Author Topic: Getting leverage  (Read 26584 times)

Dynamic

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Re: Getting leverage
« Reply #50 on: August 13, 2018, 05:48:21 AM »
I was just looking into CFD trades again, and it seems that EU rules have been tightened to point out the risks to retail investors and protect them rather more against owing sums in excess of the amount deposited. I believe professional investors can still use CFDs in the original way, obtaining enormous leverage. I imagine the same rules may well apply to DFT (Spread Bets) in the UK and Ireland too, but I haven't looked into it.

The new rules brought in by ESMA, which an Interactive Brokers overview article explains have just come into force, and ESMA has a FAQ (PDF) which explains that these rules apply for an initial period of 3 months that may be renewed later and also go into what happens under Brexit.

In summary:
  • CFD brokers have to prominently display the percentage of customers who lose money on CFDs, often between 60 and 80% from a few sites I've seen, IBKR being 62% at time of writing, which is among the lowest losing rates.
  • Initial effective leverage seems to be limited to 5x for stock CFDs, 10x for minor index CFDs, and 20x for major index CFDs and minor forex pairs, 30x for major forex pairs and just 2x for cryptocurrencies. Maintenance margin is half of initial margin, so I guess it won't force automatic liquidation until half the money put up has been lost. So the days of over 15x leverage on BRK.B as I outlined in my dummy account experience with CityIndex are gone and the risks are much reduced!
  • This refers to maximum leverage. The broker may apply their own limit based on historic volatility or similar factors of their choosing.
  • Negative Equity Protection. If you have a brokerage account like at IBKR, funds based on your initial margin will be transferred to a segregated account for CFD trading. Your other portfolio assets will not be liquidated to satisfy a CFD margin deficit, though your CFD positions may be liquidated to satisfy a regular margin deficit. Due to this change increasing their risks, especially in rare market conditions, IBKR charges a 1% higher financing spread on CFDs than they used to. It is possible to top up your margin, at least with some providers.


Shooter MacGavin

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  • Posts: 285
Re: Getting leverage
« Reply #51 on: August 17, 2018, 01:52:17 PM »
I was just looking into CFD trades again, and it seems that EU rules have been tightened to point out the risks to retail investors and protect them rather more against owing sums in excess of the amount deposited. I believe professional investors can still use CFDs in the original way, obtaining enormous leverage. I imagine the same rules may well apply to DFT (Spread Bets) in the UK and Ireland too, but I haven't looked into it.

The new rules brought in by ESMA, which an Interactive Brokers overview article explains have just come into force, and ESMA has a FAQ (PDF) which explains that these rules apply for an initial period of 3 months that may be renewed later and also go into what happens under Brexit.

In summary:
  • CFD brokers have to prominently display the percentage of customers who lose money on CFDs, often between 60 and 80% from a few sites I've seen, IBKR being 62% at time of writing, which is among the lowest losing rates.
  • Initial effective leverage seems to be limited to 5x for stock CFDs, 10x for minor index CFDs, and 20x for major index CFDs and minor forex pairs, 30x for major forex pairs and just 2x for cryptocurrencies. Maintenance margin is half of initial margin, so I guess it won't force automatic liquidation until half the money put up has been lost. So the days of over 15x leverage on BRK.B as I outlined in my dummy account experience with CityIndex are gone and the risks are much reduced!
  • This refers to maximum leverage. The broker may apply their own limit based on historic volatility or similar factors of their choosing.
  • Negative Equity Protection. If you have a brokerage account like at IBKR, funds based on your initial margin will be transferred to a segregated account for CFD trading. Your other portfolio assets will not be liquidated to satisfy a CFD margin deficit, though your CFD positions may be liquidated to satisfy a regular margin deficit. Due to this change increasing their risks, especially in rare market conditions, IBKR charges a 1% higher financing spread on CFDs than they used to. It is possible to top up your margin, at least with some providers.

thanks a lot for posting here.