February 1, 2019, | AtoZ Markets -The European Securities Market Agency (ESMA) announced extending the term on the marketing, distribution or sale of contracts for differences (CFD) restrictions to retail clients. The new CFD restrictions extension will be valid for three months from February 1. The next extension is scheduled for the second half of April and is due to take effect on May 1. Will CFD restrictions ever become permanent?
ESMA warns CFD suppliers about restrictions violations
Only national regulators such as FCA and Bafin have the right to convert the legislative measure to a permanent one. So far these two financial watchdogs have discussed their intentions with the retail brokers. ESMA in its turn, as shown by the exclusive data set report that FCA (UK) demanded from brokers, also closely monitoring brokers.
Financial analysts suggest that some companies have violated the restrictions on offering clients a reclassification to the professional status. National regulators like Bafin and FCA reported to the ESMA an increase in the number of customers treated as professional customers, which were significantly higher than a year ago.
The European financial regulator's report stated that the authority is aware of some CFD suppliers which advertise to " the retail customers the opportunity to become professional customers upon request."
Brokers have to follow all legal requirements
European financial watchdog clarified that only the client may require that he be treated as a professional client. ESMA stressed in its report that they are aware that some brokers advertised requests from “professional clients”. According to the ESMA, brokers must ensure that they always adhere to all applicable legal requirements.
ESMA emphasized that they are aware that some firms from third countries are actively turning to EU customers or that some CFD providers in the EU are promoting retail customers with the ability to transfer their accounts to a third country organization within a group.
According to the rules, firms from third countries are allowed to provide services to customers from the EU directly at their own request. ESMA, according to the experts, signals about possible violations by brokers.
The regulator's officials outlined that they are aware that firms started to provide other speculative investment products. According to the financial regulator officials, the organization will continue to monitor the offer of these other products to determine if any other EU measures are appropriate.
Only minor violations occurred since introduction of ESMA's CFDs restrictions
In addition to the loss of balance, clients paid their brokers significantly smaller amounts during the first three months of the CFD restrictions. As the regulator states in its decision, retail customers incurred “significantly lower” CFD trading costs. "The average cost of active retail accounts containing cryptocurrency CFDs fell disproportionately compared to others, although such accounts continued to incur greater costs than accounts without cryptocurrencies," the ESMA added.
In addition, the national financial regulators report a steady decline in the number of automatic closures, as well as the number of times that accounts have turned into negative capital and the size of negative balance sheets in assets. The ESMA provided a detailed explanation of the rationale for extending interim measures again.
National regulators have reported that since its introduction in August 2018, there have been only minor violations of the new regime. According to the discussions at the regulatory level, the number of retail customers, trading volumes and equity have declined significantly. In addition, regulators did not observe any changes in profitability over the three-month period until October 2018 compared with the same three months in the previous year.
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