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FCA will offer 30:1 margin leverage in government bonds

Jul 09, 2019

The Financial Conduct Authority (FCA) has recently published concluding statement with regards to caps on leverage, marketing restrictions, and mandatory risk warnings of contracts for difference (CFDs) and CFD-like options sold to retail clients.

The British regulator announced that its rules will be permanent. It is worth noting, that aforesaid regulations, that will be introduced next month, will be as substantial and important as the rules that ESMA introduced in August 2018. The FCA only mentioned one slight change to these rules, specifically the FCA would be changing leverage for one range of products.

According to ESMA’s rules, finance brokers were only allowed to provide 5:1 margin trading on government bonds. The FCA, meanwhile, indicated that 5:1 leverage limit was unreasonable given that the primary government bonds are less violated in compare to major FX pairs. Therefore, the FCA came to conclusion that the granted 30:1 leverage limit was justified and proportionate for CFDs referencing certain government bonds.

ESMA, in turn, said that"The proposed leverage limit would result in divergence from the leverage limits applied by product providers subject to other national measures". The European regulator, in this particular case, took a classic governmental position: "The other regulators should adopt measures that are as least as stringent as ESMA’s measures. Allowing higher leverage limits for a new indicated asset class would result in divergence within the Union and potential regulatory arbitrage".

The FCA in a response to this noted that it had used ESMA’s approach to assess whether providing higher leverage on government bonds would pose a risk to investors or not. The FCA also stated that it will continue to track the market and will review if it is necessary to amend its rules in case of evidence of increased losses to UK retail clients.

Regulation of CFD-like options became another zone of conflict between ESMA and the FCA. The FCA is planning to regulate products that are similar to CFDs, like turbo contracts, according to the same leverage and promoting-restrictions as normal CFDs. This was decided based on the FCA’s concerns that brokers would substitute their offering of regular CFDs with CFD-like products instead.

However, the FCA did state that the regulation will not apply to brokers from the EEA that are authorized to passport into the UK and offer CFD-like products.

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