Despite the protests and contrary to logic, the pan-European regulator of financial markets – the European Securities and Markets Authority (ESMA) – has pushed legislation that reduces the leverage of CFDs available to an individual investor and has completely banned marketing and trading of binary options within the European Union.
The new rules, after a consultation period, will come into effect as follows:
Binary Options – from July 2, 2018 – a prohibition on the marketing, distribution or sale of binary options to retail investors.
Contracts for Differences – from August 1, 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.
Steven Maijoor, ESMA Chair, stated:
-“The measures ESMA has taken today are a significant step towards greater investor protection in the EU. 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 understandable risk warnings for investors. ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product. This pan-EU approach is the most appropriate way to address this major investor protection issue. NCAs will monitor the impact of these measures during their application and will assess, with ESMA, what next steps are required.”
CFDs – measures from 1 August 2018
The product intervention measures ESMA has adopted 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 instrument:
- 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 closeout 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 (such as deposit bonuses); and
5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.
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.