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CFDs & Binary Options: Product Intervention Measures Agreed by ESMA

ESMA Agrees Product Intervention Measures against Retail CFDs and Binary Options

27th March 2018

The European Securities and Markets Authority has today announced they have agreed product intervention measures against the provision of Contracts for Difference (CFDs) and binary options to retail customers across the EU.

These measures look to prohibit the sale of binary options and restrict the sale of CFDs to retail investors.

In today’s press release, ESMA’s informs of their agreed measures, which include:

• For Binary Options: “a prohibition on the marketing, distribution or sale of binary options to retail investors”; and
• For Contracts for Differences (CFDs): “a restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a 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.”

In line with the Markets in Financial Instruments Regulation (MiFIR), ESMA can only introduce temporary intervention measures on a three monthly basis and, before the three months is up, they will have to consider whether to extend their intervention measures for a further three months.

Regulators both at home and overseas have concluded that there exists a significant investor protection concern in relation to CFDs and binary options that are offered to retail investors. The concerns are largely due to:

- their perceived complexity and lack of transparency;  

- particular features of CFDs (e.g. excessive leverage)

- particular features of binary options (e.g. structural expected negative return and embedded conflict of interest between providers and their clients);

- the disparity between the expected return and the risk of loss; and

- issues related to their marketing and distribution.

Steven Maijoor, Chair of ESMA, said:

“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. 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 a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.

The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.

A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.”

CFD Product Intervention Measures

The product intervention measures that ESMA has agreed include:

• Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:

·         2:1 for cryptocurrencies;

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

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

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

·         30:1 for major currency pairs;

• A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
• Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
• A restriction on the incentives offered to trade CFDs; and
• A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

ESMA’s press release can be read here, with further information and an official notice expected to be published in the coming weeks along with definitive implementation dates.

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