ESMA’s restrictions on CFD offering not to affect turbo certificates, structured finance products

Maria Nikolova

ESMA concedes that turbo certificates and CFDs have features in common but clarifies that turbo certificates are not within the scope of the restrictions on CFDs offering to retail clients.

There are only a couple of days left before the new ESMA rules for CFD offering to retail clients come into force, and the regulator continues to clarify the scope of the new regulation.

Earlier today, the European Securities and Markets Authority (ESMA) published an updated list of Questions & Answers (Q&As) about the temporary product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients. In particular, the latest updates concern turbo certificates and structured finance products. ESMA notes that the temporary product intervention measures will not apply to turbo certificates and structured finance products.

ESMA explains that turbo certificates are not within the scope of the new rules because, although similar to CFDs, they have different product features. Turbo certificates, unlike CFDs, have all of the following features:

  • Turbo certificates are not margined products and the investor cannot change the leverage of the turbo certificate by adding margin to or detracting margin from a specific trading account. Investors buy the turbo-certificate and are charged transactional fees, for entering the contract;
  • Turbo certificates do not have a contingent liability for the retail client. In other words, after the purchase of the product, the retail client has no possibility of being liable for a further payment when the transaction is completed or the position is closed (other than commission, transaction fees or other related costs);
  • Turbo certificates qualify as a transferable security as defined in Article 4 (1) (44) (c) of MiFID; and
  • Turbo certificates are typically listed and traded on a regulated market or MTF, which includes additional transparency requirements.

However, ESMA advises firms to pay particular attention to the leverage made available to retail clients and consider whether the turbo certificate is offered on terms that act in the best interests of the client. ESMA and NCAs will closely monitor whether new distribution trends in respect of turbo certificates raise similar investor protection concerns for retail clients and whether any firms attempt to circumvent ESMA’s CFD Decision and will act as necessary.

Regarding structured finance products, ESMA notes that they are not within the scope of the binary options decision or the CFD decision either.

“Structured finance products” are defined in Article 2(1)(28) of MiFIR as “those securities created to securitise and transfer credit risk associated with a pool of financial assets entitling the security holder to receive regular payments that depend on the cash flow from the underlying assets”. Article 1(a) of the CFD Decision, on the other hand, defines a CFD as a derivative with a “long or short exposure to fluctuations in the price, level or value of an underlying”.

Hence, ESMA concludes, these are two distinct types of products, one type that provides a payment originating from the cash flow of the underlying assets (structured finance products) and another type that provides a payment from the CFD provider based on differences in the price, level or value of an underlying and which depends on whether a long or short position has been taken (CFDs).

On August 1, 2018, the new rules for CFD offering to retail clients of European firms are set to come into effect. The measures that have encountered most objections concern restricting leverage. Major European online trading companies, such as IG Group, have already taken steps to inform their clients of the new rules and have implemented a number of changes to trading conditions in order to comply with the novel regulations.

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