CMC Markets hit by ESMA measures as income drops in 2018

Spread betting and contracts for difference (CFD) provider CMC Markets has cited the impact of new regulatory measures across Europe as the primary reason behind year-on-year declines across income and profit in 2018.

Net operating income for the 12 months to March 31, 2019 totalled £130.8m (€147.6m/$165.7m), down 30% on £187.1m in the previous year, representing a decline of £56.3m.

CMC Markets has said this drop was driven by a “significant decrease” in trading volumes from clients hit by European Securities and Markets Authority (ESMA) regulations, as well as a further drop in overall client volumes due to lower levels of market volatility presenting fewer trading opportunities to clients.

ESMA has prohibited the marketing, distribution and sale of binary options to retail investors since July 1, 2018, with a number of new restrictions on Contracts for Difference (CFDs) coming into force in August that year. This saw negative balance protection introduced for retail investor accounts, a ban on the use of incentives by CFD providers to encourage customer uptake, and providers required to warn clients about the potential for losses, among other measures. 

Active client numbers dropped 10% year-on-year to 5,857 while new, enhanced appropriateness checks by the provider on customers meant fewer new clients signed up during 2018. However, CMC Markets has said this has helped boost the quality of its new clients.

Lower active client numbers in conjunction with the lower net operating income resulted in revenue per client falling 30% to £2,068.

Despite the new regulations, clients in the ESMA region collectively generated the most income for CMC Markets, with net operating income for the market at £74.4m for the year, down from £122.5m in 2017. Asia-Pacific and Canada revenue also fell from £52.9m to £35.8m.

CMC Markets was able to offset some of this income decline by saving on costs, with total operating expenses down from £125.9m to £123.1m. After interest, total costs fell from £127.0m to £124.5m.

This was primarily achieved by cutting staff costs from £57.9m to £51.7m, due to lower performance-related pay and share-based payments. Marketing costs were also down from £18.3m to £14.1m but CMC Markets did spend more on other areas including IT, with costs up from £16.9m to £20.0m.

However, despite lower expenses, the double-digit income decline meant CMC Markets meant profit before tax plummeted 89% from £60.1m to £6.3m. Profit after tax was also down 88% year-on-year to £5.9m.

Reflecting on the results, CEO Peter Cruddas admitted that while 2018 was a challenging year for the business, he said the provider has “weathered the ESMA transition” and exits the year with renewed confidence in the future.

“We have learned as our clients adjusted to the imposition of much lower leverage levels at the same time as experiencing range bound markets,” he said. “As a result, we have adjusted our business to ensure we capture revenue appropriately and manage the net risk we are exposed to from higher client margins against smaller positions being held for longer periods.

“Our business is much more balanced today than it has ever been, with a larger stockbroking business and important growth in our institutional business alongside our stabilised CFD and spread bet business all underpinned by our technology platform.

“As regulatory change continues to be a key positive driver in our markets, we believe that our strong product offering, client service, technology platform and balance sheet will ensure our ongoing success.”