On 15 December 2017, the European Securities and Markets Authority (ESMA) published a statement explaining that it was considering the possible use of its product intervention powers under Article 40 of MiFIR to address investor protection concerns posed by the marketing, distribution and sale of contracts for differences (CFDs) and binary options to retail investors. ESMA also stated that it would conduct a brief consultation in January 2018. Our blog is here.

ESMA has now published a call for evidence on potential product intervention measures relating to the provision of CFDs, including rolling spot forex and binary options to retail investors.

In relation to CFDs, ESMA is considering restricting the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex. ESMA states that the option of applying the restrictions to professional clients is not under consideration due to the lack of evidence of harm to this type of client. The restrictions that ESMA is currently considering are:

  • leverage limits on the opening of a position by a retail client. These would range from 30:1 to 5:1 to reflect the historical price behaviour of different classes of underlying assets. In particular: (i) for CFDs in major currency pairs (comprising two of the following, US Dollar, Euro, Japanese Yen, Pound Sterling, Canadian Dollar or Swiss Franc), a limit of 30:1 is being considered; (ii) for CFDs in non-major currency pairs and major equity indices (FTSE 100, CAC 40, DAX30, Dow Jones Industrial Average, S&P 500, NASDAQ, Nikkei 225, ASX 200), a limit of 20:1 is being considered; and (iii) for CFDs in gold a limit of 20:1 is being considered; (iv) for CFDs in commodities other than gold, and for CFDs in minor equity indices, a limit of 10:1 is being considered; and (v) for individual equities and for any underlying not otherwise listed above, a limit of 5:1 is being considered;
  • a margin close out rule on a position by position basis. This would standardise the percentage of margin at which providers are required to close out a retail client’s open CFD;
  • negative balance protection on a per account basis. This would provide an overall guaranteed limit on retail client losses;
  • a restriction on the incentivisation of trading provided directly or indirectly by a CFD provider. This may include providing retail clients with a paymentv(other than a realised profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD; and
  • a standardised risk warning by CFD providers. ESMA’s preferred option is that this standardised warning would indicate the percentage range of retail investor accounts having losses, as emerging from studies and analyses conducted by Member State national competent authorities.

ESMA is also considering whether CFDs in cryptocurrencies should be addressed in the measures and welcomes views on the matter.

On binary options, the potential measure under consideration is a prohibition on the marketing, distribution or sale of binary options to retail investors. ESMA states that it is currently minded to adopt this measure on the basis that the significant investor protection concerns relating to this product are due to inherent features of the product that are unlikely to be sufficiently addressed through certain restrictions on the product (for example minimum duration contract periods).

The deadline for comments on the call for evidence is 5 February 2018.

View ESMA consults on potential CFD and binary options measures to protect retail investors, 18 January 2018