Leverage in forex under ESMA rules – limits, margin and the 50% close-out

Leverage lets you control a position larger than the money you put up. It is the reason forex and CFD trading can be attractive with small accounts – and the main reason most retail accounts lose money. Since 2018, EU rules have put hard limits on it.

#Leverage and margin in one example

You open a €100,000 position in EUR/USD. At 30:1 leverage your broker blocks margin of €100,000 ÷ 30 = €3,333. A 1% move in EUR/USD changes the position's value by about €1,000 – roughly 30% of the margin. That multiplication works in both directions.

Leverage and margin are two ways of expressing the same thing: 30:1 leverage means a 3.33% margin requirement; 20:1 means 5%; 2:1 means 50%.

#The ESMA limits

In 2018 the European Securities and Markets Authority used its product-intervention powers to restrict CFDs sold to retail clients from 1 August 2018. National regulators then made the measures permanent, and the UK's FCA adopted the same limits. The retail caps are:

"Major indices" are the FTSE 100, CAC 40, DAX, Dow Jones Industrial Average, S&P 500, Nasdaq-100, Nasdaq Composite, Nikkei 225, ASX 200 and Euro Stoxx 50. You can check any instrument with our ESMA margin calculator.

#The other four protections in the package

1. Margin close-out at 50%. When your account's equity falls to half of the margin required for your open positions, the broker must close one or more positions. It protects you from being wiped out by a single gap, but it also means you cannot "hold on" through a deep drawdown.
2. Negative balance protection. Your losses on CFDs are limited to the money in your CFD account. If a market gaps and your balance goes negative, the broker absorbs it.
3. No incentives. Brokers may not offer retail clients monetary or non-monetary benefits to trade CFDs – no deposit bonuses, trading credits or gifts. Information and research tools are allowed. See trading bonuses in Europe.
4. A standardised risk warning that includes the percentage of the provider's retail accounts that lost money over the last 12 months. Look for it on every broker's website: it is the most honest statistic in the industry.

ESMA also banned the sale of binary options to retail clients in 2018.

#Why the limits exist

Before the measures, ESMA and national regulators analysed retail CFD accounts and found that a large majority lost money – typically between 74% and 89% of accounts. Leverage of 100:1 or more meant that normal market noise could wipe out an account in minutes. The limits do not make trading safe, but they slow down the speed at which inexperienced traders lose money.

#What about professional clients?

You can ask to be treated as a professional client if you meet two of three MiFID II criteria (trading frequency, a portfolio over €500,000, relevant professional experience). Professionals can be offered higher leverage – often 100:1 or more – but lose the ESMA protections above, and sometimes access to ombudsman schemes. Read retail vs professional client status before applying.

#Leverage you choose vs leverage you are allowed

The ESMA figure is a ceiling. Your effective leverage is the total value of your open positions divided by your account equity. Traders who size each position to risk around 1% of the account (see the position size calculator) often run effective leverage well below 10:1. That, far more than the regulatory cap, is what keeps an account alive.