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.

Read this next

Market News

Stock Market Analysis: Is NVDA Losing Its Leadership?

Since the beginning of the week, the S&P 500 Index (US500) has seen a modest increase of about 0.58%, whereas NVDA’s share price has experienced a decline of approximately 3.8%. This recent divergence raises concerns among Nvidia stock investors — could it signify a loss of NVDA’s market leadership?

Industry News

ESG: Australian regulator wins first greenwashing court case against Vanguard

Vanguard admitted that a notable portion of the securities within both the Index and the Fund did not undergo the promised ESG scrutiny.

Fintech, Uncategorized

BitMEX integrates HALO from Solidus Labs for cross-market surveillance

““The recent approval of the Spot Bitcoin ETF has piqued the market’s interest. As a result of price volatility, the trading volumes for crypto derivatives have gone up substantially. HALO, with its advanced technology and crypto-native detection architecture, will enable BitMEX to smoothly and safely scale trade surveillance across its increased trading volumes and provide the necessary safeguards for new product launches.”

Reviews

IUX Broker Review

IUX, recently rebranded from IUX Markets, stands as a multi-asset Forex broker recognized for its regulatory compliance across various jurisdictions.

Industry News

Horizon Software rebrands to Horizon Trading Solutions

“Horizon Trading Solutions has seen accelerated global growth over the past year to meet the rising demand for our trading solutions and built-for-purpose technology offering. The choice to rebrand represents a key part of this development, while maintaining our heritage and history in the industry.”

Market News

USDJPY has surged to levels last witnessed in 2022. Should we consider opening a short position?

The recent resurgence of the US dollar has propelled USD/JPY to new heights, touching levels not seen since 2022. This surge comes against the backdrop of stable short-term yields and ongoing economic data that fails to signal a significant slowdown, prompting questions about the extent of current monetary easing measures.

Digital Assets

DED Trends on Twitter After Memecoin Snapshot Announcement

Polkadot-backed community coin #DED, made it to the trending charts on X, demonstrating community’s engagement and interest behind the memecoin. 

Digital Assets

BlockDAG Presale Nears $10 Million Amid Toncoin’s Momentum, Green Bitcoin’s Presale, and the Rise of Other Top Cryptos

This article will examine three top trending topics: Toncoin’s potential, Green Bitcoin’s innovative presale, and BlockDAG’s sustainable mining approach. These cryptocurrencies take centre stage for their uniqueness and innovation.

Digital Assets

Coinbase scores minor victory vs SEC, but lawsuit to proceed

A federal judge in Manhattan, U.S. District Judge Katherine Polk Failla, ruled on Wednesday that the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Coinbase can largely proceed.

<