GAIN Capital voices concerns over ESMA’s proposed leverage restrictions for CFDs
“Mandating excessively low leverage levels will have negative unintended consequences, including driving retail investors offshore to brokers that do not offer the level of investor protections present in strongly regulated markets”, says GAIN.
The number of online trading companies responding to the statement made by the European Securities and Markets Authority (ESMA) last week with regard to proposed restrictions for the offering of CFDs and binary options to retail clients continues to increase. The latest company to join the growing chorus is Gain Capital Holdings Inc (NYSE:GCAP).
In line with a stance voiced by IG Group earlier today about the negative effects that the planned restrictions on leverage on CFDs might have, GAIN Capital also expressed concern, based in part on experience operating in other markets which went through regulatory change, that “mandating excessively low leverage levels will have negative unintended consequences, including driving retail investors offshore to brokers that do not offer the level of investor protections present in strongly regulated markets”.
The broker noted that it advocates the adoption of leverage rules which strike an appropriate balance between providing additional protections to investors and other important considerations. GAIN also believes that there are other effective protective measures available to ESMA and the FCA, including requiring enhanced screening of potential clients to ensure that only those persons for whom the products are appropriate are able to trade leveraged derivatives.
In addition, GAIN has also pushed for the adoption of more stringent corporate substance and regulatory capital requirements for obtaining a license as a CFD broker in the European Union.
GAIN emphasized the importance of operating a broadly diversified business, which includes a retail FX/CFD business spanning eight regulatory jurisdictions, a US-based retail futures business and an institutional trading business, GTX. As a result of this diversification across business lines and geographies, less than 20% of GAIN’s total revenue came from retail customers in UK and EU in the three months ending September 30, 2017, GAIN explained.
GAIN does not expect the proposed changes to regulation, even if enacted unchanged, to have a material adverse effect on its overall financial results.
GAIN believes that new regulation tends to lead to industry consolidation, from which it is set to benefit. Let’s not forget that when the company published its third-quarter financial report it reiterated its push into strategic M&A and its plans to expand its product set and distribution channels to increase geographic reach and scale.
