IG, CMC and Plus500 slump as new European trading restrictions revealed

Retail investors will be banned from trading binary options and will face leverage limits on forex trades, the European financial watchdog has proposed, among a raft of new restrictions to be placed on CFD trading that saw brokers IG Group, CMC Markets and Plus500 all slump.

The European Securities and Markets Authority said it is considering measures to prohibit the marketing, distribution or sale to retail clients of binary options and set out proposals by which it might restrict the marketing, distribution and sale of CFDs, including rolling spot forex, to retail clients.

ESMA said proposed restrictions on CFDs it is reviewing includes setting leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset.

CFDs will also have a margin close-out rule, a negative balance protection to provide a guaranteed limit on client losses, a restriction on benefits incentivising trading and be marketed with a standardised risk warning.

Analysts said ESMA's proposals appeared to be more stringent than the previous suggested remedies from the UK's Financial Conduct Authority, while IG called the new leverage limits "disproportionate" and said the broader set of proposals would have an impact of between 5% and 10% on historic revenues.

ESMA will conduct a brief public consultation in January 2018 on this matter and said it was considering using intervention powers under article 40 of MiFIR, which led some analysts to consider the proposals were "a done deal".

The FCA said it "supports ESMA in its consideration of potential EU-wide product intervention" and said its domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients was ongoing. "Any permanent FCA policy measures would take in to account any prospective ESMA measures."

In order to harmonise regulation across the UK and Europe, the FCA is likely to announce the finalisation of a set of permanent measures similar to ESMA’s in the coming quarter, analysts at Investec said.

'DISPROPORTIONATE' RESTRICTIONS

IG Group, the UK's largest CFD and spread betting broker, felt the leverage restrictions are "disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage", which the company said "will push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes".

IG, which claims that more than half of its European clients revenue are eligible to be categorised as professional, said any financial impact from the implementation of the proposed new rules "is unlikely to be significant in the current financial year" and, while difficult to predict the impact on the business in subsequent financial years, it calculated that "any reduction in historic annual revenue... would have been less than 10% including the impact from lower binary revenue".

In the event that measures are implemented, IG said it would "flex marketing spend and resource allocation according to opportunity".

Rival CMC Markets, which generated £2.1m of revenues from binary products in the UK and Europe in the first half of its current financial year out of total net revenue of £84.6m, said binary prohibition will be "immaterial".

CMC also emphasised its focus on "higher value clients" said the proposed margin changes "are likely to have an impact on how clients trade, although at this stage it is not possible to quantify the impact".

Highlighting its ability to mitigate any impact from ESMA's changes, CMC also pointed to its growing geographic diversity with a Shanghai office opened in October, growing institutional business and a recently inked partnership with ANZ Bank to provide stockbroking services in Australia from next September.

AIM-listed Plus500 said it "has never offered binary options" and "has always provided balance protection to its customers across all its product offerings in all its markets", noting that it has a maintenance margin level already and last January removed its bonus schemes for the vast majority of its operations.

MORE STRINGENT THAN EXPECTED

Analysts at Numis Securities said the proposals "do not look good" and "appear more stringent than the previous FCA suggested remedies".

"A combination of a brief consultation in January and suggesting that they are considering using their intervention powers under article 40 of MiFIR mean that we believe that this is effectively a done deal and the FCA also seems to be endorsing the proposals," Numis said.

The more stringent remedies, combined with the likely pan-European impact, mean that forecasts for the industry will "almost certainly" be cut once the detail is known.

Numis feels IG is "by far the best placed to absorb the impact which we expect to be fatal for a number of their competitors", with IG having increasingly moving towards the proposed model and with the most clients that could be deemed professional and therefore exempt.

Investec added that, combined with cost mitigation in relation to marketing costs and resource allocation, would mean the future impact is "immaterial" for IG.

CMC though could see revenues fall 9% during 2019 and EPS fall 22%, Numis forecast, "but we expect profits could fall further when we get the full details".

Numis believes Plus500 is most exposed to these proposed regulatory changes "due to its very low quality customer base, higher exposure to Europe (c.80-90% of revenues) and tendency to offer trade inducements".