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ESMA CFD and Binary Options Update

April 19, 2018

What has happened?

The European Securities and Markets Authority has introduced a series of measures to restrict the marketing of contracts for difference and to ban binary options to retail investors. The limitations, also backed by the FCA, mean that there is a greater protection for investors, including restricting the use of leverage and incentives and more risk warnings on products such as binary options. Details can be found here.

ESMA’s product intervention measures will be applied to the provision of CFDs, including rolling spot forex and financial spread bets, and binary options to retail clients. Specifically, ESMA has agreed the following:

  1. Prohibition on the marketing, distribution or sale of binary options to retail clients
  2. Restrictions on the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex and financial spread bets.

The restrictions applied to CFDs are:

  • leverage limits on the opening of a position between 30:1 and 2:1, depending on the price volatility of the underlying asset
  • a 50% margin close out rule applied on a per account basis
  • negative balance protection, limiting retail clients’ liability to the funds in their CFD trading account
  • a prohibition on firms offering monetary and non-monetary benefits (excluding research and information tools) to retail investors
  • a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.

ESMA had published a consultation in December where it outlined its concerns on the risky instruments.

The FCA, which has voiced similar concerns in the past, said on 27.03.18 that it supported ESMA’s application of the ban and will consult on applying the measures permanently to firms offering CFDs to retail clients in the UK. Details of the FCA statement are here.

How can Thistle help you?

Thistle will continue to keep this area under review and will issue further updates where necessary. Please contact Thistle if you need assistance in relation to any of these issues.