Cypriot regulator drops risk-based approach to CFD leverage caps

Maria Nikolova

The Cypriot restrictions for the offering of CFDs to retail investors now envisage the same leverage caps as the ESMA measures.

The Cyprus Securities and Exchange Commission (CySEC) has today outlined the national measures to restrict the marketing, distribution and sale of contracts for difference (CFDs), with the document revealing that the Cypriot regulator has abandoned the risk-based approach to CFD leverage caps.

Let’s recall that, CySEC proposed to introduce stricter leverage limits for those retail clients falling within the grey area of the target market and slightly higher leverage limits for the retail clients falling within the upper tier of positive target market. Put simply, various leverage caps would have been applied to various categories of retail clients. But CySEC has abandoned this plan.

CySEC received feedback from 15 respondents comprised of Investment Firms, one Industry Association, one National Competent Authority (“NCA”) of another Member State and one retail investor. The retail investor requested CySEC to reconsider its approach and to refrain from introducing any measures particularly in relation to leverage. The NCA raised concerns in relation to the proposed divergence from ESMA measures under CP-02-2019, particularly in relation to whether such divergence will create confusion amongst residents of the specific Member State as to the content of restrictions that are applicable to them.

In relation to the position of the NCA, CySEC shares the concerns in relation to the cross-border application of measures and the confusion that might be created by the adoption of different measures across the European Union by the NCAs. To this end, CySEC said it believes that the most appropriate way forward is to structure its measures in a way that incorporates the content of the measures taken by other NCAs when firms falling under its remit market, distribute or sell CFDs in the territory of such Member States.

As a result, the Cyprus National Product Intervention Measures (‘CyNPIMs’) envisage the adoption of the same leverage limits for all retail clients, with ranges from 2:1 to 30:1 dependent on the type and volatility of the underlying asset:

  • 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.

CySEC will proceed with adopting the same risk warning as ESMA’s except for the case of new firms that do not have twelve months of retail client trading data where we request that the percentage range is replaced with a reference stating that:

“The vast majority of retail client accounts lose money when trading in CFDs” in the durable medium and webpage standard risk warning and in the abbreviated standard risk warning and with a reference stating that “CFD-retail client accounts generally lose money” in the reduced character standard risk warning.

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