EU brokers faced with Binary Options ban, Deposit Bonus ban, and 30x Forex leverage cap

ESMA - Did they go too far?

After several months of waiting and much speculation, European pan financial regulatory body ESMA has finally given the investing public a whiff of what it is planning to (try and) impose on the online trading world: a blanket ban on Binary Options in the EU, and a leverage cap of 30x on Forex trading.

ESMA logo newAfter stating in June that it was reviewing the online trading industry – leading some regulators such as the FCA in the UK to delay their own initiatives – ESMA issued a statement late Friday (see full text below) indicating that, while its mind is not yet fully made up, it plans early in 2018 to conduct a brief “public consultation” on the matter before issuing its final ruling, likely in the first half of next year.

ESMA also stated that what has been done so far by a number of the national regulators to rein in the online trading industry, such as by CySEC in Cyprus and BaFin in Germany, was insufficient and that “the risks to investor protection are not sufficiently controlled or reduced“.

Beyond the FX and CFD leverage cap of 30x (which ESMA indicated might even be tighter, as low as 5x on highly volatile instruments) and Binary Options ban, ESMA also plans to mandate negative balance protection on customer accounts, and a ban on “benefits incentivising trading” such as deposit bonuses.

We would note that ESMA’s final recommendations will be just that – recommendations, which each individual EU country regulator can decide to adopt, or not. However in this case it certainly looks like a lot of political pressure will be exerted on country regulators to abide by ESMA’s findings.

The big wildcard in all this is the UK. London is home to many if not most of the largest retail FX brokerages. However the UK is in the process of divorcing itself from the EU as Brexit seems to be finally taking shape. While the FCA, as we noted above, delayed its own plans to re-regulate the industry in favour of waiting for ESMA’s recommendations, it remains to be seen if it will go as far as ESMA proposes, or if the FCA will go back to its original plan of a hard 50x leverage cap. The FCA also recently indicated it was going to regulate Binary Options, as opposed to banning them, taking that pleasure away from the UK’s Gambling Commission.

The FCA did state, somewhat ambivalently, in response to the ESMA statement that:

The FCA supports ESMA in its consideration of potential EU-wide product intervention. Our domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing. Any permanent FCA policy measures would take in to account any prospective ESMA measures.

ESMA’s full statement reads as follows:

15 December 2017


Statement on preparatory work of the European Securities and Markets Authority in relation to CFDs and binary options offered to retail clients

The European Securities and Markets Authority (ESMA) is issuing this statement to provide an update on its work in relation to the provision of contracts for differences (CFDs), including rolling spot forex, and binary options to retail clients.

ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area. Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.

Notwithstanding these actions, ESMA remains concerned that the risks to investor protection are not sufficiently controlled or reduced. Further to the ESMA statement published in June 2017, ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR to address these investor protection risks. In particular, ESMA is considering measures to:

1. prohibit the marketing, distribution or sale to retail clients of binary options; and

2. restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.

The restrictions on CFDs currently under review are:

  • leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;
  • a margin close-out rule;
  • negative balance protection to provide a guaranteed limit on client losses;
  • a restriction on benefits incentivising trading; and
  • a standardised risk warning.

ESMA will conduct a brief public consultation in January 2018 on this matter.

Any product intervention measure adopted by ESMA under Article 40 of MiFIR can have an initial duration of up to three months and is renewable.

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