contracts for difference (CFDs)

ESMA Will Not Renew Temporary Restriction on Marketing, Distributing and Selling CFDs to Retail Clients

On July 31, European Securities and Markets Authority (ESMA) published a press release which announced it would not renew the temporary restriction on the market, distribution or sale of contracts for difference (CFDs) to retail clients in the EU. Therefore, the measures in ESMA Decision (EU) 2049/679 automatically expired on July 31.

This decision was made because most national competent authorities have taken permanent national product intervention measures relating to CFDs, which are at least as stringent as ESMA’s temporary measures. However, it will continue to monitor activity relating to CFDs to determine whether other EU-wide measures may be needed. Release.

ESMA Call for Evidence on Potential Product Intervention Measures on CFDs and Binary Options to Protect Retail Clients

On January 18, 2018, European Securities and Markets Authority (“ESMA”) published a call for evidence (“CfE”) on potential product intervention measures on contracts for differences (“CFDs”) and binary options in order to protect retail clients (ESMA35-43-904).

In December 2017, ESMA published a statement explaining it was considering the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) to address investor protection concerns arising out of the marketing, distribution and sale of CFDs and binary options to retail investors. It is now seeking feedback from stakeholders on the impact of certain potential measures.

In relation to CFDs, ESMA is considering implementing the following:

  • A standardized risk warning by CFD providers in any communication to, or published information accessible by, a retail client relating to the marketing, distribution or sale of a CFD. At present, ESMA’s preferred option is that this standardized warning would indicate the percentage range of retail investor accounts having losses.
  • Leverage limits on the opening of a position by a retail client that would apply to any payment made to a product provider for the purpose of entering into a CFD, excluding any commission and transaction fees owed to the provider. They would range from 30:1 to 5:1 depending on the different classes of underlying assets.
  • A margin closeout rule on a position-by-position basis. This would standardize the percentage of margin at which providers are required to close out a retail client’s open CFD. The aim is that clients are routinely protected from losing more than they have invested in a consistent manner across providers.
  • Negative balance protection on a per-account basis, to provide an overall guaranteed limit on retail client losses.
  • A restriction on incentivization of trading provided directly or indirectly by a CFD provider, such as providing retail clients with a payment (other than a realized profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD.

ESMA is currently considering how CFDs on cryptocurrencies fit within the MiFID II regulatory framework as financial instruments. It is seeking views on this and asks whether it should introduce specific restrictions concerning CFDs in cryptocurrencies.

ESMA is also considering a prohibition on the marketing, distribution and sale to retail clients of binary options. This is on the basis that the risks relating to binary options are due to inherent product features that are unlikely to be sufficiently addressed through product restrictions.

The CfE closes to responses on February 5, 2018.

ESMA Publishes New Q&A on CFDs and Other Speculative Products

The European Securities and Markets Authority (ESMA) has published a new question and answer document (ESMA/2016/590) on the application of MiFID to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients.

ESMA explains that, although CFDs and other speculative products (such as binary options and rolling spot forex) are complex products, they are widely advertised to the retail mass market by a number of firms, often through online platforms. The Q&A document is designed to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to key aspects that are relevant when CFDs and other speculative products are sold to retail clients. Although they are targeted at competent authorities, the answers are also intended to help firms by providing clarity on MiFID requirements.

ESMA has also added that, while the Q&A refer to MiFID, the principles and requirements underpinning the content of the document will remain unchanged once MiFID II enters into application.