ESMA and MiFID – how the EU is regulating the financial markets

ESMA and MiFID – how the EU is regulating the financial markets

How EU regulatory body regulates the financial markets industry with its famous MiFID directives

Knowing how the markets operate and how these measures apply is essential for anyone interested in trading CFDs. So, without any further ado, let’s delve into this matter.

What is ESMA?

According to wikipedia.com, “The European Securities and Markets Authority (ESMA) is a European Union financial regulatory agency and European Supervisory Authority”.

Founded in 2011 because of the increasing demand for a decentralized network of European Financial Supervision, ESMA replaced the Committee of European Securities Regulators (CESR). This was a network of European Union authorities that ensured consistent supervision across the EU. Additionally, it held an advisory role for the European Commission.

ESMA was created to improve the way the financial markets function in Europe by applying the necessary legislation and regulation measures. Its general mission is to ensure the stability of the EU financial system and to protect investors.

ESMA is an independent authority but is accountable to the European Parliament and reports to the Economic and Monetary Affairs Committee (ECON) during formal meetings. It is also accountable to the EU Council and EU Commission. Their activities are not only reported to these bodies but also in an annual report.

ESMA’s major roles:

Risk assessing role to financial stability, markets and investors.

Compiling a rulebook for European Union financial markets.

Coalition of economic supervision.

Direct supervision of specific entities within the financial industry, including regulatory bodies such as CySEC.

Direct supervisory role of Trade Repositories and Ratings Agencies, which are very important to the EU’s market infrastructure.

What is MIFID?

The Markets in Financial Instruments Directive (MiFID) is a law through which ESMA regulates investment services in member states of the European Economic Area. The European Union aims to increase competition amongst investment & financial services while also boosting consumer protection and providing regulations for all participating states with this move.

MiFID was first introduced back in 2006, replacing the Investment Services Directive and it was implemented later the same year. After twelve more years, MiFID II replaced MiFID I.

3 Key Aspects About MIFID

Due to MiFID, brokerage firms must place their clients into categories, depending on their risk tolerance; determining the level of protection needed for each account type and investment is of paramount importance

MiFID also requires that companies employ both pre-trade and post-trade transparency; these concepts deal with pricing levels and volume of all trades becoming publicly available

Additionally, MiFID requires that investment firms comply with “best execution” policies in regard to their transactions; this means that companies are asked to limit costs and the time taken to complete a transaction for clients

MiFID II – the latest ESMA directive

After the MiFID I law was introduced in late 2006, it took ESMA twelve more years to refine a new and more detailed directive for regulating the financial markets.

Here are the most important changes introduced for the CFDs markets (appliable to retail accounts) with MiFID II:

1. Leverage levels from 30:1 to 2:1; leverage levels vary depending on the traded instrument, as explained below:

30:1 for major currency pairs;

20:1 for non-major currency pairs, gold and major indices;

10:1 for commodities other than gold and non-major equity indices;

5:1 for individual equities and other reference values;

2:1 for cryptocurrencies.

2. A margin closeout rule of 50% of minimum required margin; this was intended to offer more protection to investors, should they experience a sharp market decline.

Learn more about the most important terms you need to know about your trading account.

3. Negative balance protection; this measure aims to provide a guaranteed limit on your account balance.

4. A restriction on the incentives offered to trade CFDs.

5. A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

As a fully regulated broker, CAPEX.com fully complies to the above regulations. Visit our about us page to find out more about the reasons why to choose us as your CFD trading broker!

Sources: wikipedia.com, esma.europa.eu, tradefinanceglobal.com

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