ESMA & Trading Outside of the EU

SUNSEEKER

Established member
872 12
ARE BROKERS CREATING A DANGEROUS SITUATION WITH THE “PRO” STATUS?

Today I called the FCA. I wanted to hear with my own ears what the watchdog of the financial service industry in the United Kingdom had to say about brokers, which are converting their clients from “retail traders” to “professional traders”.

You can’t have missed these communications from your broker. Our brokers are keen to get you to consider becoming a “professional trader”, because it means you can maintain trading with 200:1 margin, rather than the boring 20:1 margin.

Why is the broker so keen on that? Otherwise he will lose revenue as your trading size will be significantly lower. It makes sense for all parties to seek to maintain the higher margin. As I pointed out in another article a few days ago, there is not much fun trading a pound a point, if you are used to trading 10 pounds a point.


NOT EASY TO BECOME PRO
Of course, it is not so easy to achieve the “pro” status. You need a sizable chunk of money, as well as being able to demonstrate that you have some trading experience.

I decided to speak to the highest power, so I placed a call with the FCA and I asked the following question:

“If a retail client is converted to “professional status”, is he or she still protected by the FSCS?”

Before I tell you their reply, let me enlighten you about retail traders and the FSCS.

FSCS stands for the Financial Services Compensation Scheme. It is a scheme that protects the ordinary man in the street against unexpected financial disasters, such as your bank or broker or insurance company going belly up.

Say you have £5,000 in a trading account with a CFD broker, and the company goes under – for whatever reason – you are going to be compensated for your monetary loss by the FSCS.

Sounds good, right?

You have other rights too, when you are a “retail trader”. You can complain to an Ombudsman, for example, if you have a dispute with your broker, and generally you will be favoured rather than the broker, should a dispute arise.

The professional trader though is not so lucky. He is unable to complain. I imagine many people are less worried about the ability to complain and are more concerned about whether their account balances are protected by the FSCS.

So, I asked the FCA, and they said: “Professional investors are likely to lose their ability to claim compensation with the FSCS, but you should really contact the FSCS directly.”

I hung up, thinking that was a vague answer from an institution that is meant to safeguard the public against malpractice of financial firms. What does “likely” mean. Will they or won’t they lose their account protection?

So, I called the FSCS. I can’t begin to tell you how utterly unprofessional that conversation was. I might as well have been trying to explain basic calculus to a new-born. “How do you spell CFD’s?” the lady asked me.

She told me to email the FSCS legal team with my question, which I have. I am still awaiting their reply.

As I was sitting trading anyway, and I had little else to do, I went online to a couple of brokers, who have these neat online chat facilities, where you can ask questions.


ASKING THE BROKERS
I spoke to Activ Trades, and asked them this question:
“I have a question regarding the new ESMA rules. If I become a pro client, am I still protected under the FSCS?”

The answer was so laconic, and so quick, I was startled. “Yes”. That was it.
I pressed a little harder. Here is the transcript of the conversation:

ME: are you sure? The FCA says no, but they referred me to FSCS
Activ Trades: As a professional client you receive the same protection as an individual client

So ACTIV TRADES says I receive the same protection as a retail client. That is simply not what I hear elsewhere. A “pro” client will not have the risk warnings. A pro client will not have the new ESMA rule of Negative Balance Protection. I guess

Active Trades were not told that, or maybe they misunderstood my question.
I didn’t think one broker should be the basis of my investigation, so I contacted the grandfather of the CFD industry: IG MARKETS .

I spoke to the IG customer service team, posing as a new client. I asked them the same question I had asked Activ Trades, and I was put on hold.

The voice came back and said that the credit team had advised him that nothing would change. I would still be protected even if I was a “pro”.

I explained what the FCA had said, and I asked to be put through to the credit team. The credit team explained a slightly different story.

The credit team of IG explained to me that the main difference between a “retail trader” and a “pro trader” is that the retail traders trading account deposit is placed in a “segregated” bank account. This means that a company like IG can not use the client’s funds for business purposes. Your cash just has to sit there, ring-fenced.

For he “pro” trader however, it is an entirely different proposition. His account is not segregated. His funds are used as collateral with prime brokers and to facilitate the general cash flow of the business.

The guy explained to me that some clients are professionals but still have segregated accounts, while other professionals do not have segregated accounts. The difference was often that the non-segregated accounts were big individual stock traders. Their funds were often used as collateral with the prime brokers.

BUT HERE IS THE REAL KICKER OF MY CONVERSATION WITH IG: IG does not have a LEGAL obligation to segregate the funds of professional traders. The credit team went to great lengths in explaining that as a matter of good business practise, they would segregate the accounts of “pro” traders, but they were not legally obliged to do so.

So, I asked the voice a simple question: so, IF you as a company were forced for liquidity or cash-flow reasons to use the account deposits of the professional traders, you could do so legally?

I never really got a yes or a no. I think he knew where this was headed. He might as well have said “hey, while all is well, your funds are safe with us, but if the **** ever hit the fan, we can legally do whatever we want, and there is nothing you can do about it”.

