What is ESMA?
ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
What are the new ESMA proposals?
ESMA has agreed on measures in relation to CFDs. The measures restrict the marketing, distribution or sale of CFDs to retail investors, by providing the following protections:
- Leverage limits on the opening of a position between 30:1 and 2:1, which vary according to the volatility of the underlying asset:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold and major equity indices;
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and any underlying not otherwise mentioned;
- 2:1 for cryptocurrencies;
- A margin close-out rule on a per account basis;
- A negative balance protection on a per account basis;
- A prohibition on benefits and incentivising trading;
- A standardised risk warning.
Do the new ESMA proposals only apply to clients living in the EU?
The ESMA measures will apply to all clients trading with Tickmill UK Ltd under the FCA UK, irrespective of their location.
Are the new measures permanent?
According to ESMA, these measures will apply for at least three months, at which point they may be renewed.
When will the new measures take effect?
The measures on CFDs will come into effect on 1st August 2018.
Will the leverage change on the demo account to 1:30?
The demo account will simulate a live trading environment.
What does a leverage limit imply?
The leverage limits imposed on CFDs set the maximum leverage that providers can offer you when opening a CFD position.
In order to comply with ESMA regulations, Tickmill will be required to reduce the leverage on many of its products from 1:500 to 1:30 for Retail Clients. So, whereas the requirement on a 150,000 EUR position will currently require a deposit of just 300 EUR, this will increase to 5,000 EUR for Retail Clients.
With lower leverage limits investors are protected from certain risks.
Will Brexit affect whether Tickmill UK Ltd follows ESMA’s proposals?
On 29th March 2017, the UK notified the European Council of its intention to withdraw from the European Union pursuant to Article 50 of the Treaty on European Union. Subject to any extension of the withdrawal period, the withdrawal will take place on the date of entry into force of a withdrawal agreement or, failing that, two years after the notification on 30th March 2019. Until then, the UK is a Member State of the European Union. Therefore, UK CFD providers will be required to comply with ESMA’s product intervention measures.
What will happen after Brexit?
There is uncertainty as to the position that the UK will take post-Brexit, but there is a strong likelihood that not much will change.
Can I choose to trade under Tickmill Ltd (FSA SC Regulated) as a Retail Client?
In the event you do not wish or do not meet the criteria to be classified as a Professional Client but, at the same time, wish to receive higher leverage, you may be entitled to register under Tickmill Ltd (FSA Seychelles). The condition to be able to register with Tickmill Ltd at the moment is to be a permanent resident of a country outside the European Economic Area.
Does Tickmill Ltd has a compensation or insurance provision?
Under the FCA UK, eligible clients who trade with Tickmill UK Ltd are protected by the FSCS compensation scheme up to the value of 50,000 GBP. Under the FSA SC, there is no such investor protection scheme.
Who can be a Professional Client?
A Professional Client can be either ’per se’ or ’elective’:
- Per Se Professional Client:
- A client required to be authorised or regulated to operate in the financial markets, including but not limited to credit institutions, investment firms and insurance companies.
- A large undertaking meeting of two of the following size requirements on a company basis:
- A balance sheet total of 20,000,000 EUR or more;
- A net turnover of 40,000,000 EUR or more;
- Own funds of 2,000,000 EUR or more;
- A national or regional government, including a public body that manages public debt, central banks, international or supranational institutions.
- An institutional investor whose main activity is to invest in financial instruments.
- A large undertaking, including a partnership, a body corporate or an unincorporated association, which meet the relevant criteria.
- Elective Professional Client: A client must meet the requirements set by the FCA UK.
- A client must pass a “Qualitative test”, where we must assess their knowledge, experience and expertise with reference to the nature of the transactions or services envisaged, to ensure that they are capable of making their own investment decisions.
- A client must also complete a “Quantitative test” and satisfy 2 of the following criteria, where applicable:
- The client has carried out transactions in significant size and averaged a frequency of over 10 trades per quarter on the relevant market over the previous 4 quarters;
- The client has an investment portfolio and cash investments of over 500,000 EUR in value;
- The client is employed or had been employed in the financial sector for over a year in a professional position that requires knowledge of the transactions or services envisaged.
How can I become a Professional Client?
A client who wishes to be reclassified must meet the minimum criteria to be eligible to become an elective Professional Client. Clients can contact the Compliance Department directly via email or telephone.
What are the minimum requirements to become a Professional Client?
A Professional Client must possess the relevant experience, knowledge and expertise to be able to make their own investment decisions and properly assess the risks involved.
Please refer to the criteria set out above, under ’Elective Professional Client’.
