FCA’s new CFD rules might be good news for brokers with agency model

Maria Nikolova

“The new rules will take us back to a time when the market had a rhythm and could be analysed”, says Naomi Ewart-Simcock, Head of Chinese desk at AFX Group.

Back in December 2016, the UK Financial Conduct Authority (FCA) published its proposals for new rules for firms selling ‘contract for difference’ (CFD) products to retail customers in order to improve standards across the sector and ensure consumers are adequately protected. FinanceFeeds keeps exploring the potential consequences of these changes for the industry.

Naomi Ewart-Simcock, Head of Chinese desk at AFX Group in London, has kindly agreed to share her perspective on the topic. Ms Ewart-Simcock is well known for her ability to provide incisive insight into complex topics concerning the Forex industry, especially the Chinese market and Chinese traders. You may recall her contribution to FinanceFeeds’ article about IBs and the prime brokerage choice in China. That is why it comes as little surprise that Ms Ewart-Simcock’s view on the impact of the new FCA rules on the industry is rather original.

She claims that the new rules are good news – at least for STP brokers.

  • Good news for STP brokers
Naomi Ewart-Simcock, Head of Chinese Desk, AFX Group

“The Financial Conduct Authority (FCA) proposed stricter rules for firms selling ‘contract for difference’ (CFD) products to retail customers. Among the new rules, the maximum leverage will be limited by the FCA to no more than 50:1, has sent shockwaves through the sector. However, it might be good news for the brokers with agency model, or those often called STP brokers”, says Ms Ewart-Simcock.

Her words are in tune with her stance expressed in an earlier interview with FinanceFeeds, when she noted the advantages of STP brokers by saying that “companies in Britain with STP-only licences that operate an agency model in terms of execution are ever more desirable”.

Regarding the new CFD rules outlined by the FCA, Ms Ewart-Simcock said “STP brokers openly welcome the changes since they will reduce the operational risks of their running model”.

  • The Black Swan

Concerning the pending leverage restrictions, Ms Ewart-Simcock reminded us of the January 2015 events.

“In January 2015, the black swan event rocked the FX industry exposing FXCM to negative client balances and sending Alpari UK to liquidation over night. Such a volatile event definitely comes with liquidity issues and the leverage offered by the brokers will further thin the liquidity next to zero. Ultimately the biggest victims will be the brokers themselves”, she said.

  • The advantages of new leverage restrictions

Commenting further on the proposed 50x leverage cap, Ms Ewart-Simcock noted the advantages of such restrictions.

“New rules will certainly reduce STP brokers exposure. 50:1 leverage is still high enough to ‘speculate’ the market instead of ‘invest in’ the market”, she said.

“In my opinion, new rules will not only tidy up the mess which was built up by ‘casino banking’, but will also take us back to a time when the market had a rhythm and could be analysed” – Naomi Ewart-Simcock, Head of Chinese desk, AFX Group.

  • Outlook

Commenting on the proposed rules, IG Group and CMC Markets have stressed they are working with regulators in response to the changes envisaged. Apparently, the industry is about to be reshaped.

Ms Ewart-Simcock struck an upbeat note for the future of the UK CFD industry.

“In summary, both STP brokers and the retail traders might end up hand in hand winning out under a healthier environment” – Naomi Ewart-Simcock, Head of Chinese desk, AFX Group.

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