He went on to explain that professionals also lose the Negative Balance Protection, something that Activ Trades told me was entirely the same. As I said, maybe Activ Trades just misunderstood my question.

Talking of Activ Trade, they have the written on their website that as a professional client you will normally be eligible to make a claim against the FSCS,…..as long as your account with them is not your main trade or business.

Can you hear how contradicting this sounds? You are a “professional”, but it is not your main occupation. If someone said to you “I am a professional dentist, but it is not my main occupation. I am a car salesman”, would you not shake your head?

Anyway, moving on to ETX Capital, where I spoke to a really cool compliance lady who was not in the mood for platitudes and vague answers. Thank you ETX.

She said: “No, you are not protected. When you opt for the professional classification, you basically hand over the funds to the company, and if the company goes bust, you become a creditor, and you have no FSCS protection.

Short and sweet – and to the point. You become a creditor if you are a “pro” and your brokers becomes insolvent. There is no dear mamma FSCS for you, according to ETX Capital. Their story is very different to IG’s story and Activ Trades story.

The final phone call of the day was placed to Core Spreads. At this point my Dow position was moving, so I began to lose my enthusiasm for this self-appointed fact-finding crusade I had started, and was more interested in Donald’s comments about EU.

Core Spreads is a small but very ambitious brokerage company, run by a bunch of competent and thoroughly nice people. They went to great lengths to explain to me what was up and down of this whole business of “pro” and “retail”.

Look at their Terms and Conditions, because you will find their wording in all the other companies wordings too, and it just proves one thing: IF **** HAPPENS, and we get another “2015 Swiss Bank 20% move” or another “Flash Crash” or some other event that wrong-foots a bunch of traders and brokers in a bad enough way, you haven’t the slightest chance of recovering your funds.

Here is the legal wording, you need to know:

11.5 If you have been classified as a Professional Client or an Eligible Counterparty by us, we may agree, in accordance with the Applicable Rules and Regulations, that money we hold on your behalf may not be treated as client money and your money will not be held in accordance with the Client Money Rules. We will acquire full ownership of any sums which are not treated as client money for the purpose of securing or covering your present, future, actual, contingent or prospective obligations.

Such sums may not be segregated from money held in our own account and may be used by us for the purposes of our business. You will rank as a general creditor of our firm only in respect of this money in the unlikely event of our insolvency.

That is a lot of “may”.

I also contacted CMC, SPREADEX and Plus 500. I am aware of the length of my post, but you have let me entertain you with the responses I received from these companies:

CMC: “No, if you become Pro, you are not protected, but if it is something you want, we can look into it for you.”


SpreadEx: “No protection” – end of story.

Plus 500 was clearly uncomfortable with my questions. I was told after a good online chat that “Your query will undergo a thorough review by the responsible department, to give you more accurate answer. I am forwarding it now and you will be contacted through an e-mail shortly.” This was after the operator told me that the FOS and the FSCS was the same.


Here is my concern and I am not the only one sharing this concern, I can assure you of that:

1/ clients are being converted to “pro” and I doubt they understand the implications.

2/ FCA and ESMA will investigate it and as if this industry wasn’t in dire strait before, we will be if clients have been converted to professionals using wrong assumptions.

3/ How long do you think it will be before some of these new “pro” clients lose their funds, and they claim they were mis-sold and they didn’t know what they signed up to. As a friend of mine said: This is a PPI disaster in the making.

If you have any comments or questions, email me on tom@tomhougaard.dk

Good luck

Tom Hougaard
 

tomorton

Legendary member
7,157 931
Good piece of detective work Tom. Its shameful that the regulatory authorities made it necessary for you to dig so hard and so deep. Maybe they should take you on on a consultancy basis.

Meantime, if I wanted to go pro via my current SB firm, they stipulate I must be able to demonstrate I have at least £500k in a financial portfolio somewhere. The pro option with them is therefore a non-starter for me. However, especially having read your article, I am not sore that they at least are taking a conscientious line to actively discourage what some people are thinking or portraying as just a simple re-labelling exercise from private retail to pro.
 

SUNSEEKER

Established member
872 12
Hi tomorten,

that is an enormous amount of posts to your name, and we joined at the same time.

Anyway, I maintain good contacts to the city, so my article was not about naming and shaming. However, my "detective work" did uncover how inconsistent the rules are being applied, and that worries me immensely. I would hate to see my friends get into deep financial water if they as a result of being upgraded to PRO status found themselves in an unrecoverable position.
 
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NVP

Legendary member
36,279 1,787
great threat and thanks Sunseeker......ive been going through the loops as well on this from around May till now ...there were other threads on the go re ESMA new rules

im gonna go with the flow ......cant be arsed to be placing funds outside Europe....big brother will close loopholes as soon as they can i suspect ....

but great work guys

N
 

SUNSEEKER

Established member
872 12
I am not so sure that opening an account with a broker outside is a loophole. I wonder if the FCA and ESMA are thinking: good riddance, they are not with us anymore.

