Stop-Out mechanism after entering the ESMA guidelines

At the end of March this year pan European financial supervision, ESMA, has decided to introduce a number of key changes for the European Forex industry (details in a separate article). In addition to the most important of them, ie lowering the maximum level of financial leverage, there are also other equally important modifications that should be aware of.

The regulation will be subject to, among others the principle of Stop-Out, ie the mechanism protecting against indebtedness (and excessive loss) on the trader's investment account.

Although the compulsion to introduce a number of new guidelines will only be established at the beginning of July this year, some brokers have already announced that they should go ahead with these changes. In the case of one of the British brokers, the new Stop-Out rules will come into force as early as May of 26.

Be sure to read: What does Margin Call and Stop-Out depend on?

Stop-Out - what will change?

So far, each of the brokers independently set themselves the limits at which SO was activated. Depending on the level of Margin Level, you could meet values ​​from 120% to just 5% activation, where the state of the entire account was taken into account. Now all European brokers have to act according to clearly defined rules.

Conditions:

• When your capital falls below 100% of the minimum margin required for your open positions, there is a risk of Stop-Out.
• When the capital on your account drops to 50% of the minimum margin required to cover open positions, the broker close your open positions until the capital reaches your account above 50%.
• Any positions that remain open after 26 May will be subject to the new Stop-Out rule.

In the case of previously included items, the situation is not yet specified, but there is a chance that they will not be covered by new conditions. At least for now.

Example

You have a deposit of 10 000 on your account and you open the position on EUR / PLN, which requires a PLN 5000 deposit. If this item generates a PLN 7500 loss, you will have capital at 2500 PLN, which corresponds to 50% of the 5000 security deposit required to cover this open position. In such a situation, according to the new rules, the broker will be forced to limit or close this position until the capital in your account reaches 50% of the 5000 security deposit required to maintain the open position.

Greater security?

It is hard to say whether the new rules will have a real impact on increasing trade security and, consequently, minimizing losses for retail investors. Perhaps the new rules will only extend the "losing" process.

It can certainly be said, however, that transparency will increase. Uniform rules applied by all EU brokers will certainly make life easier for traders at the time of migration between bills.