Defying the guidelines of the European Securities and Markets Authority (ESMA), the Financial Conduct Authority (FCA) in the UK will now allow leverage on government bonds offered to retail traders to reach 30:1.
With government bonds, under the ESMA’s guidelines, brokers are allowed to offer leverage no greater than 5:1. In the wake of Brexit, however, FCA seem to be trying to coin its own rules.
ESMA reacted with a statement that “the proposed leverage limit would result in divergence from the leverage limits applied by product providers subject to other national measures.”
“Since the cross-border distribution of CFDs is common in this market and ESMA‘s opinion is that (all regulators) should adopt measures that are as least as stringent as ESMA’s measures, allowing higher leverage limits for a new indicated asset class would result in divergence within the Union and potential regulatory arbitrage”, the pan European regulator also said.
FCA responded by pointing out that it had followed ESMA’s proprietary methodology to determine the level of risk of government bonds being offered to retail investors with higher leverage.
“As noted by ESMA, 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures,” FCA said in its response. “We agree that this mitigates competition amongst providers that are subject to a stricter leverage limit. As retail consumers are afforded protections by the rules of other National Competent Authorities (NCAs), we concluded that our rules will not impact the markets of other Member States or result in harm to their consumers.”
On Monday FCA said it will adopt permanent rules for trading forex, CFDs and CFD- like options, which will take effect in a month. The rules widely converge with ESMAs guidelines.