The Financial Conduct Authority (FCA) has complied with almost every ESMA regulation in the past. However, this Tuesday they came out with an announcement saying they will be increasing the leverage offered on government bonds despite ESMA guidelines.
The European Securities and Markets Authority’s guidelines had a deadline on the 1st of July, but many European jurisdictions have turned its temporary ban on Binary options and restrictions on CFD products into permanent law.
The FCA was no exception as it accepted the ban on Binary options and restricted the leverage on CFDs to only 30:1. However, there was another guideline in the ESMA documents indicating the leverage cap on government bonds as well, which was supposed to be 5:1.
However, the FCA did not see government bonds as risky investments or something worth restricting too much. Therefore they will allow 30:1 leverage for trading bonds as well as CFD related products.
ESMA challenged the decision
ESMA’s response was quick as usual as it started with classifying the decision as lacking justification and proportion.
The regulator mentioned that maintaining the balance within the Union for trading leverage on all assets provides a more fluid process and the division of the markets in a more equal manner.
The fact that the FCA went ahead and allowed larger leverage on bonds indicates that more traders will transfer to UK-based or FCA regulated companies for trading bonds as it doesn’t make sense to voluntarily restrain oneself on an asset as safe as government bonds.
This was exactly FCA’s response to ESMA’s comment, mentioning that such restricted leverage was not proportionate to the risk displayed by government bonds, and therefore it didn’t see the reason to apply it.
Furthermore, it needs to be considered that the UK will soon be leaving the European Union, with or without a deal, and therefore this may have been a move from the FCA to maintain the relevance of its regulated entities on the European continent.