ESMA, How To Switch To The Professional Trader Account With High Leverage

In July 2018, ESMA measures on financial instruments and markets came into force, with a particular focus on online trading. Specifically, the new rules of the European Securities and Markets Authority (ESMA) have put traders at a crossroads: switch to the professional or non-professional trader account.

This is no small choice because while a “professional” trader can continue to use high leverage, a “non-professional” trader has severe limitations in this respect.

In this article, we will clarify the subject and answer all possible questions about it.

What Is Meant By A Professional Trader’s Account?

Brokers are asking all their clients whether or not they want to switch to the account of a professional trader, because in such terms the request started with ESMA.

Let’s see what are the requirements to switch to the professional account (you must have at least 2 out of 3):

Have experience in the financial sector, in a role that requires knowledge of CFDs and/or spreadbetting and/or forex, for a period of at least one year

Have placed orders of significant size at least 10-30 times in each of the last four quarters (with any broker)

Maintain a portfolio of investments (which may also include liquid savings, in addition to financial instruments) that exceeds 500,000 euros (with any broker)

Let’s analyze these three points, one by one.

Trading, Finance, CFD and Forex Experience

The first point is the one that is considered the most affordable, and in fact in some respects it is. If you have been doing an activity for at least one year where you need to be familiar with CFDs, spread dynamics (and spread-based trades), or Forex, then you can answer this question positively.

We would like to give you some advice on this matter. Ask yourself “in the mirror” if your trading experience has already reached a level where you can trade with high leverage. Regarding this topic, we also recommend that you read the section on negative balance protection later in this article.

Significant Or Considerable Size, What Does It Mean?

The second of the requirements concerns practical experience, i.e. the trading operations actually carried out. The significant size or considerable size is nothing more than the size of the transactions, in terms of nominal capital, on which trading positions have actually been opened. The nominal capital is the value on which you have traded.

For example, in a 1:300 leverage transaction, where the margin was 1,000, the nominal capital was 300,000 (or 1,000 x 300). The word “considerable” is therefore revered to the value on which you trade, and not so much to what you actually invested, which however should not be even too much lower than certain sums.

The size itself will not have been difficult to achieve, if you have traded with levers of 1:100 – 1:300, for example, while a problem may be represented by the constancy, or the number of transactions required in a given period.

We have written 10-30 times because depending on the broker it may vary. We start with 10 times. 10 times for each quarter of the last year. Therefore, you must have opened a “considerable” trade, at least 10 times for each of the last 4 quarters. So let’s say with a total of 40 transactions in one year, spread over time.

Investment Portfolio Of At Least 500 Thousand Euros

In the third and final question of the ESMA questionnaire, the trader is asked whether he has an investment portfolio (between liquid savings and financial instruments) that exceeds 500,000 euros (with any broker).

This is certainly the point at which only a small number of traders will be able to respond positively. 500,000 Euros is no small amount and generally these amounts are used for traditional investment, rather than CFD and Forex trading.

In this regard, we could also make a small criticism of ESMA on this point.

Suppose, for example, that a trader has liquidity or a number of financial instruments whose value exceeds 500 thousand euros. Experience is not taken into account here. Therefore, since 2 out of 3 questions need to be answered positively, a trader could answer positively to this question and to the question on open positions, not taking into account the experience required. Maybe it’s because you think that whoever has this amount has no problem losing money?

Most likely that assumption is wrong. As well as wrong, in our opinion, not to take into account as a fundamental point the knowledge of the products, and as secondary the amount of the portfolio held.

Negative Balance Protection: Watch Out For The Professional Accounts Offered

Looking at the websites of CFD and Forex brokers, you can see on the homepage the notices regarding the new ESMA regulation and the conditions offered to clients who want to become professionals.

In this regard, it is interesting to note that some brokers anticipate that with the adoption of the professional account, there will be no protection from negative balance. It should be noted that these are brokers who, even before the ESMA regulation, were already anticipating the exceeding of “zero”, i.e. debt positions.

On the contrary, some brokers, such as Plus500 and IQ Option, used to offer protection from negative balances and continue to do so now, both for regular and professional accounts.

So, in addition to answering positively or negatively to questions about becoming a professional trader and avoiding ESMA limitations, also take this into account. To stay where you are, choose a broker with negative balance protection, such as Plus500 and IQ Option, both CFD brokers.

What Happens If I Don’t Become A Professional?

If you do not want to open a professional account, you can continue to trade as usual, but under rather restrictive conditions, which mainly concern the financial levers applied.

Here is the list of the maximum leverage applied to the various financial instruments:

  • Main currency pairs: maximum leverage is 30:1;
  • Non major currency pairs, Gold and major indices: maximum leverage is 20:1;
  • Raw materials other than gold and irrelevant equity indices: maximum leverage is 10:1;
  • Individual stocks and other reference values: maximum leverage is 5:1;
  • Crypto: Maximum leverage is 2:1.

A positive aspect, however, regarding the normal account (not professional), is given by the protection from the negative balance, which will have to be guaranteed even by brokers who do not usually offer it. This means that in the worst case, your account will not be able to fall below zero.

Another new condition for the non-professional account is that the position should be closed in relation to the initial margin. In practice, if the total margin falls below 50% of the initial margin, the broker is obliged to close one or more positions to return the margin to at least 50%.

No ESMA Broker, the Trader Takes the Risk

For brokers regulated at European level by CySEC and other regulatory bodies recognised by the EU, complying with MiFID2 and registered with the CONSOB register, compliance with ESMA provisions is mandatory. The client registered with these brokers can decide whether to act as a protected client or as a professional client.

On the other hand, for No ESMA brokers, i.e. brokers that allow you to “bypass” ESMA, we recommend that you move very carefully.

  1. First, because you may come across real scam brokers, who will not give you any guarantees about anything.
  2. Secondly, because even if the broker is in good faith, you will have to deal again with your actual level of training and experience, the results of which will be noticed in the field. A No ESMA broker may simply be interested in your money.

How To Gain Trading Experience

To gain experience in trading, for example, you can study quality trading guides and at the same time practice with free demo accounts, following the progress and news of the financial market, deepening every aspect that you do not know, with specific materials, every time you realize you do not know well any topic or aspect of trading or finance in general.

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