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New FX margin rules to kick in on Oct 8. What can forex investors look at next?

Retail investors trading in foreign exchange will have to fork out a higher margin from Oct 8, due to the new regulation imposed by the Monetary Authority of Singapore.

Forex investors using leverage for their trades will be faced with an increased minimum margin requirement, from 2% to 5%. The new margin requirement applies to all leveraged foreign exchange trades, whether traders use contracts for difference or any other types of leverage, and it also extends to exempt financial institutions like banks, who do not require a capital markets services license.

However, the 2% minimum margin requirement is still maintained for accredited investors, expert investors, and institutional investors.

Here’s snapshot of the latest minimum margin requirements for various investment assets.

Products Minimum Margin Requirements
Equity CFDs without stop‑loss features (a)         10% for index stocks; and

(b)         20% for non-index stocks.

Index CFDs without stop‑loss features 5%
Foreign Exchange CFDs without stop‑loss features (a)         2% for any contract entered into only with a customer who is an accredited investor, expert investor or institutional investor; and

(b)         5% for any contract entered into with a customer who is not an accredited investor, expert investor or institutional investor.

CFDs with non‑guaranteed stop‑loss features Lesser of —

(a)         the sum of the amount at risk* and 30% of the standard margin; or

(b)         the standard margin**.

CFDs with guaranteed stop‑loss features Lesser of —

(a)         the amount at risk; or

(b)         the standard margin.

CFDs with guaranteed stop‑loss features, if the relevant CFD is subject to any adjustment for dividend, interest or commission Lesser of —

(a)         the sum of the amount at risk and 10% of the amount at risk; or

(b)         the standard margin.

Any other CFD without stop‑loss features 20%
Spot foreign exchange contracts for the purposes of leveraged foreign exchange trading with non‑guaranteed stop‑loss features Lesser of —

(a)         the sum of the amount at risk and 30% of the standard margin; or

(b)         the standard margin.

Spot foreign exchange contracts for the purposes of leveraged foreign exchange trading with guaranteed stop‑loss features Lesser of —

(a)         the amount at risk; or

(b)         the standard margin.

Spot foreign exchange contracts for the purposes of leveraged foreign exchange trading with guaranteed stop‑loss features, if the relevant spot foreign exchange contract is subject to any adjustment for dividend, interest or commission Lesser of —

(a)         the sum of the amount at risk and 10% of the amount at risk; or

(b)         the standard margin.

Any other spot foreign exchange contracts for the purposes of leveraged foreign exchange trading without stop‑loss features (a)         2% for contracts entered into only with customers who are accredited investors, expert investors or institutional investors; and
(b)         5% for contracts entered into with a customer who is not an accredited investor, an expert investor or an institutional investor.

Source: MAS

* Amount at risk refers to the maximum loss a customer may incur based on the difference between the contract price and stop‑loss price

**Standard margin refers to the minimum margin for either CFDs without stop-loss features, or spot foreign exchange contracts for the purposes of leveraged foreign exchange trading without stop‑loss features.

 

What does this change mean for investors?

Margins in forex trading are nothing like the fees or transaction costs seen in equity trading. They are simply the required amount of equity that is needed to be maintained in the investor’s forex account to maintain any open position. The margin will also be used to cover any losses that occur from the open positions.

The margin can even be in the form of cash, gold, shares, and convertible bonds listed on the SGX, among others.

For example, if an investor wants to trade EUR/USD, and intends to buy 100,000 Euros at the current price of US$1.10. At a 2% margin, the investor would need to maintain US$2,200 in their forex trading account. But with the revised margin requirement of 5%, the same investor would have to keep a minimum of US$5,500 to perform the same trade.

That means, with the same pool of investible funds, forex investors would either have to put in fewer trades or smaller sized trades in order to comply with the new margin requirements.

 

A better risk management strategy needed

The revised margin requirements by MAS are intended to protect retail investors who may not be able to fully appreciate the risks of trading in leveraged derivatives. As such, this may well be a good time for investors to take a step back, re-evaluate their risk management strategies, and consider other investment strategies that allow greater finesse in determining their maximum risk, while more effectively utilising their investible funds.

IG, a leading provider of CFDs and forex trading, is launching a new product known as knock-outs (KO), that offers investors just the option to manage the maximum risks they take.

 

What are knock-outs?

Knock-outs are limited-risk CFDs , and are available for major forex pairs, 24-hour indices and selected commodities.

Knock-outs allow investors to easily and safely invest in the direction they believe the market will move. For instance, if the investor thinks the EUR/USD pair is going to go up, they can buy a bull KO. If they think it is going to go down, they will buy a bear KO.

The knock-out price is decided by this formula:

Knockout Price = Difference between the underlying IG price and KO level + KO premium

 

What is the knock-out premium?

The knock-out premium protects investors from slippage on their KO level, and it is returned if the KO level is not reached. KO premiums vary from market to market, as they are determined based on the risk and volatility of a particular market.

For example, the EUR/USD pair has a KO premium of 1.2, while the GBP/USD pair has a KO premium of 2.

 

Benefits of knock-outs

There are three main benefits of knock-outs.

Knock-outs offer a simple pricing, because it moves one-for-one with the underlying IG price.

It provides investors with a lot of flexibility because your margin is determined by your choice of knockout level and your trade size. (Hence, you will be less impacted by the new FX margin change)

What’s more, as a limited risk instrument, the investor’s risk is limited to your margin, so you can decide how much you are willing to risk in that trade.

 

How much is the margin required?

Here’s how margins are calculated for Knock-outs

Margin = Opening KO price x Size of trade x 1.1

If we go back to the earlier example, with the investor buying 100,000, or 1 contract, of the EUR/USD pair thinking it is going to rise. The investor might enter the position at the underlying price of US$1.10 with a knockout price of US$1.095.

(11000.0 – 10950.0 + 1.2) x US$1 x 1.1 = US$56.32

In this case, the investor would need to maintain a margin of just US$56.32.

 

How to start trading knock-outs

  • To start, you can open a trading account with IG. Knock-outs are available on their trading platforms and their mobile apps.
  • Choose a bull or bear knock out
  • Set your knock out level
  • Open your position

 

Learn more about Knock-outs

Investors who want to learn more about IG’s new offering can download the new e-book by Bloomberg “Alternatives to FX CFD trading”. The e-book will offer more details and tips on how investors can utilise knock-outs, indices and precious metals as part of their investment strategies.

Investors can also try out knock-outs with a demo account of $200,000 virtual credits from IG. Get started here.

(By ZUU online)

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