The European Securities and Markets Authority (ESMA) has agreed to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August, from 1 November 2018 for a further three-month period.
ESMA says it has “carefully considered” the need to extend the intervention measure currently in effect and believes that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist.
The restrictions dictate that leverage limits on the opening of a position by a retail client vary according to the volatility of the underlying asset. For major currency pairs it is 30:1, for non-majors, gold and major indices 20:1, for commodiites other than gold and non-major indices it is 10:1, for individual equities and other reference values it is 5:1, and for cryptocurrecnies it is 2:1.
A margin close out rule on a per account basis is also effected. ESMA says this will 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;
Negative balance protection on a per account basis is another part of the regulation, which ESMA says will provide an overall guaranteed limit on retail client losses. A restriction on the incentives offered to trade CFDs is also imposed and a standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, is required. The latter is seen to be difficult for some retail brokers as the percentage of clients losing money on CFDs is believed to exceed 80%.
During its review of the intervention measure, ESMA says it obtained information that, in certain cases, CFD providers experienced technical difficulties in using the risk warnings due to the character limitations imposed by third party marketing providers. Therefore, it says it has agreed to introduce in the renewal an additional reduced character risk warning: [insert percentage per provider] % of retail CFD accounts lose money.
The new warning will be allowed only in cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed.
ESMA says it intends to adopt the renewal measure in the official languages of the EU in the coming weeks, following which it will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from 1 November 2018 for a period of three months.