New temporary measures agreed by ESMA should be the foundation to improve reputation of CFD market

Following the European Securities and Markets Authority (ESMA) statement on temporary product intervention measures placed on CFD trading, Fintech company Capital.com has broadly welcomed the changes, stating that the work of regulators is essential to create a level playing field between CFD providers and to protect consumers from unsustainable risks.

Ivan Gowan, CEO of Capital.com explains: “ESMA has put forward a raft of sensible measures and we are ready for these changes to our industry. CFD providers have a responsibility to help retail investors manage their appetite for risk against their ability to handle any losses and ESMA’s temporary measures provide an improved yardstick for providers to make sure that the industry get this balance right.”

ESMA recently published a statement detailing a range of product intervention measures to take affect across the European Union. These temporary measures will last for three months before being further reviewed. In the UK, The Financial Conduct Authority (FCA) has responded by undertaking its own consultation to explore making the ESMA measures permanent. The measures include:

  • Putting a leverage limit on the opening of a CFD. This level varies according to the volatility of the underlying (from as little as 2:1 for cryptocurrencies to 30:1 for major currency pairs)
  • A margin closeout rule of 50 per cent of minimum initial required margin
  • Negative balance protection on a per account basis
  • Restriction on advertising incentives to attract customers
  • A specific warning that includes the percentage of losses on a CFD provider’s retail investor accounts.

“ESMA’s negative balance protection and margin closeout rule are central to protecting retail clients from the risks of sudden gaps developing in the positions that they take and the potential for significant loses and debt, and we are very much behind these measures. Furthermore, the restrictions on incentives offered in advertising promotions is really good for client outcomes – this is a financial product and people need to be clear-sighted about what CFD trading entails. Marketing should not make untrue statements and contain appropriate risk warnings. All of these measures – negative balance protection, margin closeout and marketing without bonus incentives are very much part of Capital.com’s DNA, and we already comply with these measures.”

However, the leverage limits set out in the new product intervention measures are not consistent with meeting the needs of retail investors. While some leverage restriction, depending on the knowledge of the retail investor is a good thing (a 400:1 leverage is very hard to justify under any circumstances), putting in place very tight leverage limits for the all retail traders, regardless of their experience is not in the consumers interest. Furthermore, such a situation will increase the chances that those seeking higher leverage will go offshore to access the leverage that they desire.

ESMA should consider the imposition of leverage restrictions in the context of the other protections in place, including CFD providers making a responsible assessment of the level of sustainable risk that a retail investor can take (something that Capital.com already does, with differing levels of leverage offered depenfing on experience). This approach, alongside the new negative balance protection and margin closeout requirement, should be enough to adequately protect retail investors while allowing them to take advantage of what CFD trading can offer.

Ivan concludes: “In responding to the measures set out by ESMA, Capital.com views the needs of the customer as paramount, and we are fully prepared to be compliant with ESMA and the FCA’s guidelines as they become mandated.”