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ESMA adopts CFD Product Intervention Measures today

1st August 2018

ESMA adopts final product intervention measures on CFDs

From today, 1st August 2018, temporary product intervention measures, as published by the European Securities and Markets Authority (ESMA) will apply to Contracts for Differences (CFDs).

Published two months ago in June, ESMA informed it would formally be adopting new measures on the provision of CFDs and Binary options to retail investors.

These measures were published in the Official Journal of the European Union, with those measures in relation to binary options applying from last month on 2nd July 2018 and those in relation to CFDs applying from today.

It should be noted that MiFIR gives ESMA the power to introduce such temporary product intervention measures on a three-monthly basis.

Overview of ESMA CFD Product Intervention Measures:

ESMA’s product intervention measures apply restrictions on the marketing, distribution or sale of CFDs to retail investors and consist of:

- Leveraging limits on opening positions;

- Margin close out rule on a per account basis;

- A negative balance protection on a per account basis;

- Preventing the use of incentives by a CFD provider; and

- A firm specific risk warning delivered in a standardised way.

ESMA has adopted these measures and they will remain in force for a period of three months from the date of application.

Mr Maijoor, Chair of ESMA, said of these measures: “they are a significant step towards greater investor protection in the EU.  The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors.”

CFD Product Intervention Measures from 1st August 2018

The following sections provide greater detail on the measures ESMA has today adopted:

CFD: Leverage Limits:

Leverage limits to be applied on the opening of a position by a retail client. These limits will vary from 30:1 to 2:1 according to the volatility of the underlying:

·         for major currency pairs 30:1;

·         for non-major currency pairs, gold and major indices 20:1;

·         for commodities other than gold and non-major equity indices 10:1;

·         for individual equities and other reference values 5:1; and

·         for cryptocurrencies 2:1;

CFD: Margin Close Out:

A margin close out rule on a per account basis. This measure looks to standardise the percentage of margin (at 50% of minimum required margin) at which CFD providers are required to close out one or more retail client’s open CFDs;

Negative Balance Protection:

Negative balance protection on a per account basis. This measure will provide an overall guaranteed limit on retail client losses;

Incentive Restrictions:

A restriction on the incentives offered to trade CFDs; and

CFD Risk Warnings:

A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

Next Steps for CFD Product Intervention Measures:

Before the three month temporary product intervention period runs out (1st November 2018), ESMA will look to review the measures and consider whether such measures will need to be extend for a further three month period.

If you have concerns or would like further clarification on the product intervention measures for CFDs, please do not hesitate to contact our experienced consultants who would be happy to assist.

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