ESMA agrees to extend CFD restrictions for further three months

Maria Nikolova

The EU regulator believes that a significant investor protection concern related to the offering of CFDs to retail clients is still present.

MiFID II implementation likely to be set back even further

The European Securities and Markets Authority (ESMA) has earlier today announced that it will extend the restrictions on CFD offering to retail investors by further three months.

The rules initially came into effect on August 1, 2018, and were set to expire on November 1, 2018. As per today’s announcement, the restrictions will be renewed from November 1st.

The reason for the decision is that the EU regulator believes that the concerns around investor protection are still present.

As per the extended restrictions, leverage caps remain at:

  • 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.

The margin close out rule on a per account basis also remains. It aims to 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.

The restrictions also include negative balance protection on a per account basis. This is set to provide an overall guaranteed limit on retail client losses.

The restriction on the incentives offered to trade CFDs stays in place too.

Brokers have to display a standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts. However, during its review of the intervention measure, ESMA obtained information that, in certain cases, CFD providers experienced technical difficulties in using the risk warnings due to the character limitations imposed by third party marketing providers. Hence, ESMA has agreed to introduce in the renewal an additional reduced character risk warning:

[insert percentage per provider] % of retail CFD accounts lose money.

This new warning format will be allowed only in cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed.

ESMA plans to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from November 1, 2018 for a period of three months.

Let’s recall that ESMA has decided to extend the ban on binary options offering to retail investors for a period of three months too amid continued concerns about risks associated with such investments.

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