ESMA clarifies scope of CFD restrictions in relation to rolling spot forex

Maria Nikolova

The CFD rules apply to rolling spot forex products that do not qualify as an option, future, swap or forward rate agreement.

The European Securities and Markets Authority (ESMA) has today updated its Questions and Answers on its product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients. The updated Q&As aim to provide clarification on the application of the temporary product intervention measures in relation to rolling spot forex.

The question is “Do ESMA’s product intervention measures in relation to CFDs (in the CFD Decision) also apply to rolling spot forex?”.

The EU regulator explains Article 1(a) of the CFD Decision provides that a CFD is a derivative other than an option, future, swap or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level or value of an underlying, irrespective of whether it is traded on a trading venue, and that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event.

ESMA notes that Paragraph 8 of the CFD Decision states that rolling spot forex products are in scope. The CFD Decision applies to rolling spot forex that do not qualify as an option, future, swap or forward rate agreement. A forex derivative which uses the spot price as reference value and automatically rolls over at the end of the contract period and allows a party to terminate the contract other than by reason of default or another termination event is a CFD for the purposes of Article 1(a) of the CFD Decision.

The clarification was made after earlier today, ESMA said it would extend the restrictions on CFD offering to retail clients by further three months. As per today’s announcement, the restrictions will be renewed from November 1st.

The leverage restrictions and other investor protection measures, such as negative balance protection on a per account basis, will remain in place. 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. That is why the regulator has determine 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.

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