But if you can stomach the higher margin rates, then there are obvious advantages to staying, absolutely.
 

metronomist

Newbie
8 0
Having considered all possibilities I've decided to keep my business within the UK, for now anyway. I'll keep a closer eye on my margin and lower my leverage.
Some great posts and research on here. Good luck to all. And remember.... Treat the market like a Casino and it will deal with you like a Gambler.
 

metronomist

Newbie
8 0
Having considered all possibilities I've decided to keep my business within the UK, for now anyway. I'll keep a closer eye on my margin and lower my leverage.
Some great posts and research on here. Good luck to all. And remember.... Treat the market like a Casino and it will deal with you like a Gambler.
 

dowsp

Member
61 3
Thanks to all for your posting your comments and information on thise frustrating ESMA situation and trying to find ways to be able to still be able to trade at the present or prior rates that we have been used to.... I still cannot believe how this ESMA thing has been allowed to effect private non pro traders like most of us on here I would think..

If its to just get rid of small traders as overall these big companies may make most profit just from the big or rich PRO boys.... then you would still think there should be an opportunity from other companies who would still be happy and offer a similar as present service to allow the small traders to trade at present rates before margin rates get increased 10 times or more.

In ref to finding other companies outside the UK.... yes you can find some for certain things like CFDs... BUT as far as Spread betting goes... I am led to believe that Spread betting is a UK Only option.. Which I am very sorry to say.. as I just read about the option to use IGs OZ office... and contacted IG to discuss it with them thinking that I could open a IG OZ account and would would still be able to trade with IG to continue to spread bet... thinking they were offering their smaller clients a way around it ... BUT as I said... unfortunately it does not include their spread betting..

BUT I suppose at least present IG clients who do or have traded CFDs with them.. can at least remain to still trade with them at the same or similar rates...

I still wonder what may happen if we continue to come out of the EU... in ref to Brexit... are they likely to alter the margins rates back as they were say within 12 months time...

or are these Spread bet companies happy to remain PRO only for the higher (10 X) rates...

Why the USA or any other Country is unable to offer similar services as spread betting is beyond me..

London Capital Group I believe includes spread betting on indices like FTSE and Wall ST... and will allow you to trade with them at lower stakes but the ammount and profits will be 10 times lower after the ESMA changes take place.... but they are only offering it for futures only like trading... they dont offer options like puts or calls..

IG index I must admitt .... overall were offering one of the cheapest ways to trade on the planet... when you could trade daily call and put options on the likes of Wall Street as low as 3 to 5 GBPs which at one time you could had bought 100 points out of the money and if the dow moved 200 points... you could make over 100 GBP profit...

but recently you have been having to pay 5 GBP and in order to buy a daily wall st put or call at such a price... it would be more like 200 to 300 points out of the money... so you would need to see the dow move 200 to 300 points or more to be able to make any sort of worth while profit on them..

from July 28th.... IGs existing non pro clients will have to pay 50 GBPs for the same sort of opportunity..
 
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mike.

Senior member
2,098 701
Its starting to look like these 3 options/choices then :

1) put up the extra margin to cover reduction in leverage(down from 1:300 to 1:30) and continue spreadbetting with your UK broker as before with your funds in the safety of UK regulators.

2) Apply for an account like IG ,IC markets outside the EU, trade CFD's (no spreadbetting) on higher leverage e.g (1:500 forex..1:200 indices) on a smaller margin account and deal with the tax implications and also the fact its none uk regulated.

3) If you meet the criteria then apply for professional status.

Any other options then feel free to add...
 
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FXX

Experienced member
1,138 187
They seem to have changed the margin amounts as well as the ratios. I have been trading 10:1 since I began trading. It should have made zero difference to me when the changes came in but it seems this isn't the case. I could open 5 positions before I would get a not enough margin error and now I can only trade 2. Having opened up a swing trade this week I am unable to place new trades and have to add more capital to do so.



Sent from my SM-G950F using Tapatalk
 

mike.

Senior member
2,098 701
Be interesting to find a table to show the differences in new margin requirements FXX
 

barjon

Legendary member
10,206 1,522
Its starting to look like these 3 options/choices then :

1) put up the extra margin to cover reduction in leverage(down from 1:300 to 1:30) and continue spreadbetting with your UK broker as before with your funds in the safety of UK regulators.

2) Apply for an account like IG ,IC markets outside the EU, trade CFD's (no spreadbetting) on higher leverage e.g (1:500 forex..1:200 indices) on a smaller margin account and deal with the tax implications and also the fact its none uk regulated.

3) If you meet the criteria then apply for professional status.

Any other options then feel free to add...
Stop trading? :)
 
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FXX

Experienced member
1,138 187
Be interesting to find a table to show the differences in new margin requirements FXX
I have emailed my broker for clarification. It doesn't make sense, I should have been unaffected and if you try search for this information it doesn't exist. My broker discusses the percent margin requirements but I thought those percentages are tied to the leverage ratio which according to the information, is described according to the max (30:1).i think they have upped the margin requirements even for traders like me who trades with responsible risk. I wonder if this is in accordance with the rules or an excuse to up their aggregate client holdings. What is their reasoning for this, it is a question I am currently unable to answer but it might have something to do with their bargaining power with their service providers. Anyone have any opinions on this?