FCA updates CFDs restrictions in response to ESMA

July 3, 2019, | AtoZ Markets - The British Financial Conduct Authority will not apply restrictions to CFD-like option providers authorized in the other EEA Member States other than a UK branch or a tied agent. At the same time, France’s financial regulator AMF decided to apply ESMA restrictions on Binary Options and CFDs. 

FCA updates CFDs restrictions for the local retailers

On July 1, 2019, The British financial watchdog published its Policy Statement (PS)19/18 and finalized rules on CFD’s sale, marketing, and distribution for retail clients in or from the UK.

The statement’s publication follows the recent letter from the FCA to the pan-European authority ESMA regarding points of disagreement about CFD's restrictions in the UK. Today ESMA published the final opinion on the FCA’s product intervention measures. According to the pan-EU financial authority, the British regulator’s proposed national measures are justified and proportionate, with the exception for its decision to:

  • Not apply sales and distribution restrictions to CFD-like option providers authorized in other EEA Member States other than a UK branch or tied agent.
  • Setting leverage limits for CFDs to 30:1 (compared to 5:1 under ESMA’s measures). To ensure that leverage limits are appropriate and proportional, FCA used ESMA’s methodology. The British regulator concluded that the leverage limit of 30: 1 corresponded to the leverage limits set for other asset classes, taking into account the historical volatility of some government bonds.

CFD’s and CFD-like options; differences and similarities

According to British authority, CFD-like options pose the same risk of harm as CFDs. They have a similar pay-out structure to CFDs and share common product features. 

According to the final rules, UK retail customers will be able to continue to open accounts for trading unlimited CFD-like options with product suppliers established in other EEA member countries (except through a branch or a linked agent in the UK), provided that these suppliers are not actively promoted products in the UK.

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FCA added, that, if a customer from the UK contacts a foreign company on his own initiative, this company can sell these products if they are allowed in their own jurisdiction.

The British authority also noted that it does not allow EEA firms outside the UK to sell CFD to retail customers in the UK if a UK retail customer turned to this company on their own initiative, as there is a greater risk of harm. 

The authority explained, by capturing CFD-like options they aim to ensure that UK firms do not seek to avoid local CFD measures by offering closely substitutable products.

According to the UK regulator CFD’s rules updates, British firms will have to limit leverage to 5: 1 for CFDs that refer to certain government bonds when selling CFDs to retail customers located in other EEA jurisdictions that have adopted the same rules as ESMA. 

At the same time, ESMA noted, that 30: 1 does not exceed the maximum leverage limit for other asset classes in terms of the pan-European regulator. FCA agrees that this reduces competition among suppliers who are subject to a stricter leverage limit.

The UK regulator noted that its rules will not affect the markets of other Member States or harm their consumers, as retail consumers are protected in accordance with the rules of other national competent authorities (NCAs)

French national restrictions mirror the measures from ESMA

The Autorité des Marchés Financiers (AMF) of France announced earlier today about banning the sale of binary options to retail customers. The French regulator decided to follow other European regulators decision on product intervention measures and also extended its restriction against promoting CFDs to non-professional investors.

The new measures are applicable to local investment firms and brokerage companies and to those firm which operate in the country from another EU member state through the EU Schengen Area. The AMF directive also expected to ensure that customers can’t lose more than their trading stake.

In addition, the new rules will forbid bonuses and other incentives that may encourage overtrading. The decision includes renewing the following leverage limits, including for cryptocurrencies, which vary according to the volatility of each asset class:

  • 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; or
  • 2:1 for cryptocurrencies.

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