ESMA announces formal adoption of new rules regarding binary options, CFDs

Maria Nikolova

The new rules will start to apply from July 2, 2018 for binary options and from August 1, 2018 for CFDs.

MiFID II implementation likely to be set back even further

Further to the announcement by the European Securities and Markets Authority (ESMA) from March this year, about the new rules for offering CFDs and binary options to retail investors, the regulator today says that it has formally adopted the new measures.

The measures have been published in the Official Journal of the European Union (OJ) today. They will start to apply from July 2, 2018 for binary options and from August 1, 2018 for CFDs.

As a result:

  • From July 2, 2018, a prohibition on the marketing, distribution or sale of binary options to retail investors is introduced.
  • Effective August 1, 2018, a restriction on the marketing, distribution or sale of CFDs to retail investors is introduced. 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.

In particular, the leverage limits on the opening of a CFD position by a retail client vary from 30:1 to 2:1, according to the volatility of the underlying:

· 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 will apply 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.

The negative balance protection will also be implemented on a per account basis. This will provide an overall guaranteed limit on retail client losses.

There will also be a restriction on the incentives offered to trade CFDs, as well as a standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

The measures will remain in force for a period of three months from the date of application.

Let’s recall that MiFIR gives ESMA the power to introduce temporary intervention measures on a three monthly basis. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.

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