CFD Regulations in Europe in 2021
What are CFDs?
A contract for difference is an offshoot product that allows a purchaser to predict the value change of an underlying asset without owning the asset. Specifically, any profits or losses are calculated by the asset’s value movement between trade entry and exit. Traders can trade on either increases or decreases in value, depending on their predictions from the asset's underlying value at contract expiry.
CFDs were first used by institutional traders and hedge fund managers in the united kingdom to hedge contact with stocks. To many investors, the CFD market most resembles the futures and options market, with a few key differences:
- No expiry date on contracts;
- Trading is carried out over-the-counter with CFD brokers or market makers;
- The contract is normally one-to-one with the underlying instrument;
- Low entry threshold, with small contract sizes as little as just one share;
- Wide number of underlying instruments available because of ease of creating new instruments, with no exchange or jurisdictional boundaries;
- Not available to residents of america or Hong Kong.
CFDs were brought to retail traders in the late 90s. Their features made them quickly popular, which was amplified by innovations in trading technology that allowed traders to determine live prices and conduct transactions on the internet and instantly.
Worldwide expansion continues to be rapid since 2002, and CFD online brokers like capex.com, for instance, are now available online to traders from many countries including Spain, UK, Italy and Germany Because of regulations, CFD trading isn't permitted in many countries such as the United States & Hong Kong.
Along with the proliferation of new brokers, this explosion of CFD trading around the world have managed to make a huge traders users list for these services. This has resulted in increased scrutiny and regulation by authorities. Regulatory bodies have recognized the need for consumer protection and responded by creating specific regulations and imposing restrictions on brokers around the world and specially in Europe.
CFD Regulation in Europe
Most CFD brokers who be employed in Europe are regulated by The Cyprus Filing . Brokers who operate in the UK are also regulated by The Financial Conduct Authority in the uk.
Regulations imposed by these regulatory our body is mainly targeted at increasing traders awareness and data, lowering the high-risk nature of the trading activity and protecting traders funds and privacy.
Some restrictions imposed through the CYSEC and also the FCA with regards to retail traders include:
- Strict leverage limits per account
- A standardized margin close-out per account
- A negative balance protection per account – preventing retail clients from losing a lot more than the funds within their trading account
- Prohibition of cash or other inducements that encourage retail trading
- A standardized risk warning informing potential or existing clients of the risks active in the trading activity and presenting the proportion of the broker’s retail client accounts who are suffering losses.
In addition CFD brokers must meet strict capital and fiscal requirements, work with top-tier banking institutions and keep their client funds in separate accounts.
As CFD trading continues to expand, increased regulations are likely to appear offering increased protection to traders, promoting a good trading environment and much more confidence in the market.
