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For most people in Singapore, 8 October 2019 will be a day like any other. But for FX traders, some changes to the regulations are going to have an impact on their lives.
The Monetary Authority of Singapore has passed on a new rule to raise margin requirements from 2% to 5% from 8 Oct onwards. We explore what this mean for traders in Singapore.
What is a margin and how does it work in the context of trading?
A margin enables traders to get higher exposure on their investments by enabling them to execute larger trades for a fraction of the capital they originally would need. Using margins is a way of leveraging.
For starters, traders are required to open a margin trading account with a broker and deposit money into it. The broker then provides a certain percentage of funds above and beyond this deposit, so the trader is able to execute a larger trade.
So, a margin of 2% would mean that when you deposit $2,000, you can trade $100,000 in total, with the broker providing the remaining $98,000. Assuming you manage to make a profitable trade, it’s easy to see how you would make a lot more money trading $100,000 than just $2,000.
Of course, it’s all fine and dandy if you only make profitable trades. But margin also carries a significant degree of risk when your trades go in the wrong direction, hence it is important to limit your potential losses with the use of risk management tools.
So, as mentioned earlier, MAS is raising margins from 2% to 5%. A margin of 5% means you now have to fork out $5,000 rather than $2,000 for a trade worth $100,000.
Here’s what the higher margins mean to you as a trader:
- Higher monetary commitment – You now need more capital to make trades of the same size as before.
- Higher “risk” as margin call will involve a bigger amount – While higher margins are ostensibly being put in place to reduce overall risk to the trader, you might actually be at a higher risk of running out of cash, as you’ll need to put more money in when your broker makes a margin call.
However, not everyone will be affected. Accredited, expert and institutional investors are exempted from the rule and may continue trading at margins of 2%.
As an accredited investor of IG, you will be able to get better flexibility to trade with lower margins, get preferred rates and also get a dedicated account manager to guide you with your trading needs. You can check your eligibility and declare with supporting documents to become an accredited investor.
If you’re an expert investor or institutional, that means you are probably a professional trader or otherwise in the business of investing.
It’s thus clear that most ordinary bedroom investors will be hit by the new margin rules.
Why is this being done by MAS?
The rules are going to make it harder for people to get into FX trading, and yes, it could be fair to assume that this is MAS’s intention. Due to the volatile nature of FX, it is important that FX trading should not be taken lightly and that traders should use leverage with care.
This change also mirrors international standards following margin policy changes put in place by the European Securities and Markets Authority.
So, are your days of trading over? What can you do to mitigate the damage caused by the new rules on your portfolio? Well, one major thing you can do is to make sure you take advantage of the risk management tools like guaranteed stops offered by platforms like IG, who have a comprehensive suite of tools to help you manage your risk. These can really help you get an edge, and you might find your trades becoming more well managed. We will touch more on these tools in subsequent articles and explain how these can help you to mitigate the risk involved in trading.
Alternatively, you can consider trading other asset classes available on the IG platform like commodities, indices or shares. Check out this site to see how IG helps you manage risk over a wide range of CFDs. Stay tuned as we carry on this series with how else you can cope with the new changes to margin requirements.
How do you think MAS’s new rules on FX trading will affect you? Share your views in the comments!
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