ESMA plans Binary Options Ban and new FX Leverage Cap

We are approaching the end of the year and soon markets will see the MiFID II regulations coming into force. ESMA plans Binary Options Ban and new FX Leverage Cap as a part of its regulatory activities. 

18 December, AtoZForex - The key European financial services markets regulator, the European Securities and Markets Authority (ESMA) has issued a statement today with updates on its work in regards to the sale of contracts for difference (CFDs), Binary Options, and some other speculative products to retail investors.

ESMA Statement on Binary options and CFDs offered to retail clients

The statement on the preparation work of the ESMA relating to the binary options and CFDs offered to retail clients has been published earlier last week.

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The regulatory body has been expressing concerns in regards to the provision of speculative products, such as CFDs, Binary Options and spot Forex to retail clients for some period of time. The watchdog has conducted an ongoing overseeing and supervisory convergence work in this field.

Some of the competent officials have also adopted national measures to cap the provision of these products to retail clients.

ESMA plans Binary Options Ban and new FX Leverage Cap

The European supervisor further states that it is concerned that the risks to investors protection are not properly controlled or decreased. The official announcement from the ESMA states:

"Further to the ESMA statement published in June 2017, ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR address these investor protection risks. In particular, ESMA is considering measures to:

prohibit the marketing, distribution or sale to retail clients of binary options; and

restrict the marketing, distribution or sale to retail clients of CFDs,  including rolling spot forex."

Following on this, the limitations on CFDs that are currently under review include:

  • leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;
  • a margin close-out rule;
  • negative balance protection to provide a guaranteed limit on client losses;
  • a restriction on benefits incentivizing trading; and
  • a standardized risk warning.

The ESMA states it will also carry out a brief public consultation in the front month on this matter.

FCA comments on ESMA Binary Options Ban

Following the ESMA regulatory update, the UK financial regulator Financial Market Authority has commented:

"The FCA supports ESMA in its consideration of potential EU-wide product intervention. Our domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing. Any permanent FCA policy measures would take in to account any prospective ESMA measures."

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