Challenges facing CFDs Brokers in 2023 – an analysis of ESMA priorities and market trends

For a vast part of the financial market population, CFDs Brokers are considered crucial players in the constitution and maintenance of the financial services net since they bring investors closer to the financial markets, such as CFDs on virtual assets, currencies, commodities, and indices, in an easy and relatively low-cost manner. 

However, those benefits are associated with several risks, especially for the retail market.

Challenges facing CFDs Brokers in 2023

Subsequently, ESMA and many National Competent Authorities, such as the Financial Conduct Authority (“FCA”), have conducted thorough reviews and published relevant publications and warnings to the Brokers. It should be noted that market developments highly affect the investor since the volatility and other factors make their financial position more vulnerable and exposed.

On another note, these events also expose the CFD Broker itself to a range of risk challenges, including regulatory, market, operational, liquidity, and reputational risks. Based on the above, and experiencing bizarre phenomena the last few years, ESMA and National Competent Authorities set their priorities to be more proactive, protecting the centre of CFDs Brokers: the Investor. CFDs brokers will likely face various risk challenges in 2023, some of which may also stem from ESMA priorities and market trends.

These challenges are documented in ESMA Priorities Agenda for 2023, which includes:
– Investor protection,
– financial stability,
– market integrity,
– supervisory convergence.

Mentioned priorities are likely to significantly impact CFDs brokers, as they may need to proceed with amendments to their procedures, strategies and practices to comply with the developments in regulations and familiarise their business models to meet evolving market trends.

Maintaining financial stability is particularly important in the context of a fluid market ecosystem and uncertainty about future economic conditions. Consequently, one of ESMA’s strategic priorities consists of adopting effective markets and financial stability, making EU financial markets more efficient and resistant while respecting the principle of proportionality. 

The above includes further developing, maintaining, and restructuring the single rulebook to reflect new developments and ensuring its effective and widespread application, thus strengthening the single EU market and making it more attractive. The increased significance of cross-border activities and the further development of the single EU capital market demand strong and efficient supervision across national borders, irrespective of whether the supervision is primarily at the national or European level. The interdependence of various financial market participants means a more holistic management approach. Therefore ESMA, in cooperation with the Regulators, will focus on efficient guidance bringing together a unified supervisory approach. In addition, ESMA will enhance its role as a direct supervisor, confirming the applicability of prudent cooperation with the respective NCAs.

All of the above are also reflected as risks and challenges for CFDs Brokers – the proposed new regulations to enhance retail investors reducing the risk of financial instability will further develop retail investor trend monitoring and analysis. The European Authority will concentrate its efforts on risks posed, among others, by new and innovative products or services (e.g. digital assets or non-fungible tokens) and products with strong retail investor demand (e.g. ESG). ESMA will also assess risks to retail investors that may stem from the distribution of complex products, alternative marketing and distribution channels, such as. social media advertising. CFD brokers should be prepared to comply with these regulations, which may require significant changes not only to policies and procedures but also to their business models.

The recent developments showed that the volatility of financial markets will always be a crucial factor for CFDs Brokers. Market trends such as the rise of environmental, social and governance (“ESG”) investing, the increasing popularity of virtual assets, and the growing use of AI and automation are likely to impact CFDs brokers; thus, robust risk management systems in place are always suggested in order adapt to these market trends and have to manage and/or transfer efficiently the market risk.

The financial scenery has also created the potential for operational risk challenges in 2023 due to the increasing complexity of financial markets and the evolving technology landscape requesting more robust operational controls and cybersecurity measures in place to manage and prevent these risks. In uncertain market situations, the liquidity risk challenges are always underlying for CFD Brokers. 2023 is highly likely to affect Brokers’ liquidity due to the potential for market shocks and the changing regulatory environment. Brokers should be in a position to face this challenge by maintaining sufficient liquidity to meet their financial obligations and also have strategic plans in place to manage any liquidity shocks. Consequently, reputation risk challenges will likely occur in 2023 due to the increasing scrutiny of financial institutions and the association of CFDs with high-risk investments. Robust compliance controls and measures are always the safeguards against illegal activities, as they protect the company’s reputation.

It should be noted that the actions for a Company to be compliant with the Law and the regulatory framework are not a one-person mission. The importance of being compliant lies also to all the Company members: the management, the second line of defence personnel, the stakeholders, etc. Being compliant shows adjustability and preparedness to maintain strong risk management systems in place to protect clients, business, company’s culture, and at the same time, remain competitive.

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