Regulation & Client ProtectionESMAEuropean Securities and Markets Authority
ESMA (European Securities and Markets Authority)
The EU securities markets authority whose 2018 measures set the leverage caps and CFD rules used across Europe.
What ESMA (European Securities and Markets Authority) means
The European Securities and Markets Authority is the European Union's independent securities markets authority. It builds the single rulebook, issues guidelines and technical standards, and coordinates the national competent authorities that actually license firms, such as CySEC in Cyprus, BaFin in Germany and the Central Bank of Ireland. Under MiFIR it also holds temporary product intervention powers, which it used for the first time in 2018 to restrict contracts for difference and to ban the marketing, distribution and sale of binary options to retail clients across the Union.
The 2018 CFD measures set the template still used today. Retail leverage was capped at 1:30 on major currency pairs, 1:20 on non-major pairs, gold and major indices, 1:10 on other commodities and minor indices, 1:5 on individual equities and 1:2 on cryptocurrencies. Firms had to provide negative balance protection on a per-account basis, close out positions when equity fell to 50 percent of required margin, stop offering monetary and certain non-monetary inducements, and display a standardised warning stating the percentage of that firm's retail accounts that lose money.
ESMA's own measures were temporary and were allowed to lapse in 2019, but national regulators adopted equivalent or stricter permanent rules, and the United Kingdom carried them into domestic law. ESMA does not authorise, supervise or compensate individual clients, and it operates no compensation fund. The rules apply only to retail clients of EEA-authorised firms, so they do not reach professional clients, non-EU group entities or offshore affiliates, and they limit position size without limiting the chance of losing the full deposit.
Worked example
Under the ESMA-derived rules a retail client with 2,000 EUR can open no more than about 60,000 EUR notional on EUR/USD, sees a loss-percentage warning on the broker's homepage, and has positions closed automatically once equity reaches 1,000 EUR of the required margin level.
Related terms
- Leverage CapA regulatory ceiling on the leverage a broker may offer retail clients, varying widely between jurisdictions.
- Negative Balance ProtectionA rule or policy under which a client's losses cannot exceed the funds in their account, so no debt is owed to the broker.
- CySEC (Cyprus Securities and Exchange Commission)The Cypriot securities regulator and the most common EU licensing hub for retail forex and CFD brokers.
- Retail ClientThe default regulatory client category, carrying the highest level of protection under conduct rules.
- Professional ClientA client category with fewer regulatory protections, available to institutions and to individuals who pass an opt-up test.
Frequently asked questions
What does ESMA (European Securities and Markets Authority) mean in forex trading?
The EU securities markets authority whose 2018 measures set the leverage caps and CFD rules used across Europe.
How does ESMA (European Securities and Markets Authority) work in practice?
The 2018 CFD measures set the template still used today. Retail leverage was capped at 1:30 on major currency pairs, 1:20 on non-major pairs, gold and major indices, 1:10 on other commodities and minor indices, 1:5 on individual equities and 1:2 on cryptocurrencies. Firms had to provide negative balance protection on a per-account basis, close out positions when equity fell to 50 percent of required margin, stop offering monetary and certain non-monetary inducements, and display a standardised warning stating the percentage of that firm's retail accounts that lose money.
What is an example of ESMA (European Securities and Markets Authority)?
Under the ESMA-derived rules a retail client with 2,000 EUR can open no more than about 60,000 EUR notional on EUR/USD, sees a loss-percentage warning on the broker's homepage, and has positions closed automatically once equity reaches 1,000 EUR of the required margin level.
Trade with a regulated broker
Understanding the terminology is the cheap part. The expensive part is choosing a counterparty whose execution, financing and withdrawal behaviour match what the marketing implies. Every broker below has been reviewed with a funded live account, and each review states which legal entity and which regulator applies to the account you would actually open.
Check the licence on the regulator's own register before you deposit — our regulators directory explains what each authority enforces, from leverage caps to compensation limits.