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ESMA Renews Restrictions on CFDs and Binary Options

7th January 2019

ESMA renews restrictions on CFDs and Binary Options

In December, The European Securities & Markets Authority (ESMA) agreed to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, that has been in effect since 1st August 2018. It was previously renewed from 1st November 2018 for three months and has now again been renewed for a further period of three months with effect from 1st February 2019.

After carefully considering the need to extend the invention measure currently in place, ESMA still believes that a significant concern relating to investor protection exists in offering CFDs to retail clients. Therefore they have decided to extend the intervention measures for a further three months.

In addition, ESMA also decided to renew the ban on the marketing, distribution or sale of Binary Options to Retail Clients, with the renewal of prohibition taking effect on 2nd January 2019 for a further period of three months.

Renewal of CFD Restrictions:

ESMA’s renewal of their restrictions on CFDs for retail clients was agreed by the Board on 18 December 2018 and includes the following measures:

• 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;
• 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
• A restriction on incentives offered to trade CFDs; and
• A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

Abbreviated Standard Risk Warnings:

It should be noted that as was introduced in ESMA’s previous renewal decision for extending the CFD Product Intervention Measures, abbreviated risk warnings may be utilised. This is only in cases where the standard terms of a third party marketing provider has a character limit lower than that needed to provide the full risk warning, here, an abbreviated risk warning may be used, provided that the advertisement is also linked to a webpage on which the risk warning is disclosed in full.

This latest renewal of the product intervention measures for CFDs will apply from 1st February 2019 for three months, before the end of which ESMA will again review and determine whether to extend the measures again.

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