ESMA enacts product intervention measures for retail CFD and binary option products

The European Securities and Markets Authority (ESMA) has agreed a range of product intervention measures  to prohibit the provision of binary options and to restrict the provision of Contracts for Difference (CFDs) in order to protect retail investors.

ESMA’s product intervention measures will be applied to the provision of CFDs including rolling spot forex and financial spread bets, and binary options to retail clients. Specifically, ESMA has agreed the following:

  1. Prohibition on the marketing, distribution or sale of binary options to retail clients; and
  2. Restrictions on the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex and financial spread bets.

The restrictions applied to CFDs are:

  • leverage limits on the opening of a position between 30:1 and 2:1, depending on the price volatility of the underlying asset
  • a 50% margin close out rule applied on a per account basis
  • negative balance protection, limiting retail clients’ liability to the funds in their CFD trading account
  • a prohibition on firms offering monetary and non-monetary benefits (excluding research and information tools) to retail investors; and
  • a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.

ESMA intends to adopt the agreed measures in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measures will be published in the Official Journal of the EU (OJ) and firms will be required to implement the prohibition on binary options, one month after publication in the OJ, and two months following the OJ publication, for the restrictions on CFDs.

The product intervention measures will be applied under Article 40 of the Markets in Financial Instruments Regulation (MiFIR) and will have an initial duration of up to three months, after which the measures may be renewed.

The Financial Conduct Authority (FCA) supports ESMA’s application of EU-wide temporary product intervention measures. The FCA expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients.