ESMA introduces TC-CCP classification system - Another move to block risky trades?

The European Securities and Markets Authority has introduced a new system that will classify Third Country Central Counterparties according to tiers. The tiers will be assigned to the CCPs according to their roles with a member state.

What this means is that if, for example, South Africa continues its crucial fruit trade with the Netherlands, it will be given a Tier 1 status, therefore charged with less administrative fees and a more open environment. However, if the trading agreement is not crucial, the CCP will receive a Tier 2 status, therefore charging them with slightly higher fees in hopes of increasing the quality and administrative overhead in the long term.

This is something completely different as to what ESMA is known for in the financial world. Sure it gives both the member states and the Third Country participants the ability to restructure their operations and make them more effective, but it’s nothing necessarily close to the financial regulation imposed by ESMA a few years back.

ESMA’s role in the EU’s financial markets

ESMA first appeared on the radar of EU-based financial companies when it banned the sale and promotion of binary options in 2016. Nearly half of the financial companies had to either close up shop and start a new venture or simply relocate into a different country altogether.

Naturally, this caused quite a lot of jobs to be funneled outside of the European Union with years of growth going down the gutter. However, the reasoning behind the ban was absolutely understandable.

The idea of binary trading is everything but trading. You see, when somebody places a trade on binary options, they’re not necessarily making an investment, it’s more of a gamble. Every binary trade has about a minute before it expires. What this means is that the “trader” makes a guess that a minute after their trade, the asset is going to be either lower or higher than the price when the trade was made on.

If they turn out to be right, they get 80% of their investment as profit, but if they’re wrong, they lose it all.

ESMA saw quite a lot of risk in this kind of trading methods, or didn’t see any resemblance of trading at all and decided to place a ban.

Another reason was that the brokers themselves were the ones to benefit the most if the traders got their guesses wrong, which encouraged them to tamper with the traders’ chances.

The ban damaged quite a lot of companies that were doing things the clean way as well. For example, according to this IQ Option review, brokers were forced out of the industry even if they were conducting the operations according to every part of the regulation in place. Unfortunately, the trading strategy itself was just too much for ESMA to let go free, which is why the ban was introduced.

Many companies like IQ Option then fled to industries like FX and CFDs, but that industry was not going to welcome them either.

The attack on CFDs

Once the binary options ban was in place, ESMA started to shift its vision towards Contracts for Difference, or CFDs for short. A CFD is basically a contract that specifies that you have purchased an asset on the market, but don’t necessarily own that asset. However, you can sell this contract, and if the price of the asset is higher than the price you purchased the contract for, you make a significant profit.

However, it wasn’t the act of trading assets like this that distressed ESMA, but the exceeding leverage allowed on the market.

According to a new regulation imposed sometime in 2016, every CFD broker had to lower their maximum leverage. FX became 1:30, stocks became 1:15 and commodities went to 1:10. The largest hit though was delivered to cryptocurrencies, which were lowered to 1:2 overnight, ultimately rendering crypto CFDs worthless to trade with.

The financial companies took another hit, but that wasn’t enough to scare them away from the lucrative EU market.