Leverage Limits Around the World: A Jurisdiction Map

What leverage is and what a cap changes

Leverage is the ratio between the size of a position and the margin the trader must deposit to hold it. At 1:30 a trader controls a 30,000 dollar position with 1,000 dollars of margin; at 1:500 the same 1,000 dollars controls 500,000 dollars. The position's profit and loss are the same in dollars per pip either way; what leverage changes is how large a position a given deposit permits, and therefore how large a move against the trader wipes the deposit out.

A leverage cap therefore does one thing: it limits the size of position a trader can open relative to the account. It does not limit the loss on a position of a given size, and a trader who wants the same exposure can deposit more. What made the caps effective in reducing losses, according to the regulators' own reviews, is that most retail traders did not deposit more, and that the caps arrived together with two other measures: negative balance protection, which stops a loss exceeding the account balance, and a margin close-out rule, which closes positions when equity falls to half the required margin.

The map

The following is the position in the main jurisdictions for retail clients trading major currency pairs, with the ladder for other instruments where one applies.

• Japan: 1:25 on all currency pairs since August 2011, after a reduction to 1:50 in 2010. The Financial Services Agency also requires brokers to hold client money in trust and to report retail volumes monthly.
• United States: 1:50 on major pairs and 1:20 on other pairs since 2010, set by the CFTC. No negative balance protection is mandated, but registered dealers must hold at least 20 million dollars of net capital and cannot offer hedging in a single account.
• European Union: 1:30 on major pairs, 1:20 on non-major pairs, gold and major indices, 1:10 on other commodities and minor indices, 1:5 on shares and 1:2 on cryptocurrencies, from ESMA's 2018 measures as adopted by each national regulator. Negative balance protection and a 50 percent margin close-out are mandatory. Professional clients who meet an opt-up test are exempt.
• United Kingdom: the same ladder, made permanent by the FCA in 2019, with retail crypto derivatives banned outright from 2021.
• Australia: the same ladder from ASIC's 2021 product intervention order, extended to 2027, with the same protections. Wholesale clients are exempt.
• Singapore: 1:20 for retail clients of licensed brokers under the Monetary Authority of Singapore's rules, with a 2019 tightening of the definition of accredited investor.
• Hong Kong: leveraged forex trading is licensed by the Securities and Futures Commission with margin requirements that in practice limit leverage to around 1:20.
• Canada: provincial regulators, with the Canadian Investment Regulatory Organization setting margin rates by currency that typically allow leverage around 1:33 to 1:50 on majors.
• South Africa: no statutory cap for clients of FSCA-licensed derivative providers, with leverage commonly 1:400 to 1:2000.
• Kenya: no statutory cap under the Capital Markets Authority's online forex regulations, though licensed brokers commonly offer 1:400.
• United Arab Emirates: the Securities and Commodities Authority and the Dubai Financial Services Authority license brokers with margin requirements that limit retail leverage to around 1:50 in the onshore and DIFC regimes respectively.
• Offshore centres: the Seychelles, Mauritius, Vanuatu, Belize, the British Virgin Islands, the Bahamas, Saint Vincent and the Grenadines, the Cayman Islands and the Marshall Islands impose no leverage cap. Brokers licensed there commonly offer 1:500 to 1:2000, and a few advertise unlimited leverage on balances below a threshold.

Why the caps were set where they were

Each cap followed a study. Japan's FSA reduced leverage after finding that the majority of retail forex accounts lost money at 1:100 and higher. The CFTC's 2010 rule was part of the Dodd-Frank response to the financial crisis and originally proposed 1:10 before the industry's objections settled it at 1:50. ESMA's 2018 measures rested on studies by several national regulators that found between 74 and 89 percent of retail CFD accounts losing money, and it set the ladder so that the estimated probability of a 50 percent loss on a position was roughly equal across instruments of different volatility. ASIC's 2021 order cited its own 2019 review, which found that around 72 percent of retail CFD clients lost money and that the aggregate loss across the clients of the providers it examined ran to over 1.5 billion Australian dollars in a single year.

The ladders are similar because the regulators shared their analysis and because the industry, which operates across all of them, argued for consistency. The result is that a European or Australian retail client sees the same product at the same leverage whichever broker they choose, and the competition has moved to pricing, platform and service.

What happened next: the offshore route

The caps did what their authors intended for the clients who stayed. They also created a large population of clients who did not want to stay. Brokers responded by opening entities in jurisdictions without caps and by routing clients by residence: a resident of a capped country is onboarded to the capped entity, a resident of anywhere else to an offshore one. Some brokers went further and allowed clients in capped countries to request a transfer to an offshore entity, a practice CySEC and ASIC have both acted against.

The effect on the map is that the leverage a trader actually gets is a function of where they live and which entity accepts them, not of the broker's name. Two clients of the same brand in Berlin and Bangkok trade the same platform at 1:30 and 1:1000. The Berlin client has negative balance protection, a compensation scheme and a regulator that answers complaints; the Bangkok client has whatever the Seychelles licence and the broker's own terms provide. 88 Forex Brokers records each broker's entities and their licences for exactly this reason.

What a trader should take from this

Higher leverage is not a benefit in itself. It is the ability to take a larger position on a smaller deposit, which is useful to a trader who sizes positions by risk and harmful to one who sizes them by what the margin allows. The protections that come with the capped jurisdictions, negative balance protection above all, are worth more to most retail traders than the leverage they give up. A trader who genuinely needs 1:500 and understands why should at least know which entity is providing it and what that entity is obliged to do if the broker fails.

Sources

• European Securities and Markets Authority, decision on product intervention measures for CFDs, 2018, and the related cost-benefit analysis
• UK Financial Conduct Authority, PS19/18
• Australian Securities and Investments Commission, Report 626 on CFD providers, 2019, and the 2021 product intervention order
• US Commodity Futures Trading Commission, retail forex rules under Regulation 5.9, 2010
• Japan Financial Services Agency, amendments to the Financial Instruments and Exchange Act on forex margin, 2010 and 2011
• Monetary Authority of Singapore, Securities and Futures Commission of Hong Kong and Canadian Investment Regulatory Organization margin rules
• Financial Sector Conduct Authority of South Africa and Capital Markets Authority of Kenya licensing regulations for online forex
• Published leverage and entity terms of the brokers on the 88 Forex Brokers database

This paper consolidates publicly available information as at its publication date. It is research and commentary, not investment advice, and is revised when the sources it draws on are updated. Corrections are welcome through the contact form.