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ESMA bans binary options, sets restrictions on CFDs for retail clients

Mar 27 2018
By
Jonathan Smith

The European Securities and Markets Authority (ESMA) announced three-month ban on the marketing, distribution or sale of binary options to retail investors and a set of restrictions on CFDs offered to the same type of clients.


The restrictions on CFDs include leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a standardized risk warning.


To be more precise, the leverage limits on the opening of a position by a retail clients will range from 1:30 to 1:2, depending on the underlying asset:

- 30:1 for major currency pairs;

- 20:1 for non-major currency pairs, gold and major indices;

- 10:1 for commodities other than gold and non-major equity indices;

- 5:1 for individual equities and other reference values;

- 2:1 for cryptocurrencies.


The providers will be required to close out one or more retail client’s open CFD positions, when the required margin reaches or falls below 50%. Additionally, the forex and CFD brokers will be required to introduce negative balance protection on a per account basis in order to guarantee limit on retail client losses.


“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors”, said ESMA’s chairperson Steven Maijoor. “The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.


“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.


“A pan-EU approach is required given the cross-border nature of these products,  and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.”  


As per the MiFIR, ESMA can only introduced temporary three-month measures, but before the period expires, the regulator will review the results and will consider a further extension for another three months.


The pan-European ESMA measures are similar to those introduced last year by the Cyprus Securities and Exchange Commission, UK’s Financial Conduct Authority and several other European regulators.

 

TAGS: esma  binary options  cfd  ban  restrictions 
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