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.

Read this next

Executive Moves

Crculus taps Michael Idzkowski as head of sales

Michael Idzkowski has joined Crculus, a UK-based startup that describes itself as a multi-custody middleware infrastructure for financial institutions, in the post of its head of sales.

Retail FX

ActivTrades jumps on fractional stock trading bandwagon

CFDs and FX broker, ActivTrades has updated its trading offering to provide its clients with the opportunity to trade fractions of stocks.

Digital Assets

BitMEX to list its native token by end of 2023

BitMEX CEO Alexander Hoeptner said the crypto exchange is planning to list its native token, called BMEX, on the spot market by the end of the year.

Market News

Forex investments take over popular sentiment as a worthy global trend

Quite the confusion is afoot in the financial markets. Tighter regulation, rising inflation, energy sector disruptions, social unrest and wars have taken a toll on the world’s economies. How come Forex, as a means of investment, has come up on top as a global trend in 2022? Against the backdrop of current events, the international broker’s expert team at OctaFX has gathered some answers.

Crypto Insider, Metaverse Gaming NFT

How Hiding Crypto’s Influence Will Be Key To Unlocking Its Success

In past years, cryptocurrency has advanced well beyond the technophiles responsible for its initial success to reach widespread name recognition. Crypto has found its way into news, music, culture, and other relevant facets of daily life. 

Digital Assets

SCRYPT Digital taps Enclave Markets to mirror dark pool trading in crypto

“A service like this has been sorely lacking in the crypto space. There hasn’t been a solution that provides the security or privacy that institutions require with these kinds of trades.”

Institutional FX

FXSpotStream reports record monthly volume at $1.613 trillion

Trading volumes on institutional FX platforms surged in September after fears over the impact of recent developments around Russia’s military invasion of Ukraine sent speculative asset classes reeling.

Industry News

OKX adds four-time Olympian snowboarder Scotty James as brand ambassador

‘What is OKX?’ is the name of the new multi-milion dollar brand campaign launched by crypto exchange OKX as part of its efforts toward world expansion.

Industry News

Circle buys Elements and announces beta version of Crypto Payments API

“Lowering barriers of entry for payments and financial services and establishing dollar payments utility are core to Circle’s mission.”

<