ESMA bans offering of binary options to retail investors, introduces restrictions to CFDs

Maria Nikolova

Leverage for CFDs will vary from 2x to 30x depending on the underlying, with the strictest leverage cap to be applied to cryptocurrency CFDs.

Following a consultation launched earlier this year, the European Securities and Markets Authority (ESMA) has just announced that it has agreed on measures on the provision of contracts for differences (CFDs) and binary options to retail investors.

As previously guided by the regulator, a ban on the marketing, distribution or sale of binary options to retail investors is introduced. All other measures restricting the offering of such products to retail investors did not give the desired result.

There will be restrictions on the offering of CFDs, including caps on leverage depending on the underlying, with the strictest restrictions to be imposed on cryptocurrency CFDs. The product intervention measures ESMA has agreed under Article 40 of the Markets in Financial Instruments Regulation include:

1. Leverage limits:

  • 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;

2. A margin close out rule on a per account basis. This is set 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;

3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

4. A restriction on the incentives offered to trade CFDs; and

5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

In the coming weeks, ESMA plans to adopt these measures in the official languages of the EU. After that, ESMA will publish an official notice on its website. The measures will then be published in the Official Journal of the EU and will start to apply one month, for binary options, and two months, for CFDs, after their publication in the Official Journal.

The new measures are introduced amid growing concerns of ESMA and the National Competent Authorities (NCAs) about investor protection in relation to CFDs and binary options offered to retail investors. The regulators note that these products are complex and lack transparency. Concerns have been voiced about the particular features of CFDs – excessive leverage – and binary options – structural expected negative return and embedded conflict of interest between providers and their clients; the disparity between the expected return and the risk of loss; and issues related to their marketing and distribution.

NCAs’ analyses on CFD trading across different EU jurisdictions shows that 74-89% of retail accounts usually lose money on their investments, with average losses per client ranging from €1,600 to €29,000. NCAs’ analyses for binary options also found consistent losses on retail clients’ accounts.

Steven Maijoor, Chair, commented:

“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics”.

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