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CySEC tightens control on forex and binary options brokers in line with ESMA’s guidelines

Dec 05 2016
By
Forexbrokerz.com

 
The Cyprus Securities and Exchange Commission (CySEC) has issued a circular to Cyprus investment firms, setting some new rules about trading bonuses, maximum leverage and withdrawal time. In its essence, these measures are in line with ESMA’s guideline, published in October.


First of all, in its paper CySEC says that the brokers “must avoid the practice of offering bonuses that are designed to incentivize retail clients to trade in complex speculative products such as CFDs, binary options and rolling spot forex as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients”.


Moreover, all CySEC-licensed forex and binary options brokers must inform it whether or not they have such bonus schemes by December 14.


According to The European Securities and Markets Authority (ESMA), brokers use trading bonuses to lure retail traders into trading in CFDs or other speculative products with high risk. It is also true that in many cases brokers require their clients to trade certain volumes in order to be able to withdraw the bonuses, which involves additional risks.


Speaking of withdrawals, CySEC also urges investment firms to allow same-day withdrawals. According to the circular, brokers must process the client’s fund withdrawal request on the same day it was made (or the next working day if the client’s request is received outside of normal trading hours), provided that the cash balance in the client’s account is positive.


Indeed, forex forums and websites are full of complaints from traders that brokers delay or refuse withdrawals. ESMA’s Q&A document also claims the clients’ right to have access at any time to their funds deposited with a firm offering CFDs and other speculative products.


Also in line with ESMA’s recommendations, CySEC is planning to set the default leverage to 1:50. According to the Cypriot financial watchdog, brokers offering “excessive leverage” to retail clients are most likely not doing it in the best interest of their clients, because the higher the leverage, the greater the risk.


In its Q&A document, ESMA said that brokers should not offer clients the maximum leverage as default, but should instead provide them the option to lower the leverage in order to limit their exposure.
Besides, CySEC also urged brokers to ensure that clients cannot lose more than they have in their accounts, a policy also known as negative balance protection.


In conclusion, forex and binary options brokers regulated by CySEC are required to take the appropriate measures and actions in order to comply with the new rules until January 30, 2017. From then onwards, the regulator intends to “conduct thematic reviews” to ensure they are complying with them, as well as with the general provisions of the law. In case CySEC finds any infringements, it will undertake the respective punitive measures.


CySEC’s new set of rules come on the background of an increased regulatory activity concerning risky instruments in Europe. Many EU regulators have expressed intentions to restrict high-risk trading in instruments. Belgium banned the distribution via online channels of over-the-counter (OTC) binary options, spot forex, and CFDs with leverage from 18 August. France and the Netherlands are in the process of developing laws that would prohibit the advertisement of risky financial instruments, and Germany is also considering similar steps.

 

TAGS: cysec  binary options  forex  esma 
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