ESMA set to launch consultation on restrictions for binary options, CFD offering to retail clients

Maria Nikolova

ESMA is considering measures to prohibit the marketing, distribution or sale to retail clients of binary options.

The European Securities and Markets Authority (ESMA) has published a brief update on its plans to regulate the offering of contracts for differences (CFDs), including rolling spot FX, and binary options to retail clients.

In particular, ESMA is considering measures to:

  • prohibit the marketing, distribution or sale to retail clients of binary options; and
  • restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.

The restrictions on CFDs under review are:

  • leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;
  • a margin close-out rule;
  • negative balance protection to provide a guaranteed limit on client losses;
  • a restriction on benefits incentivising trading;
  • a standardised risk warning.

ESMA plans to conduct a public consultation on this matter in January 2018.

A number of European countries, such as France, have already introduced restrictions regarding the marketing of high-risk investment products. Whereas there is a ban on digital advertising of “toxic” products like binary options, thanks to the Sapin 2 law, France’s financial markets regulator AMF has admitted that certain brokers fail to comply with the law and continue to market such products to French residents. Nevertheless, the French regulator is waiting for ESMA’s measures and has not yet punished the violators.

The position of the UK Financial Conduct Authority (FCA) regarding CFD offering to retail clients also hinges on ESMA’s stance. In June this year, the UK regulator delayed the implementation of new rules for CFD firms explaining the delay with a statement by ESMA on its consideration of product intervention measures under Article 40 of the Markets in Financial Instruments Regulation (MiFIR). ESMA’s product intervention powers can only come into effect from January 3, 2018 at the earliest.

The UK FCA is taking over binary options firm regulation from January next year. The protection for investors, however, is set to remain limited – for instance, there will be no protections to compensate investors for any losses from trading binary options.

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