What evidence will a client be asked to submit to reclassify as a Professional Client?
At this stage, Tickmill UK Ltd is not asking for any specific evidence. However, in cases where a client has previously submitted information to us that would suggest that they are unlikely to meet the elective Professional Client criteria, then Tickmill reserves the right to request evidence. Should we require evidence in the future, it will include:
- Evidence of trading activity showing approximately 40 trades of a significant size during the past year.
- Any documentation that shows that the client has worked in the industry in the relevant financial sector for over a year in a professional position requiring knowledge of the transactions or services envisaged.
- Bank statements, share certificates, broker accounts, etc. that evidence 500,000 EUR or more in investments.
What can I do if I fail to meet the minimum criteria to reclassify as a Professional Client?
Our Retail Clients will enjoy the maximum protection available under the FCA UK rules. If you do not meet the minimum requirements, then you will continue to be classified as a Retail Client. Kindly note that you should NOT provide false information in order to qualify as a Professional Client.
What are the practical implications of becoming a Professional Client?
As a Professional Client, you will not have the following protections afforded to Retail Clients under the FCA UK:
- Risk Warnings – We will not be obliged to restrict your account with standardised risk warnings and rules that protect Retail Clients.
- Communications – When we communicate with you, we may assume that your level of experience is sufficient to use language that is more complex than with Retail Clients.
- Experience – We may assume your level of experience when determining if our products and services are suitable for you.
- Best Execution – We owe you a duty when executing your orders. As a Professional Client, we may look at other factors when processing trades such as speed and likelihood of execution. For Retail Clients, we are required to prioritise overall cost of the transaction.
- FOS – If you are an elective Professional Client who is not defined as a ‘consumer’, you will not have access to the Financial Ombudsman Service (FOS).
- No leverage restrictions – You might be exposed to higher leverages that can amplify your losses.
What is the new margin close-out rule and what are the practical implications of it?
- The margin close-out rule standardises the percentage of margin at which CFD providers are required to close out a CFD or multiple CFD positions.
- The margin close-out has been set at 50% to ensure that investors’ margin is not eroded close to zero.
- Specifically, if the total margin in an account falls more than 50% of the amount of the initial margin required in respect of the open CFD position, the provider must close one or more of the CFD positions.
- The margin close-out rule does not prescribe which positions must be closed out or in what order.
What is negative balance protection?
- The negative balance protection limits the maximum losses that a retail investor could have. It is designed as a backstop for cases when margin close-out does not work effectively as a result of a very sudden price movement.
- By introducing negative balance protection per account, the investor can never lose more than the total sum invested for trading CFDs. There can be no residual loss or obligation to provide additional funds beyond those in the investor’s CFD trading account.
Will Tickmill UK Ltd offer credit allocations that will increase leverage?
Tickmill does not plan to offer credit allocations that will effectively increase the leverage limit.
What can I use in my investment portfolio?
You can use bank statements, share certificates and SIPS (provided it is not a company pension). This list is not exhaustive.
We will not accept company pensions, physical commodities and fixed assets (including properties and vehicles).
What level of professional experience do I need to have to qualify as a Professional Client?
The minimum professional experience requirement is to have worked in an industry and a role that required a good understanding of CFDs and the foreign exchange market for at least one year.
Will my funds still be segregated if I become a Professional Client?
Yes. For the time being, we will continue to segregate all elective Professional Client funds.
Will my funds still be protected if I become a Professional Client?
If you choose to become an elective Professional Client, your funds will continue to be covered by the Financial Services Compensation Scheme (FCA UK) up to the value of 50,000 GBP per client (not per account) under Tickmill UK Ltd.
Can I have a professional account and a retail account at the same time?
As Tickmill only offers CFDs, a client can be a Retail or a Professional Client. Tickmill UK Ltd will not be offering a retail and a professional account at the same time. You will be classified either as a Professional or a Retail Client.
Do I get negative balance protection as an elective Professional Client?
Yes, professional clients will enjoy negative balance protection.
Does my professional qualification guarantee I will become a Professional Client?
No. A relevant qualification alone will not guarantee that someone will become a Professional Client. However, it will be looked upon favourably.
Once I become a Professional Client, can I revert to Retail Client status if I wish?
Yes. Please note that you must inform Tickmill UK Ltd to offer you full FCA UK protection and also apply the Retail Client restrictions, including maximum leverage of 30:1 on CFD positions etc.
Do the new ESMA measures apply to companies as well?
Yes, they do. The measures apply to Retail Clients, whether they are individuals or corporations.