FCA quantifies impact of CFD offering restrictions on brokerage profits

Maria Nikolova

The profit reduction for firms offering CFDs to retail clients is c. £38.5 million and £55.3 million.

The UK Financial Conduct Authority (FCA) today published an impact assessment regarding the regulations that restrict the offering of contracts for difference (CFDs) to retail clients.

The rules, inter alia, limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset, envisage a close-out of a customer’s protection when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account, and provide protections that guarantee a client cannot lose more than the total funds in their trading account. The restrictions introduced by the FCA go further than ESMA’s by applying to a wider range of products by including CFD-like options, and limiting leverage for CFDs referencing certain government bonds to 30:1 (compared with 5:1 under ESMA’s measures).

As per the document made public today, the FCA assessed the impact of CFD leverage limits on firm’s profits by reviewing the earnings and revenue estimates from sell-side analysts for two UK based CFD firms before and after the implementation of ESMA’s temporary measures (these firms do not offer CFD-like options and are not impacted by those restrictions). The FCA used this information because it was the only publicly available information to assess expected impact on firms’ due to loss of profits.

The UK regulator believes that information from these firms is representative of the UK CFD market because they represent 43% of the UK CFD market based on client money. Moreover, the firms differ in their platforms, product offerings and business models, so that a range of products and business models is covered. However, the FCA recognises that this data may lead to an over-estimation because firms may offset declining profits by reducing costs, such as marketing costs and variable remuneration, and some firms are expanding to different jurisdictions unaffected by the measures.

The reduction in net income for these two firms for the financial years 2019 – 2021 is close to £17 million per year on average. This represents a 6.7% decline in net income (around 6% for the first firm and 10% for the second).

Business feedback also suggested that the FCA restrictions on CFD-like options will cause disruption to one firm’s business. Although the regulator requested this information, these firms did not provide an estimation of costs.

Since firms’ business models differ, scaling up this loss of net revenue for the whole market will not yield a precise estimate of CFD firms’ total loss of profit. In light of this, the FCA calculated lower and upper bounds for the estimates for the remaining CFD firms based on the expected decline in net income of 6% and 10% for these two firms. The corresponding reduction for all firms is therefore approximately £38.5 million and £55.3 million.

Scaling up the losses based on trading volumes to account for losses on CFD-like options leaves these figures unchanged because of the low retail trading volumes of CFD-like options.

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