Gain Capital criticises European regulatory crackdown

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A proposed European crackdown on binary options which includes a leveraging limit on FX and CFD trading has been criticised by a major FX trading company.

Gain Capital Holdings Inc, which is based in New York, but which runs the UK financial spread betting firm City Index, along with the well-known international FOREX.com brands, issued a statement following last week’s announcement by the European Securities and Markets Authority (ESMA) that it was considering a number of measures to tighten up regulation of speculative financial products.

The potential changes could come into effect early next year after a short consultation period, and the proposals caused an immediate fall in the share price of a number of leading financial spread betting companies in the UK.

ESMA revealed that it was considering restricting the trade of CFDs on the retail market, along with a range of measures, including a limit on the losses that retail customers can incur, a restriction on trade incentives, standardized risk alerts and the enforcing of leverage limits on FX and CFD trading to 30x. It is the last of these measures that Gain has criticised.

In a statement, Gain warned that the proposed leverage limit could lead to unwanted and unintended consequences. Their particular concern appears to be the prospect of European retail customers being tempted to switch to offshore brokers outside of the European market. Many of these brokers are unregulated and do not adhere to the standards of consumer protection required of licensed and regulated operators such as City Index.

Gain’s statement revealed that less than a fifth of the group’s revenue was derived from UK and EU customers, so it would not be unduly affected by the proposed measures. It also made the point that major regulatory changes of this kind are more likely to benefit larger, well-established players in the market, since oversized leverage and bonuses for making deposits are two of the most important tools that smaller financial brokers use to establish themselves. The implication is therefore that a European crackdown on these aspects of the market could lead to a less competitive environment and a poorer deal for retail customers.

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