ESMA AGREES TO RESTRICT CFDS
The European Securities and Markets Authority (ESMA) has agreed on measures on the provision of contracts for differences (CFDs) and binary options to retail investors in the European Union (EU).
The agreed measures include:
1. Binary Options - a prohibition on the marketing, distribution or sale of binary options to retail investors; and
2. Contracts for Differences - 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 accordance with MiFIR, ESMA can only introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will consider the need to extend the intervention measures for a further three months.
CFDs – agreed measures
The product intervention measures ESMA has agreed under Article 40 of the Markets in Financial Instruments Regulation include:
1. 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:
· 30:1 for major currency pairs;
· 20:1 for non-major currency pairs, gold and major indices;
· 10:1 for commodities other than gold and non-major equity indices;
· 5:1 for individual equities and other reference values;
· 2:1 for cryptocurrencies;
2. 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;
3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
4. A restriction on the incentives offered to trade CFDs; and
5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.