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More ESMA Restrictions on CFDs

Redwan Eid | Dec. 20, 2018
More ESMA Restrictions on CFDs

December 20, 2018 AtoZ Markets- The European Securities and Markets Authority (ESMA) has extended its temporary restrictions on selling (CFDs) to retail customers for more three months, amid concerns of consumer protection.

The European financial regulator said last Tuesday that it intends to renew the limitation on “marketing, distribution or sale” of the derivatives to retail traders it imposed last August for another period of three months, which is supposed to come into force on February 1st, 2019.

The step comes after Europe’s financial watchdog had extended its restriction for the first time last September, which was supposed to take place until the end of January 2019, in extension to its initial decision of restricting CFDs that was supposed to end by November, 1st, 2018.

“ESMA has carefully considered the need to extend the intervention measure currently in effect. ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. It has therefore agreed to renew the measure from 1 February 2019 on the same terms as the previous renewal decision that started to apply on 1 November 2018.”, said ESMA on its website.

The new decision as per market analysts was already expected, as the overall tone in ESMA’s line headed toward tougher cuffs on CFDs and, as AtoZ Markets reported earlier this year.

ESMA detailed its decision as the following:

“The renewal was agreed by ESMA’s Board of Supervisors on 18 December 2018 and includes renewing the following:

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 standardised risk warning will continue to allow use of the additional abbreviated risk warning introduced in the previous renewal decision for cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed.”

As some brokers experienced difficulties regarding the limits imposed by third party ad providers on the number of used characters, ESMA then agreed that the mandatory disclosure text should the following format: “[insert percentage per provider]% of retail CFD accounts lose money”.

Online reviews show that ESMA’s decision seems to have put a touched impact on the industry.

ESMA also extended its restriction on binary options last October, in which it said “falls under Article 40 of Regulation (EU) No 600/2014 to prohibit the marketing, distribution or sale of binary options to retail clients, which ESMA adopted on the 21st of September this year.”

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.