client losses, perhaps in the form of negative balance protection. ESMA’s proposals could affect the entire EU Forex market, so the FCA has decided to lay off its own proposed changes until ESMA makes a final decision.
In ESMA’s statement, they suggest the new rules may only come into effect from the 3rd day of January, 2018. This is in accordance with Article 40 of Markets in Financial Instruments Regulation (MiFIR) – the same body of regulations that implemented MiFID II. Even though the Brexit vote passed, the talks have only began and the UK is still technically part of the EU. As such, we can expect any changes to Forex market regulations to wait until next year.