The European Securities and Markets Authority (ESMA) has now formally adopted new measures for the provision of binary options and contracts for differences (CFDs). The measures provide a prohibition on the marketing, distribution or sale of binary options to retail investors, starting to apply the 2 July 2018.
In this way, the Authority aims also at preventing the purchase of these contracts by unaware “venture web-capitalists” trying to make easy money through these investors. Namely, Steven Maijoor, ESMA’s Chair, claims that “..ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.”
Concerning CFD, although a full ban has not be imposed to retail investors, several restrictions will be adopted from the beginning of this August. The product intervention measures ESMA has adopted include:
1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:
· 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;
2. A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
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.
“The measures ESMA has taken today are a significant step towards greater investor protection in the EU”, continued the ESMA Chair. ” 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 understandable risk warnings for investors.”
These measures in the official languages of the EU and they will remain in force for a period of three months from the date of application. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.