ESMA’s product intervention measures relating to CFDs and binary options
On 1st June 2018 ESMA has formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors.
The measures have been published in the Official Journal of the European Union (OJ) on 1st June 2018. They will start to apply from 2 July 2018 for binary options and from 1 August 2018 for CFDs and will apply as follows:
1. Binary Options (from 2 July 2018) – a prohibition on the marketing, distribution or sale of binary options to retail investors; and
2. Contracts for Differences (from 1 August 2018) – 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.
ESMA has adopted these measures in the official languages of the EU and they will remain in force for a period of three months from the date of application.
On 1st June 2018 ESMA has published Q&As on the temporary product intervention measures on the marketing, distribution or sale of CFDs and Binary options to retail clients.
On 27th March 2018 ESMA has published additional information on the agreed product intervention measures relating to contracts for differences and binary options.
Measure related to CFDs from 1 August 2018
The product intervention measure ESMA has agreed under Article 40 of MiFIR for CFDs include:
- Leverage limits on the opening of a CFD 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;
- A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum initial required margin) at which providers are required to close out one or more of a 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 firm-specific risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, delivered in a standardised way.
Measures related to binary options from 2 July 2018
The product intervention measure ESMA has agreed under Article 40 of MiFIR is a prohibition on the marketing, distribution or sale of binary options to retail investors.
MiFIR gives ESMA the power to introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.
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