New ESMA regulations coming into force for the EU region are set to standardise the way margin close out rules work for retail traders. On the IG trading platform the new margin close-out rules will come into effect from 1pm on Monday 30 July. Please find an overview of the new regulation and how this may effect your account. We've included a useful video and a worked example which may also help.
Please remember that these changes only affect retail clients of EU firms (that are subject to ESMA regulation), and do not apply to professional clients. Please add any query, question, or request for clarification in the comments box.
What is the new ESMA margin close out rule?
Put simply, for all ESMA regions we will need to include running losses for limited risk positions when looking at the equity calculation. Let's look at a worked example.
- Say you have £1200 cash on your IG account.
- You place a FTSE trade with a guaranteed stop and it requires a margin of £1000.
- If the market moves against you £200's worth you would then start to eat into your margin.
- If the market continues to move against you by a further £500 (i.e. 50% of the margin required to open your trade) your position would be closed.
- This is because 50% of your margin was used up, and your equity value was therefore £500 (half of the margin).
- The new ESMA rules require us to close the position.
- You would be left with £500 in your account.
- Please remember if the market gaps over this level then there is no guarantee to close your trade at this exact 50% level. There is a 'negative balance protection' rule which will be in place from July 28th, however this applies to the account as a whole.
There are a couple of other important things to note
- We will not be implementing 24 hour or weekend close out rules for ESMA retail clients. This change will be made on July 30 from 1pm and will be apply on an account level (both existing and new positions).
- You can still use running profits to cover margin on new positions.
- Positions which have guaranteed stops will be margined at the higher value; max risk on the trade or the underlying market margin rate.
What does this mean for me?
"I currently have a limited risk account" - If you currently have a limited risk account (i.e. every time you open a new trade you have to have a guaranteed stop attached to your trade) then you may be at risk of having your positions closed out automatically. This will be the first time that previously 'limited risk' accounts could get closed out automatically.
"I currently have a regular account" - If you currently have a regular account (i.e. you don't need to apply a guaranteed stop to every position, however it is an option if you wish) then you may be at risk of having your positions closed due to the above change in close out rules. When we calculate account equity today, we do not currently include running losses on positions with guaranteed stops. Under the new ESMA requirements, such positions will need to include running losses as part of the deposit ratio calculation. This means that your positions will be closed out when your cash, including all profit and loss, reaches 50% of your margin requirement.
What is 'margin'?
In trading, margin is the funds required to open and maintain a leveraged position. You can read more about margin via our glossary definition of what margin means on the IG platform. You can also have a once over of the below video.
If you have any queries or questions regarding the new ESMA regulations please add a comment below.
Once again, please remember that these changes only affect retail clients of EU firms (that are subject to ESMA regulation), and do not apply to professional clients. Please add any query, question, or request for clarification below.
You may also find the following links useful.