ESMA admits: more retail CFD traders lost money after leverage cap

ESMA - Did they go too far?

European financial regulatory body ESMA has come out with more details on its decision to extend its CFD leverage cap for a second three month period. The new ESMA rules governing leveraged CFD and Forex trading came into effect on August 1, with ESMA announcing at the end of September that it would renew the three month effective period for the new rules for (at least) a second three month period, i.e. through to the beginning of February 2019.

Interesting to note in ESMA’s decision is that it admitted that in looking at the first month of implementation (i.e. August 2018) and comparing client success data to the previous August, the share of profitable retail client accounts actually decreased slightly under the new rules. However ESMA brushed off the data, attributing the decreased profitability of clients to the fact that cryptocurrency prices were soaring in August 2017, with general market conditions in August 2017 more bullish in comparison to August 2018 – leading to more profitable trading in August 2017.

ESMA did note a reported decrease in the number of automatic close-outs, and a reduction in occurrences where client accounts went into negative equity, under the new rules.

ESMA also went on to note that it plans to keep a close eye on licensed brokers in the EU trying to encourage clients to be treated as “professional” traders – which would allow the brokers to offer those clients higher amounts of leverage, but would require them to give up certain protections afforded to retail traders. Also, ESMA said that it is aware that some third-country firms (i.e. offshore brokers) are actively approaching EU clients, and that some EU-licensed CFD brokers are marketing the possibility for retail clients to move their accounts to an intra-group third-country (i.e. offshore) entity. While that is indeed allowed if the client initiates the request, it isn’t allowed for the EU brokers to actively market that possibility to clients – something we have noted before is indeed going on.

The full text of the ESMA decision follows, and can also be accessed via the EUR-Lex website detailing European laws.


of 23 October 2018

renewing and amending the temporary restriction in Decision (EU) 2018/796 on the marketing, distribution or sale of contracts for differences to retail clients


Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (1), and in particular Articles 9(5), 43(2) and 44(1) thereof,

Having regard to Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (2), and in particular Article 40 thereof,

Having regard to Commission Delegated Regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions (3), and in particular Article 19 thereof,


(1) By its Decision (EU) 2018/796 (4), the European Securities and Markets Authority (ESMA) restricted the marketing, distribution or sale of contracts for differences (CFDs) to retail clients with effect from 1 August 2018 for a period of three months.

(2) In accordance with Article 40(6) of Regulation (EU) No 600/2014, ESMA must review a temporary product intervention measure at appropriate intervals and at least every three months.

(3) ESMA’s review of the restriction on CFDs has been informed by, inter alia, a survey among national competent authorities (5)(NCAs) on the practical application and impact of the product intervention measure as well as additional information provided by NCAs and stakeholders.

(4) NCAs detected only limited examples of non-compliance with the ESMA product intervention measure, which mainly related to the risk warnings.

(5) NCAs reported an overall decrease in the number of CFD retail client accounts, trading volume and total retail client equity over the month of August 2018 in comparison with August 2017. The share of profitable retail client accounts decreased slightly, but this appears to be mainly arising from the soaring prices of cryptocurrencies in August 2017 (6). Comparing client outcomes over time is not only impacted by the product intervention measures, but also for example by market conditions. Market conditions in August 2017 were bullish in comparison to August 2018. Furthermore, the population of retail clients changed (7). Finally, NCAs reported a decrease in the number of automatic close-outs and the occurrences that accounts went into negative equity (8).

(6) NCAs also reported an increase in the number of clients treated as professional clients on request over the month of August 2018 in comparison with August 2017. ESMA is aware that some CFD providers are advertising to retail clients the possibility of becoming professional clients on request. However, a retail client may request to be treated as a professional client when, in particular, the client submits a request in writing in accordance with all the requirements set out in the applicable legislation. Providers should ensure that they comply at all times with those requirements (9). ESMA is also aware that some third-country firms are actively approaching Union clients or that some CFD providers in the Union are marketing the possibility for retail clients to move their accounts to an intra-group third-country entity. However, without authorisation or registration in the Union, third-country firms are only allowed to offer services to clients established or situated in the Union at the client’s own exclusive initiative. Finally, ESMA is aware that firms are starting to provide other speculative investment products. ESMA will continue to monitor the offer of these other products to determine whether any other Union measures are appropriate.

(7) During the review period, ESMA did not obtain evidence contradicting its overall finding of a significant investor protection concern identified in Decision (EU) 2018/796. ESMA has therefore concluded that the significant investor protection concern identified in Decision (EU) 2018/796 would persist if its decision to restrict the marketing, distribution or sale of CFDs to retail clients is not renewed.

(8) Since the adoption of that Decision, the applicable existing regulatory requirements under Union law have not changed and continue not to address the threat identified by ESMA. Furthermore, NCAs have not taken action to address the threat or the actions taken do not adequately address the threat. In particular, since the adoption of the Decision, no NCA has adopted its own national product intervention measure under Article 42 of Regulation (EU) No 600/2014 (10).

(9) The renewal of the restriction set out in Decision (EU) 2018/796 does not have a detrimental effect on the efficiency of financial markets or on investors that is disproportionate to the benefits of the action and does not create a risk of regulatory arbitrage for the same reasons set out in that Decision.

(10) If the temporary restriction is not renewed, ESMA considers it is likely that CFDs will again be offered without adequate measures to sufficiently protect retail clients against the risks related to those products that gave rise to the consumer detriment identified in Decision (EU) 2018/796.

(11) In view of these reasons, taken together with the reasons set out in Decision (EU) 2018/796, ESMA has decided to renew the restriction for a further three-month period to address the significant investor protection concern.

(12) In renewing the restriction, ESMA has carefully considered any new relevant information that has emerged during the review period. In this respect, ESMA obtained information that, in certain cases, CFD providers experience technical difficulties in using the abbreviated risk warning due to the character limits imposed by third party marketing providers for communications other than through a durable medium or a webpage. Therefore, a reduced character risk warning should be introduced in this renewal.

(13) The reduced character risk warning is not intended to replace the abbreviated risk warning. The new warning is envisaged to be used only for cases where the third party relied on by a CFD provider to market the product imposes a character limit that is not compatible with the number of characters comprising the risk warnings.

(14) The reduced character risk warning provides retail clients with information on the percentage of CFD retail accounts losing money. However, in order to fully draw clients’ attention to whether they can afford the high risk of losing their money when investing in CFDs, this renewal requires that any communication containing the reduced character risk warning also includes a direct link to a webpage of the CFD provider where the warning required for durable media or webpages is shown.

(15) As the proposed measures may, to a limited extent, relate to agricultural commodities derivatives, ESMA has consulted the public bodies competent for the oversight, administration and regulation of physical agricultural markets under Council Regulation (EC) No 1234/2007 (11). None of those bodies has raised any objections to the proposed renewal of the measures.

16) ESMA has notified NCAs of the proposed renewal Decision, HAS ADOPTED THIS DECISION.

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