ESMA to extend CFD restrictions for further three months

Maria Nikolova

The measure will start to apply from February 1, 2019 for a period of three months.

The European Securities and Markets Authority (ESMA) today announces that it will renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients from February 1, 2019 for a further three-month period.

The EU regulator explains that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. It has therefore agreed to renew the measure from February 1, 2019 on the same terms as the previous renewal decision that got into effect on November 1, 2018.

The renewal includes renewing the following:

  1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary 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;

2. A margin close out rule 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;

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. The standardised risk warning will continue to allow use of the additional abbreviated risk warning introduced in the previous renewal decision for 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.

ESMA plans to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website.

Let’s note that the UK Financial Conduct Authority (FCA) has earlier this month opened a consultation on permanent restrictions on the offering of CFDs to retail clients. The FCA’s proposals are, in their essence, the same as the ESMA’s existing, EU-wide temporary restrictions on these products, but they differ in some important aspects. First off, the proposed measures by the UK body are set to be permanent. Second, the restrictions would apply to a wider range of products. The FCA is proposing to extend the rules to closely substitutable products, including so-called turbo certificates. The regulator is also envisaging 30:1 leverage limits for CFDs referencing certain government bonds (compared to 5:1 under ESMA’s measures).

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