ESMA agrees with Spain’s CNMV applying CFD restrictions to Futures and Options

Rick Steves

Spain’s CNMV is introducing marketing restrictions preventing the offering of training, technical seminars, courses or sessions to retail investors to all leveraged products, excluding turbos. The regulator is also taking action on margin requirements.

The European Securities and Markets Authority (ESMA) has published an opinion on product intervention measures taken by the Comisión Nacional del Mercado de Valores (CNMV), Spain’s financial watchdog.

CNMV’s CFD product intervention consists of further restrictions on the marketing of CFDs, including the advertisement of CFDs to the public, as well as the introduction of initial margin and margin close-out requirements to products where the investor may lose more than initially invested.

CNMV targets Futures and Options. Turbos get a pass

The first part establishes a prohibition of advertising communications on CFDs aimed at retail clients, including a prohibition of related sponsorship of events or organisations and brand advertising, such as the use of public figures by the firms marketing CFDs. There is an exception for cases in which the sponsorship or brand advertising does not intend to offer such products or services, in particular where such products or services only account for a small part of the offers on the website of the firm when compared with its general activity. Finally, it establishes a series of restrictions on the remuneration policies and the rules for cash deposits by customers.

The second part establishes specific intervention measures on the marketing, sale, and distribution to retail clients of certain ‘other leveraged products’, such as certain futures and options, defined for the purpose of the proposed measures as financial instruments whose maximum amount at risk at the time of subscription is either unknown or is greater than the amount initially invested. The scope excludes for example turbo products where the total amount at risk is equal to the amount invested.

These specific intervention measures are designed with reference to the ‘initial margin protection’ and ‘margin close-out protection’ included in the measures on CFDs in ESMA’s Decision of 2018 and in the intervention measures on CFDs already taken by the CNMV in the CNMV Resolution of 27 June 2019 (the 2019 CFD Resolution).

Spain’s CNMV orders brokers to close positions when they’re half the initial margin

The CNMV has notified ESMA that under its proposed measures:

  • providers of these other high risk products will be required to close one or more of a retail client’s open positions when the value of the positions is reduced to half the initial margin, i.e. the same account-level mechanism as under the existing CFD measures;
  • these other high risk products will be subject to the same initial margin protection as in the existing CFD measures with one exception: if the trading venue requires a lower amount of initial margin for a product with an underlying other than crypto-assets than required under the existing CFD measures, this lower amount of initial margin can be used.

In both instances, the measures only apply to entities authorised to provide investment services in Spain, regardless of the origin of the investment firm and whether it has a branch in Spain.

If the relevant instrument’s underlying, however, is a crypto-asset that is not considered a financial instrument under Directive 2014/65/EU of the European Parliament and of the Council, the measures also apply to firms authorised in Spain providing services in other Member States.

ESMA highlights that CNMV allows higher leverage for futures and options

In its assessment, ESMA noted that the 2019 CFD Resolution included a ‘negative balance protection’ measure in recognition of the severe risk of investor detriment from a market gapping event for CFDs as a leveraged product whose maximum amount at risk is unknown (e.g. for a short CFD, the maximum amount at risk is unlimited) or exceeds the amount invested.

“The CNMV’s proposed new measures do not go as far as introducing a ‘negative balance protection’ measure. Instead, they mitigate the investor protection risk of negative balances by applying the following elements of the 2019 CFD resolution: (i) margin close-out protection and (ii) initial margin protection, for high-risk products in scope that are not subject to margin requirements on a trading venue, and for any high-risk products in scope that have crypto-assets as their underlying. These proposed measures, taken together, are aimed to ensure that retail investors’ positions on these high-risk products are closed out on an account basis in a consistent, clear and prudent way in line with the existing CFDs measures”, said the EU regulator.

“However, the national measures also enable a lower amount of initial margin than that required under the existing CFD measures for a product subject to lower margin requirements of a trading venue. In this respect, the CNMV notes that its measures are designed to address the current possibility that firms reduce the margin required from their retail clients to allow for higher leverage than that applied by trading venues.

ESMA also noted that CNMV takes into account that margin requirements by trading venues are already designed to mitigate the risk of negative balances through gapping events according to risk management tools by the trading venue calibrated to the particular instrument in question.

ESMA agrees with Spain likening other leveraged products to CFDs

ESMA agreed with the CNMV that other leveraged products are similar to CFDs and will be monitoring whether detrimental consequences for retail clients like those observed in relation to CFDs would arise in respect of those other products.

In addition, the EU regulator agrees that crypto assets pose major risks for investors, including inherent difficulties in arriving at a valuation and a very high level of uncertainty around market price movements.

“While plainly extending the initial margin protection used for CFDs to these instruments could provide retail investors with a clear, simple set of leverage limits across broadly similar leveraged products, ESMA understands that the CNMV needs to balance this against the effectiveness of existing margining practices by trading venues calibrated to the particular features of a given instrument. The CNMV’s assessment is that such margining practices are effective except in the case of high-risk products that have crypto-assets as their underlying.”

CNMV’s marketing ban already captured by ESMA’s 2019 CFD Resolution

As to the proposed marketing restrictions preventing the offering of training, technical seminars, courses or sessions to retail investors, ESMA finds it was already captured by the scope of the existing 2019 CFD Resolution.

Those measures include a prohibition on directly or indirectly providing a retail client with a payment, monetary or excluded non-monetary benefit in relation to the marketing, distribution, or sale of a CFD. In this respect, ESMA already provided a positive opinion on this element of the proposed national measure in its earlier opinion dated 24 June 2019.

The EU’s financial markets regulator and supervisor encouraged all National Competent Authorities (NCAs) in the European Union, to monitor whether similar risks as those identified by the CNMV may arise in their jurisdictions.

According to Article 42 of Regulation (EU) No 600/2014, NCAs may take product intervention measures but are required to notify all other NCAs and ESMA of the details and related evidence at least one month before a measure is intended to take effect unless there’s a need for urgent action.

After receiving notification from an NCA of its proposed measure, ESMA must adopt an opinion on whether the proposed measure is justified and proportionate. If ESMA considers that the taking of a measure by other NCAs is necessary, it must state this in its opinion.

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