ESMA renews restriction on CFDs for a further three months

ESMA - Did they go too far?

Pan European regulator ESMA has decided to extend its CFD and Forex leverage cap (and related rules) for a further three months. The three month trial has already ended on November 1.

The effects of ESMA’s rules have already begun to be felt by the online brokerage industry, with reduced Revenues reported by the likes of IG Group and CMC Markets.

The complete text of the regulator’s decision can be seen below:

The European Securities and Markets Authority (ESMA) has agreed to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August, from 1 February 2019 for a further three-month period.

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.

Renewal of restriction on CFDs

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

  1. 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.

Next steps

ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, following which ESMA will publish an official notice on its website. The measure will then be published in the Official Journal of the EU and will start to apply from 1 February 2019 for a period of three months.

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