Reason behind MFSA New Forex, CFDs Leverage limit Requirements

MFSA issued a new set of rules for financial firms. What is the reason for MFSA Malta New Forex, CFDs Leverage limit and higher Capital Requirements?

4 April, AtoZForex The Malta Financial Services Authority (MFSA) has issued a feedback statement. It outlines a proposed policy for online operating CFDs and Forex firms. The document is reflecting changes to the leverage limits and capital requirements of the companies’ operations.

MFSA Malta New Forex, CFDs Leverage limit and higher Capital Requirements

The Malta New Forex, CFDs Leverage limit and higher Capital Requirements statement from MFSA has been issued yesterday. The regulator has addressed several changes that are subject to the operations of Forex and CFDs brokers intending to conduct business in Malta. Moreover, the document is concerning applicants for Category 2 or Category 3 licenses. Such licenses give firms the authority to offer CFDs and Forex contracts under MiFID norms in and from Malta. In the official Feedback statement from MFSA, the regulator states:

“These requirements are applicable with immediate effect to all firms, subject to the transitory provisions referred to below. Both at application stage as well as when effecting material changes to the firms’ business set up approved by the Authority at the application stage.”

MFSA Policy proposition: “Companies applying for a Category 2 license will be subject to a higher minimum initial capital requirement of €730,000, similar to the initial capital requirement for Category 3 license holders in light of the risks associated with this kind of business and potential loss of retail clients’ money. The said capital should be satisfied on an ongoing basis and not just at licensing stage.”

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Industry comment

Commenting on the new requirements, industry experts stated that “this proposition is not in line with what other regulators are proposing and thus puts Malta as a financial services center at a competitive disadvantage.”

MFSA stance

Thus, the regulator has noted that it also can consider other tools as extra measures to assure investors’ safety. The firms should fulfill the new capital requirements of MFSA on an ongoing basis, according to the regulatory document

Leverage limit change

MFSA Policy proposition: “firms are required to set the leverage limits for retail and professional clients to a maximum of 1:50. This leverage limit shall be applicable across all platforms as made available to retail and professional clients on the firm’s website(s).”

Industry comment

Some of the sector experts believe that there is a need for differentiation between retail and professional clients. Moreover, they think that imposing leverage limits of 1:50 for both retail and professional clients will have a negative effect on the competitiveness of Malta’s firms. In addition, industry experts stated that many of retail clients are well aware of the CFDs trading risks.

MFSA Stance

Thus, the suggestion to allow wider leverage limits “affords these same individuals the liquidity to trade these instruments with significantly lower risk than they would in an unleveraged and an unhedged trading environment”.

Nevertheless, the MFSA believes that the business of online models offering investment services in regards to the complex speculative products involve high risks. Moreover, some of the clients might not fully understand the risks of the speculative trading.

Leverage will protect investors' community

Therefore, the leverage is acting as a shield for the clients, changing the exposure to the underlying instrument. Also, it firms the financial result of the investment. Thus, it exposes the client to the potential losses that can be greater that their initial funds. The official document from the MFSA states:

“The Authority has set the following maximum leverage limits:

- For retail clients – 1:50;

- For retail clients electing to be treated as professional clients in terms of MIFID – 1:100; and

- For all other clients – no leverage limits are in place. “

Following on this, the regulator considers the introduction of a requirement for CFDs and Forex firms to submit to MFSA an audit of the IT systems utilized. Regulator intends to introduce such reports for submission on an annual basis. The watchdog will announce the details later.

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