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ESMA - 100% margin needed in some cases?


geldrausch

Question

If I understand the email from today correctly, in some cases 100% margin of a trading position are needed.

A lot of traders that I know that are using CFDs or spreadbetting use it for the trading aspect of their portfolio, while long term strategies like holding stocks are performed in other accounts.
That is how I do it and that is why I mostly do not diversify trades on IG.

Lets say I would like to trade Bitcoin via IG.

Lets make a simple example:

Bitcoin is at 10000 US$

I would like to trade 1 unit (Euro or BP...), that means that under the new ESMA rule I have to put down a 50% margin in that case equivalent of 5000 US$.

Should that be my only position in the account, then the position would be automatically be closed at a loss of 50% of the account, which would occur at Bitcoin at 7500 US$ although the (guaranteed) stop is not reached and enough money is on the account.

To really only be executed at a 50% stop, would mean to increase the balance of the account to 10000 US$ meaning that I trade effectively at a leverage of 1 instead of the maximum 2.

 

 

That applies for any trader that is only holding a single position.

Are there any plans of IG to counter that "problem" as in for example offering "virtual loans"
Especially for cryptocurrencies I else do not see the point in using IG (or any CFD/spreadbetting company within Europe) compared to directly buying the coins if, in the end, a 100% margin is needed anyway.

 

Any input or correcting my possibly wrong way of understanding the ESMA rules is appreciated.

 

Best regards

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Hi all - The 50% margin close out rule would happen in the same way as it does today, with a notable exception - your account can't go into a negative value and is guarded by the 'negative protection' rules required by ESMA. Let me try and explain using a different example for the sake of clarity... 

If we assume that bitcoin is priced at 10,000 and you have a $10,000 USD balance in your account with no open positions, at 50% margin on a $1/point trade would require you to ringfence $5000 margin to maintain the position. You therefore have 'spare' cash to the value of $5000 on your account.

If the market moved against you, your account can make a loss of $5000 (to clear the spare funds on the account), plus 50% of the margin you have tied up (i.e. a further $2500 as a financial loss). At this point the position would be closed, you'd have $2500 on the account (which is half the margin you originally required to open the position). 

When looking at the price of bitcoin, this is saying that bitcoin would go from 10,000 to 5,000 (clearing the $5000 'spare' cash), then down to 2,500 (to clear 50% of the $5000 margin, i.e. the $2500). 

A guaranteed stop further away, plus the fact that you have spare funds on the account to cover down to this level, won't be sufficient to maintain an open trade. 

This is how your account behaves at the moment.

The ESMA regulation has given an extra 'negative protection' requirement. Currently accounts can go into a negative balance, for example if a market gaps over the weekend and wipes out the spare cash on an account along with over and above the ring fenced margin (think big stock movements in VW when the emissions scandal came out, or Tescos when the accounting scandal hit the news). When ESMA comes into force all accounts will be guarded against this. The margin itself isn't protected, but a negative balance is. 

Hope this provides clarity.

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Nice post and an interesting one. Would be good to get a maths break down of that whole 50% rule.

 

It’s important to remember that technically speaking the MARGIN wouldn’t change if you decided to have more funds in your account to cover your position, but yes I take your point that it would almost be an EFFECTIVE margin.

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and then you have this

 

" The MCO rule does not prescribe which positions must be closed out, or in what order. Some investors currently instruct their provider to close out positions in a specified order. In other cases of existing market practice, MCO is implemented on a position-by-position basis, i.e. any single CFD is closed out if the margin allocated to it falls below a certain level. These different ways of implementing MCO will still be possible, but importantly, the threshold of total margin in an account at which MCO is triggered will be standardized at 50%. "

 

https://www.esma.europa.eu/sites/default/files/library/esma71-98-125_faq_esmas_product_intervention_measures.pdf

 

i think i read somewhere that by the end of this month there will be some more information available ?

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On 4/18/2018 at 9:49 PM, geldrausch said:

If I understand the email from today correctly, in some cases 100% margin of a trading position are needed.

A lot of traders that I know that are using CFDs or spreadbetting use it for the trading aspect of their portfolio, while long term strategies like holding stocks are performed in other accounts.
That is how I do it and that is why I mostly do not diversify trades on IG.

Lets say I would like to trade Bitcoin via IG.

Lets make a simple example:

Bitcoin is at 10000 US$

I would like to trade 1 unit (Euro or BP...), that means that under the new ESMA rule I have to put down a 50% margin in that case equivalent of 5000 US$.

Should that be my only position in the account, then the position would be automatically be closed at a loss of 50% of the account, which would occur at Bitcoin at 7500 US$ although the (guaranteed) stop is not reached and enough money is on the account.

To really only be executed at a 50% stop, would mean to increase the balance of the account to 10000 US$ meaning that I trade effectively at a leverage of 1 instead of the maximum 2.

 

 

That applies for any trader that is only holding a single position.

Are there any plans of IG to counter that "problem" as in for example offering "virtual loans"
Especially for cryptocurrencies I else do not see the point in using IG (or any CFD/spreadbetting company within Europe) compared to directly buying the coins if, in the end, a 100% margin is needed anyway.

 

Any input or correcting my possibly wrong way of understanding the ESMA rules is appreciated.

 

Best regards

It is now only a few weeks till this will happen, could you maybe address the issue ?
Does a guaranteed stop in that circumstances block the ESMA rule or is a guaranteed stop in this case useless as it will never be executed?

Edited by geldrausch
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