FCA set to consult on whether to apply on permanent basis ESMA’s restrictions on CFDs, binary options

Maria Nikolova

In a brief comment to the measures outlined by ESMA, the FCA says it is supportive of the proposals.

The UK Financial Conduct Authority (FCA) has just published a brief comment to the measures proposed by the European Securities and Markets Authority (ESMA) regarding contracts for difference (CFDs) and binary options offering to retail investors.

The comment summarizes ESMA’s announcement, made earlier today, with the UK financial regulator voicing its support for the measures outlined by the pan-European watchdog.

Let’s note that the proposed product intervention measures are temporary. The measures will be published in the Official Journal of the EU (OJ) and firms offering CFDs and binary options will be required to implement the prohibition on binary options, one month after publication in the Journal, and two months following the Journal publication, for the restrictions on CFDs.The product intervention measures will be applied under Article 40 of the Markets in Financial Instruments Regulation (MiFIR) and will have an initial duration of up to three months, after which the measures may be renewed.

In its announcement, the FCA stated that it “expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients”.

ESMA’s measures include a prohibition on the marketing, distribution or sale of binary options to retail investors, as well as restrictions on the offering of CFDs, including caps on leverage, depending on the underlying. The strictest cap – only 2x, will be applied to CFDs on cryptocurrencies. The cap for major currency pairs will be 30x.

The list of measures for CFD offering to retail investors also includes a margin close out rule on a per account basis. This is set to 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. There is also set to be negative balance protection on a per account basis, in a move that aims to provide an overall guaranteed limit on retail client losses.

Restriction on the incentives offered to trade CFDs and a standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, are also on the list of measures agreed by ESMA.

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