European regulator ESMA warns on CFD trading

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Is this ESMA's way of indicating it plans to tighten rules for CFD trading?

ESMA logoThe EU's financial markets regulator, ESMA (the European Securities and Markets Authority), has issued a somewhat strange and "plain-vanilla" sounding warning against CFD trading by retail investors. 

The ESMA warning on CFD trading states that ESMA is concerned that "during the current period of low investment returns, inexperienced retail investors across the EU are being tempted to invest in complex financial products, which they may not fully understand..."

It must be remembered that ESMA, like its predecessor CESR (the Committee of European Securities Regulators), is not a regulator itself – each EU / EEA country has its own national securities regulator, such as the FSA in the UK and CySEC in Cyprus. However ESMA, which came into being two years ago at the beginning of 2011, was meant to have more powers that its somewhat toothless predecessor CESR, which was basically only able to consult to national regulators. ESMA has powers which include drafting technical standards that are legally binding in EU member states. Essentially, ESMA cannot force national regulators to adopt certain regulations, but it can make formal suggestions which – if not adopted – can put a national regulator in an uncomfortable position.

It is unlikely that ESMA will try to enact US-like rules on the FX and CFD market in Europe. Recall that recently, US regulators introduced a limit on leverage to 50x, and (as still proposed) an NFA ban on using credit cards or ePayment services such as PayPal to deposit money into FX brokerage accounts. However as ESMA is still trying to carve out a meaningful niche for itself, pronouncements such as these seem to be a "first warning" that ESMA may look to tighten certain regulations for FX and CFD trading in Europe.

For the ESMA press release click here.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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Guest Thursday, 24 April 2014

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