ESMA disagrees with FCA on some CFD offering restrictions

Maria Nikolova

In ESMA’s view, the proposed leverage limit for CFDs referencing certain government bonds is not justified and proportionate.

The European Securities and Markets Authority (ESMA) has earlier today issued a set of opinions regarding proposed product intervention measures by national competent authorities, including the UK Financial Conduct Authority (FCA). As FinanceFeeds has reported, the FCA has made changes to its Handbook regarding restrictions to offering of CFDs and CFD-like products to retail investors.

Overall, the measures outlined by the FCA were the same as those adopted by ESMA. And yet, there were some differences. Today, it became clear that ESMA does not agree with all the measures set forth by the UK regulator.

The national measures consist of a permanent restriction on the marketing, distribution or sale to retail clients in or from the UK of contracts for differences (CFDs) as well as products referred to by the FCA as ‘CFD-like options’.

The FCA informed ESMA that the national measures are the same as ESMA’s measures at national level, with the differences that the national measures would: (i) also capture products referred to by the FCA as ‘CFD like-options’, which are not included in ESMA’s measures; (ii) set a leverage limit of 30:1 for CFDs and CFD-like options referencing certain government bonds, instead of the 5:1 leverage limit provided for in ESMA’s measures; (iii) include minor amendments to the initial margin protection requirement in ESMA’s measures; (iv) include minor amendments to the risk warnings in ESMA’s measures.

Unlike ESMA’s measures, the national measures would capture CFD-like options. In ESMA’s measures, ESMA acknowledged that these products, despite differing in various respects from CFDs, also have similarities with CFDs and that ESMA and the NCAs would monitor whether detrimental consequences for retail clients similar to those observed in relation to CFDs would also arise in respect of products with similar or comparable features to CFDs. For the purposes of the national measures, ESMA has assessed the relevance of the FCA’s supervisory experience, in particular the evidence concerning the significant losses of UK retail clients when trading CFD-like options and the likelihood of the circumvention of the restrictions on CFDs by UK product providers. In the light of these national specificities, ESMA considers that it is justified and proportionate for the national measures to include CFD-like options.

In relation to the planned application of the restrictions on CFD-like options to all providers marketing those products in or from the UK and to UK providers and UK branches of providers authorised in other Member States distributing or selling those products in or from the UK, ESMA considers that the proposed distinction does not adequately address the consumer detriment which the FCA has observed for UK retail clients in respect of CFD-like options. That is because the distinction would still permit UK retail clients to trade CFD-like options with providers established in other Member States and experience significant losses. Therefore, ESMA considers that the restrictions on CFD-like option providers should be applied equally to providers authorised in the UK as well as to providers authorised in other Member States.

Therefore, according to ESMA, the FCA’s proposed application of the restrictions to CFD-like option providers authorised in other Member States only in respect of the marketing of CFD-like options, and not in respect of the sale or distribution of those products, is not justified and proportionate.

With regard to the proposed leverage limit of 30:1 for CFDs referencing certain government bonds, ESMA acknowledges that this proposal is based on quantitative analysis which follows a methodology consistent with the approach taken in ESMA’s measures, subject to available data, and that 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures, which may mitigate competition amongst providers that are subject to a stricter leverage limit.

However, in ESMA’s view the proposed leverage limit for CFDs referencing certain government bonds is not justified and proportionate. The proposed leverage limit, ESMA argues, would result in divergence from the leverage limits applied by product providers subject to other national measures under Article 42 of Regulation (EU) No 600/2014 based on ESMA’s measures.

With regard to the proposed minor amendments to the initial margin protection requirement in ESMA’s measures, ESMA considers these amendments to be consistent with its interpretation of the requirement. ESMA finds that the FCA’s proposed clarifications to the initial margin protection requirement in ESMA’s measures are justified and proportionate.

Finally, in respect of the differences in the risk warnings between the national measures and ESMA’s measures, ESMA considers that the proposed amendments to refer in the risk warnings also to CFD-like options is consistent with the FCA’s proposed extension of the national measures also to CFD-like options.

In conclusion, ESMA is of the opinion that the national measures are justified and proportionate except for:

  • (i) the FCA’s proposal not to apply the national restrictions to CFD-like option providers authorised in other Member States other than through a UK branch or tied agent in respect of the sale or distribution of those products to UK retail clients; and
  • (ii) the FCA’s proposal to apply a 30:1 leverage limit for CFDs referencing certain government bonds, instead of the 5:1 leverage limit in ESMA’s measures.

Although the opinion is partially negative, it is not certain that ESMA will be doing anything particular to force the FCA to change the new rules. The pan-EU regulator has already indicated that its powers are limited at a national level.

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