The European Securities and Markets Authority (ESMA) has imposed new rules on CFD trading for retail clients, which came into force on 01.08.2018. Clients with a Professional status are not affected.
The regulation refers to
- the limits of leverage (leverage limits)
- the margin close-out rule for each individual account
- Negative balance protection for each individual account
- a limitation of the incentive for CFD trading
Most customers (institutional customers excluded) are initially classified as Retail customers. Under certain conditions, retail customers may qualify as professional customers and vice versa.
The following sections show how IBKR intends to implement the ESMA regulations.
1. limits of leverage
1.1 ESMA Limitation (Margins)
The limits of leverage have been fundamentally defined by ESMA at different levels:
- 33% for major currency pairs; major currency pairs result from a combination of USD, CAD, EUR, GBP, CHF, JPY
- 5% for non-major currency pairs and non-major indices
Non-major currency pairs result from a combination that includes currencies not present in the list above
Important indices are IBUS500; IBUST100; IBGB100; IBDE30; IBEU50; IBFR40; IBJP225; IBAU200
- 10% for non-major stock indices; IBES35; IBCH20; IBNL25; IBHK50
- 20% for individual shares
1.2 Applied Margins - Standard Guidelines
With respect to ESMA Margins, IBKR (UK) sets its own margin guidelines (IB Margins), which depend on the historical volatility of the underlying asset and other factors.
IB will apply the IB Margin Guidelines if they are higher than required by ESMA.
For more information on the applicable IB and ESMA margin guidelines, please see here.
1.2.1 Applied Margins - Minimum Concentration
A concentration fee will be charged if, for one, your portfolio consists of a small number of CFD positions or your 2 largest positions have an overweight (dominant weight). The portfolio will be charged by IB if there are negative movements of 30% of the 2 largest positions and 5% in the remaining positions in the portfolio. A total or aggregate loss will be drawn as a requirement for Maintenance Margin if it is greater than the default requirement.
1.3 Funds Available for Initial Margin (Initial Margin)
Opening a CFD position requires the deposit of initial margin in the form of cash. Profits from CFD trading are realized in the form of cash and are available immediately, i.e. the cash does not have to be settled first. Unrealized profits, on the other hand, do not fall under the requirements to deposit an initial margin.
1.4 Requirements Automatic Financing of Initial Margin (F-segments)
IBKR (UK) will initiate an automatic funding/provisioning of funds from your main account to your F-Segment of your account to ensure the Initial Margin requirements are met.
Please note that no transfers are made to meet margin requirements when trading CFD.
Therefore, if the qualifying equity (see below) is no longer sufficient to maintain the margin requirements, liquidation may occur even if you have sufficient cash in your main account. If you want to avoid liquidation, you must ensure that you transfer additional funds to the appropriate F-Segment through your account management.
2. margin close out rule
2.1 2.1 Maintenance Margin Calculation & Liquidation
According to ESMA requirements, IBKR can liquidate CFD positions if the qualifying equity falls 50% below the initial margin taken to open the positions. In doing so, it is possible that IBKR itself may close out positions that IB has deemed to be more conservative. In this case, the qualifying equity is composed of the available cash in the F-Segment (excluding cash in other account sections) and the unrealized CFD P&L (positive and negative).
The Initial Margin calculation base is the amount posted at the time of opening a CFD position. In other words, the amount of initial margin does not change, unlike the calculation of initial margin for non-CFD positions, when the value of open positions changes.
2.1.1 Example
You have 2,000 EUR of cash in your account and want to buy 100 CFDs of value XYZ at a limit price of 100 EUR. In doing so, you will first receive 50 CFDs and then the remaining 50 CFDs. Your available balance will decrease when your trades are executed:
*Equity equals cash plus unrealized profit and loss.
The price increases to 110. Your capital increases to 3000. Nevertheless, you cannot give up comparable positions because your available assets are 0, and your initial and maintenance margin must be unchanged according to ESMA regulation:
The price drops to 95. Your capital decreases to 1500, but your margin remains unaffected because you are still above 1000:
The price continues to fall to 85. Your margin is at risk and a (forced) liquidation is executed:
3. protection against negative capital
The ESMA Decision limits your CFD related liability to the funds designated for CFD trading. Here, other financial instruments (equities or futures) cannot be liquidated to make up the CFD margin deficit.
Therefore, assets in the securities and commodities sections of your main account and non-CFD assets held in the F-Segment are not part of your risk capital for CFD trading.
As the negative capital protection regime is an additional risk for IBKR, IB charges retail investors an additional funding spread of 1% for CFD positions held for more than one year.
*Although IB cannot liquidate non-CFD positions to cover a CFD deficit, IB can liquidate CFD positions to cover a non-CFD deficit.
4. incentives for CFD trading
The ESMA Decision prohibits monetary and certain types of non-monetary benefits in connection with CFD trading. IBKR and CapTrader do not offer bonuses or other incentives for trading CFDs.