EU Regulator ESMA Urges Retail Brokers to Review their Permits


EU Regulator ESMA urges retail brokers to review their permits. As per the letter from regulators, the firms across the union were instructed to thoroughly reassess their business models.

9 April, AtoZForex The key European regulators have issued an announcement for the licensed retail brokerages in regards to the necessity to review their trading permits. The announcement follows the recently introduced measures to restrict the availability of leverage to retail traders along with obligatory negative balance protection.

EU Regulator ESMA Urges Retail Brokers to Review their Permits

As per the letter from regulators, the firms across the union were instructed to thoroughly reassess their business models. The regulatory changes are expected to influence future revenues of the industry participants. These include potential requirements for revision of the capital and the liquidity of numerous entities.

According to the new conduct rules, firms will need to disclose any change to their business expectations in their Internal Capital Adequacy Assessment Process (ICAAP). The entities will need to highlight capital and liquidity requirements.

One of the primary ESMA’s new regulatory framework points is related to the protection of clients from adverse market movements. All industry participants will need to thoroughly consider how the provision of negative balance protection influences the risks. They will also need to take into account the capital and liquidity they need to hold.

IFPRU 125K matched principal licensed firms

Firms with an IFPRU 125K matched principal license will be required to assess whether offering negative balance protection is compatible with their Part 4a Permission. As per the regulatory bodies, their ability to face market risk is capped by their Matched Principal limitation and IFPRU 1.1.12R.

In addition, these companies might need to reassess their permission to be able to continue operating in the market.

As for the notice from ESMA to the regulated firms, the leverage restrictions only will be applicable to new positions that are being opened from the implementation date. Regarding existing positions, they can be potentially managed under the previous leverage arrangements. The regulators are asking firms to consider the way how they deal with the transition period in order to make sure that they act in clients’ interests.

Reportedly, the market can expect further clarifications from the national regulators in the near future. The IFPRU 125K firms will need to send a response to the UK financial regulator FCA in relation to their plans in regards to the license update. The same applies to their will to increase their capital in order to meet the provision of negative balance protection.

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