The European Securities and Markets Authority (ESMA) has just expressed its opinion regarding the product intervention measures proposed by the Polish and other European regulators.
July 31, 2019, | AtoZ Markets - The pan-European regulator has stated that it finds certain CFDs margin requirements in Poland inappropriate.
Poland suggests exceptions to national product intervention measures
As Komisja Nadzoru Finansowego of Poland (KNF) informed, the national restrictions regarding CFDs are similar to ESMA’s measures at the national level.
However, like the Cypriot regulators, KNF has taken different direction regarding certain product intervention measures, offered by the pan-European financial authority.
According to Cyprus' financial authority, there have to be various sub-categories of retail traders, and the leverage has to vary across these sub-categories.
- in the case of services provided from Poland in another Member State product intervention measures would only apply in the absence of a related product intervention measure applicable to those services in the host Member State (reduced territorial scope);
In addition, the Polish authority has proposed to subdivide the definition of a retail client by including a new category of ‘experienced client’ in its national measures. Thus, KNF has suggested, the following changes to the regulations :
- in the case of services provided in Poland, enable a new category of experienced clients to have lower initial margin requirements for two of the five types of underlying in ESMA’s measures (lower margin requirements for experienced clients).
- For experienced clients only, the national measures provide a lower initial margin requirement for the (i) main currency pairs; and (ii) other currency pairs, main equity indices, and gold.
- Instead of the initial margin percentages of 3,33% and 5% used in ESMA’s measures for these two types of underlying, the national measures of Poland propose an initial margin requirement of 1%.
The national measures in Poland are expected to take effect on August 1, 2019.
The KNF justifies its product intervention measures
In order to explain their adjustments to the product intervention measures, the Polish financial watchdog provided results of surveys conducted by the KNF and by a Polish association of investment firms.
The research indicates, that many Polish traders opened accounts with brokers registered outside of the European Union and that this was driven by the ability to access higher leverage.
According to KNF such investors are not protected by the requirements of Regulation (EU) 600/2014 or Directive 2014/65/EU of the European Parliament and of the Council (8) and have to operate in a foreign legal system, which may not provide equivalent protection.
With regard to the lower margin requirements, the KNF observed (i) a decrease in the number of active accounts of retail clients; (ii) a significant decrease in the trading volume by retail clients; and (iii) a decrease in the number of transactions carried out by retail clients.
The Polish regulations meet ESMA disapproval
The Polish financial watchdog notified ESMA on June 28, 2019, of its intention to take product intervention measures.
In its response to KNF's proposal on product intervention measures, ESMA stated that it does not consider that lowering margin requirements for experienced clients is appropriate. The pan-European authority outlined, that excessive leverage was one of the major causes of consumer detriment that led to ESMA’s measures.
Moreover, according to the EU regulator, the Directive 2014/65/EU differentiates between retail clients and professional clients and lays down criteria that must be met for a retail client to become a professional client on request. ESMA concluded that their measures should apply in respect of all retail clients.
Furthermore, as ESMA stated there is no evidence that a specific subset of retail clients lose less money or lose less frequently when trading CFDs.
In addition, the KNF has not provided any evidence that a specific subset of retail clients differs systematically in their investment needs or risk tolerance.
As such, ESMA has neither received evidence to support lower margin requirements for experienced clients in general nor for a specific sub-set of retail clients.
The EU regulator summarized that the national measures are justified and proportionate except for:
- the reduced territorial scope
- the lower margin requirements for experienced clients
It remains unclear, whether ESMA will take any particular action with regard to Poland, given the specific Polish approach to CFD restrictions.
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