ESMA renews restrictions on CFDs and binary options
The European Securities and Markets Authority (ESMA) has decided to renew intervention measures which restrict the sale of contracts for difference (CFDs) and binary options to retail investors for a further three months.
As expected, ESMA announced in a press release dated 28 September 2018, that the Board of Supervisors had agreed to renew the restrictions imposed on CFDs for a further three-month period when the current period expires on 1 November 2018 and new restrictions imposed by ESMA on the sale of binary options come into force on 2 October 2018.
We reported on ESMA's initial adoption of these measures in June 2018, which restrict the marketing, distribution and sale of CFDs to retail investors, by imposing the following requirements:
a. leverage limits on opening positions;
b. a margin close out rule on a per account basis;
c. negative balance protection on a per account basis;
d. a restriction on the incentives offered to trade CFDs; and
e. a standardised risk warning.
ESMA originally put these restrictions in place as a result of its and national regulators' growing concerns regarding the increasing losses being suffered by retail investors engaging in CFD trading (as discussed in our July 2017 article). These concerns resulted in ESMA issuing a call for evidence in January 2018 in relation to its proposed intervention in the market to protect retail investors, using its newly acquired powers under MiFID II.
Following this consultation, we reported on ESMA's announcement in March 2018 that it intended to introduce the above restrictions for the sale of CFDs. However, as ESMA is only able to implement these measures for a period of three months at a time under MiFID II, it must decide whether or not to renew them for a further three months on an ongoing basis. On 28 September 2018, ESMA conducted its first renewal process and decided to renew all of the existing restrictions on CFDs.
At the same time as intervening in the CFD market earlier this year, ESMA also chose to impose a total ban on the sale of binary options to retail investors from 2 July 2018, which it considered necessary as it found that they posed an even greater threat to retail investors than CFDs.
Interestingly, when it came time to consider the renewal of this ban on binary options in August 2018, ESMA altered its position to a limited extent by allowing the sale of binary options to retail investors, if they meet the following criteria:
a. it has two pre-determined pay outs, neither of which is less than the initial investment of the customer; or
b. it has all of the following features:
i. the term from issuance to maturity lasts for at least 90 days;
ii. it is accompanied by a public prospectus; and
iii. it is fully hedged by the provider or another within the same group.
ESMA considered that binary options that fall into either of these categories have sufficiently mitigated the risk of investor detriment and it has, therefore, excluded them from the ban on the sale of binary options, which otherwise continues unchanged.
Next StepsWe expect the restrictions on the CFD market to remain in place for the foreseeable future given the ongoing concerns ESMA has about the threat they pose to retail investors. It remains to be seen whether ESMA will revert to a full ban on the sale of binary options or not. However, whatever the outcome, the FCA has been very vocal in its support for these intervention measures. Therefore, firms in the UK should not expect the FCA's close scrutiny of the sale of these products to diminish any time soon.