UK regulator responds to ESMA’s opinion on rules for CFDs and CFD-like options

Maria Nikolova

The regulator explains why it has decided not to apply restrictions to CFD-like option providers authorised in other EEA Member States other than a UK branch or tied agent.

Further to the publication of ESMA’s Opinion on the UK rules for restricting the offering of CFDs and CFD-like options to retail investors, the Financial Conduct Authority (FCA) has made a statement regarding its points of disagreement with the pan-EU watchdog.

On July 1, 2019, the FCA published Policy Statement (PS)19/18 and finalised rules that restrict the sale, marketing and distribution of CFDs and CFD-like options to retail clients in or from the UK.

Today, ESMA published an Opinion concluding that overall the FCA’s proposed national measures are justified and proportionate, with the exception for its decision to:

  • Not apply our sales and distribution restrictions to CFD-like option providers authorised in other EEA Member States other than a UK branch or tied agent.
  • Setting leverage limits for CFDs referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures).

The FCA explains that CFD-like options pose the same risk of harm as CFDs because they have a similar pay-out structure to CFDs, and share common product features (i.e. they allow retail consumers to gain exposure to a wide range of assets for a fraction of the value of an asset). By capturing CFD-like options, the FCA rules aim to ensure that UK firms do not seek to avoid the FCA’s CFD measures by offering closely substitutable products.

Under the FCA’s final rules, UK retail clients will be able to continue to open accounts to trade unrestricted CFD-like options with product providers established in other EEA Member States (other than through a UK branch or tied agent), provided that these providers have not actively marketed the products in the UK. The FCA did not think it would be proportionate, practical or effective to seek to apply its rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction.

Therefore, where a UK-based client contacts an overseas firm on their own initiative, that firm may still sell those products, if they are permitted in their own jurisdiction. CFD-like options are not commonly traded by UK retail consumers, nor are they commonly sold by UK firms.

The FCA notes that it is not allowing EEA firms outside the UK to sell CFDs to retail clients in the UK, if a UK retail client approached that firm at their own initiative because there is a greater risk of harm. That is because they are more commonly sold on a cross-border basis and used by UK retail consumers to speculate on financial markets.

The FCA considers that limiting its scope in this manner is justified and proportionate.

Regarding leverage limits, the FCA notes that, under its rules, UK firms must limit leverage for CFDs and CFD-like options referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures). To ensure its leverage limits are appropriate and proportionate, the FCA utilised the methodology used by ESMA in setting its leverage limits. Using historical price data, the regulator concluded that a 30:1 leverage limit was consistent with leverage limits set for other asset classes, considering the historic volatility of certain government bonds.

The FCA has also considered whether its proposed leverage limits could result in regulatory arbitrage and have a significant effect on the markets of other Member States or result in harm to retail consumers located in other EEA jurisdictions. UK firms will however, need to limit leverage to 5:1 for CFDs referencing certain government bonds when selling CFDs to retail clients located in other EEA jurisdictions that have adopted the same rules as ESMA.

As noted by ESMA, 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures The FCA agrees that this mitigates competition amongst providers that are subject to a stricter leverage limit.

As retail consumers are afforded protections by the rules of other National Competent Authorities (NCAs), the UK regulator concluded that its rules will not impact the markets of other Member States or result in harm to their consumers.

Having considered this feedback, the FCA believes that a 30x leverage limit is justified and proportionate for CFDs referencing certain governments bonds.

  • Read this next

    Crypto Insider

    Saudi Launches World’s First Cultural Metaverse

    The Saudi Ministry of Culture, droppGroup, and Oracle have joined forces to launch the Cultural Universe, the world’s first government-operated national Metaverse initiative.

    Retail FX

    eToro revives IPO plans after failed $10B SPAC merger

    Israeli social trading network eToro is actively exploring options for a public market listing, according to CEO Yoni Assia in an exclusive interview with CNBC.

    Digital Assets

    Meme Coin Communities Gear Up for the CoinMarketCap Crypto Awards

    CoinMarketCap’s Crypto Awards 2024, the first edition of a new annual event, is captivating the global crypto community. This is especially true for the Meme Coin Of The Year category, where voting has become a battleground for the most passionate and vibrant communities in the crypto space.

    Digital Assets

    Sui Recognized as 2024 Blockchain Solution of the Year at AIBC Eurasia Awards

    The Layer-1 Received the Top Honor at the Eurasia Awards While Experiencing a Period of Unprecedented Growth and Recognition

    Crypto Insider

    Vitalik Buterin, Sandeep Nailwal Lead Decentralized AGI Summit, Address Centralized AI Risks at ETHDenver

    Sentient and Symbolic Capital’s Decentralized AGI Summit will feature leading Decentralized AI authorities like Vitalik Buterin and Sandeep Nailwal.

    Digital Assets

    Aethir Unveils Its First Decentralized AI Node Sale

    Aethir, a leader in decentralized GPU cloud infrastructure, has announced its highly anticipated Node Sale.

    Market News

    Weekly data: Oil and Gold. How they might be affected in the short term?

    This preview of weekly data looks at USOIL and XAUUSD where economic data coming up later this week are the main market drivers for the near short-term outlook.

    Digital Assets

    BitForex goes offline after mysterious $57 million withdrawal

    BitForex, the Hong Kong-based cryptocurrency exchange, abruptly went offline following a mysterious withdrawal of $57 million from its hot wallets. Blockchain detective ZachXBT was among the first to spotlight this, revealing that BitForex has ceased withdrawal transactions and its team appears to be unresponsive.

    Digital Assets

    Should the largest Bitcoin trade be priced in BTC or USD?

    Three days ago, the Bitcoin network witnessed a staggering transaction of 26,139 BTC, valued at $1.347 billion. This recent transaction contrasts sharply with a notable event from 2011, where 500,000 BTC were moved, then valued at around $1.13 million.

    <