ESMA’s temporary product intervention measures on CFDs and Binary Options

Due to inherent risks posed to investors, the European Securities and Markets Authority (“ESMA”) has agreed to impose temporary product intervention measures on the provision of contracts for differences (“CFDs”) and Binary Options. 

 

ESMA has decided that investor protection concerns exist when CFDs and Binary Options are offered to retail investors due to:

 

  1. The complexity of CFDs and Binary Options;

  2. The particular feature of excessive leverage of CFD;

  3. The structural expected negative return in Binary Options;

  4. The embedded conflict of interest between the providers and the clients in Binary Options; and

  5. The disparity between the expected return and the risk of loss.


To provide greater investor protection, ESMA is seeking to ensure that investors cannot lose more money than they put in, restrict the use of leverage and provide more risk warnings to the investors through the following temporary product intervention measures:

 

Binary Options

 

ESMA has decided to prohibit marketing, distribution and sales of binary options to retail investors.

 

CFDs

 

ESMA has decided to include the following restrictions when CFDs are offered to retail investors:

 

  1. Leverage Limits on the opening of a CFD by a retail client which vary according to the volatility of the underlying;

  2. A margin close out rule on a per account basis, to standardise the percentage of margin at which providers are required to close out a retail’s open CFD;

  3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

  4. A restriction on the incentives offered to trade CFDs; and

  5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.


​These intervention measures are temporary since according to MiFIR such measures are introduced on a three-monthly basis. Before the end of the three months, ESMA may decide to extend such intervention measures for a further three months. ESMA announced that these intervention measures will be adopted in the official languages of the EU in the coming weeks and will be published in the Official Journal of the EU. The intervention measures will start to apply one month after the publication in the Official Journal for Binary Options and after two months from such publication for CFDs.

 

Please feel free to contact us if you would like to know more on these temporary intervention measures on Binary Options and CFDs.

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