On 15 December 2017, the European Securities and Markets Authority (ESMA) issued a statement to provide an update on its work in relation to the provision of contracts for differences (CFDs), including rolling spot forex and binary options to retail clients.
ESMA has previously expressed concern about the provision of speculative products to retail clients and has conducted ongoing monitoring and supervisory work in this area. Additionally, a number of National Competent Authorities have adopted national measures to limit the provision of these products to retail clients including Belgium, Cyprus and France.
In December 2016, the FCA published CP 16/40 setting out the early policy work being undertaken to improve investor protection by limiting the risks of CFD products for retail investors. Within the CP, they stated that they had found increasing instances of poor conduct and risks of consumer detriment across the CFD sector. In June 2017, following discussions with ESMA, the FCA announced its intention to defer bespoke UK national legislation, so that a consistent and coordinated European approach could be defined.
Although national measures have been introduced, ESMA remains concerned that the risk to investor protection has not been controlled or reduced. In particular, ESMA is considering measures to prohibit the marketing, distribution or sale of binary options to retail clients and to restrict the marketing, distribution or sale of CFDs and rolling spot forex to retail clients. ESMA provided some clarification on the measures they were considering, including:
- leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;
- a margin close-out rule;
- negative balance protection to provide a guaranteed limit on client losses;
- a restriction on benefits incentivising trading; and
- a standardised risk warning.
ESMA further stressed that it is considering the possible use of its product intervention powers under Article 40 of MiFIR. ESMA advised that it will conduct a public consultation in January 2018 on the proposed measures.
Following the publication of this statement by ESMA, the FCA further emphasised its support for ESMA in its consideration of EU-wide product intervention in respect of CFDs and binary options, and any measures introduced by the FCA would take into consideration any measures proposed by ESMA. The FCA has also confirmed that their policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing.
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